There is no evidence that the nation’s growing demand for biofuels and the crops needed to produce them are the culprits behind higher food prices at home or abroad, according to USDA’s top official.
Speaking at a food and fuel media briefing, Agriculture Secretary Ed Schafer acknowledged that higher demand for corn for ethanol and soybeans for biodiesel “has led to higher prices for those crops over the past couple of years. But we do not have a one-to-one relationship between higher prices for those commodities and what consumers are paying for foods at the retail level. There are many factors at work.”
Schafer noted that USDA economists estimate “that only 3 percent of the more than 40 percent increase in world food prices this year is due to the increased demand on corn for ethanol.”
Meanwhile in the United States, the year-to-year increase in food prices for U.S. consumers was much smaller than in the rest of the world, at 4 percent, and 1.5 percent higher than the average annual increase of 2.5 percent. Schafer does expect consumer prices to increase 5 percent this year.
Meanwhile oil and food commodity prices are up almost 70 percent and almost 50 percent, respectively.
USDA chief economist Joe Glauber says only 20 percent of what consumers pay for food items can be attributed to the farm value of the underlying commodities. He believes much of the cost of food items comes from “labor costs, advertising, energy costs and other factors.”
Glauber said other factors affecting food prices include energy, weather, export restrictions and a rise in the standard of living in many developing countries.
“Global economic growth has been quite substantial over the last few years,” he said. “The increasing gross domestic product in India and China has expanded demand, particularly for meat products, which has contributed to both a growth in livestock exports and demand for protein meals and soybean meal. And that this is projected to continue.”
Droughts and other weather problems affected crops in Oceania, Australia, Ukraine, Canada and the European Union in 2007-08.
And last year, major rice- and wheat-producing countries imposed export restrictions, banned exports or increased export taxes, which limited supplies in the world marketplace, buoying prices.
Another major factor on food prices is energy costs, and their impact on food marketing and transportation costs.
Glauber also noted the impact of high costs on farmers. “On the input side, crop and livestock producers have been seeing much, much higher prices this year. One, fertilizer prices have really taken off, almost 67 percent. Fuel is up 43 percent, and feed costs up 23 percent over the first four months of 2007.”
Glauber says USDA studies indicate that eliminating the blender credit for ethanol, as some politicians have asked for as a measure to reduce food prices, would result in a decline in corn prices of 10 percent to 15 percent.
But Schafer noted, “We don’t want to do something here that’s politically expedient, that sounds good, that makes headlines or 30-second sound bytes. We want to make sure that what we do here doesn’t suppress production, but increases production so that we can feed people across the world.
“The policy choices we’ve made on biofuels will deliver long-term benefits. But we also have to recognize that there may be some short-term costs or dislocations involved, and we have to consider those costs in the light of the ultimate benefits that we hope to secure for the American people.”
Schafer noted that according to the International Energy Agency, biofuels production available to the United States and European markets over the last three years “has cut the consumption of crude oil by 1 million barrels a day. At today’s prices, that’s a savings of more than $120 million per day.
“Ethanol also brings environmental benefits. It gives us cleaner air by cutting tailpipe emissions of carbon monoxide and hydrocarbons that can cause ozone and smog. It also displaces benzene and other toxic ingredients of gasoline that would otherwise be burned at a greater rate. And by replacing MTBE as the blending agent of choice in gasoline, it has relieved us of water quality problems associated with MTBE while still boosting oxygen and octane contents of gasoline.”
To address rising energy costs, Schafer stressed that the United States “needs to take steps to increase our domestic supply of traditional energy sources. We have vast untapped oil and gas reserves within our borders or just offshore. We could draw on those to help expand supply and bring down the cost of oil and therefore the price of food.”
USDA is projecting a 33 percent increase in corn use in ethanol this year, from 3 billion bushels to 4 billion bushels. Schafer noted that capacity and corn use for ethanol “should start to taper off as the corn-based ethanol production starts approaching the renewable fuels standard called for in the 2007 Energy Act.”