Busting Big Oil Myths on the RFS and Ethanol, Part II: Food Prices

Source: Geoff Cooper is RFA’s Vice President of Research and Analysis. • Posted: Monday, June 3, 2013

Last week I kicked off a short series of posts examining some of the biggest myths perpetuated by the oil industry in its crusade against biofuels and the Renewable Fuel Standard (RFS). As part of an aggressive push to repeal the RFS, oil industry trade groups and their allies have used a well-stocked arsenal of half-truths and misinformation regarding ethanol and other biofuels. Big Oil’s PR machine regurgitates these myths via conference calls with reporters, meetings with editorial boards, sham studies, paid advertising, social media and many other channels. Their goal, of course, is to weaken political and public support for the RFS and put the brakes on the transition to renewables.

My first post challenged the ridiculous idea that we don’t need an RFS or renewable fuels anymore because of the boom in domestic oil production from fracking. This post takes aim at another oft-repeated myth: the old “food versus fuel” canard. The oil industry has teamed up with industrial meat and grocery manufacturers to breathe new life into the false notion that crop-based biofuels expansion has “diverted” crops away from feed markets and significantly affected food prices. The facts demonstrate the absurdity of these claims.

Myth #2: Ethanol Expansion and the RFS Have Meaningfully Affected Consumer Food Prices

It is beyond dispute that the emergence of the ethanol industry has positively impacted prices for corn. Indeed, adding value to farm products was a fundamental reason for developing the ethanol industry in the first place. Stimulating demand and enhancing the value of local crops was a principal motivation for the tens of thousands of farmers and other rural Americans who invested in the development of ethanol plants in their communities. The RFS created an environment of certainty that gave those investors the assurance and confidence needed to finance the creation of a new American energy industry.

While the emergence of the ethanol industry has positively impacted corn prices, the magnitude of ethanol’s effect compared to other factors influencing corn prices is often greatly overstated. Transitioning diets in emerging markets, drought, flooding, inefficient food distribution systems and waste, higher energy costs, rising labor costs, monetary policies, trade restrictions, agriculture technology bans, excessive speculation in energy and ag markets, food hoarding, and profiteering are among the many other factors that influence commodity and food prices. Unfortunately, opponents of the RFS have often incorrectly assumed that 1) much or all of the growth in corn prices since 2006 is entirely attributable to the RFS and ethanol, and 2) higher corn prices significantly affect retail food prices. Several independent economic analyses have exposed these notions as erroneous.

recent study commissioned by the International Centre for Trade and Sustainable Development (ICTSD) examined the impacts of ethanol policies, including the RFS and now-defunct blender’s tax credit, on world crop prices in the 2005-2010 timeframe. Using a partial equilibrium economic model, the study found corn prices in 2009/10 wouldn’t have been any different at all with or without the RFS in place. Corn prices would have been just 3.3% lower, on average, in the entire five-year study period without the RFS and ethanol blender’s tax credit, the study found. The effect of the RFS and other ethanol-related policies on other crops is even less. If the RFS had not existed from 2005-2010, wheat prices would have been an average of just 1.6% lower, soybean prices would have been an average of 1.7% lower, and rice prices wouldn’t have been any different at all. These results are explained by the fact that economic factors other than the RFS and tax credit were primarily responsible for ethanol growth, and that even market-based ethanol expansion had only modest effects on corn prices: “Higher crude oil prices would have increased the demand for biofuels and would have created strong market-driven investment incentives that would have resulted in a large expansion of the US ethanol industry even without the [RFS and tax credit].”

The ICTSD study found retail prices for broiler meat wouldn’t have been any different at all without the RFS. Similarly, retail beef and pork prices wouldn’t have been any lower without the RFS, with the exception of one year when prices for each would have been lower by just $0.01 per pound. As explained by the author, “[t]he reason for such a small price impact is that feed prices make up a small share of retail prices and because the feed cost impacts from ethanol [policy] over this period are small.”



Source: Babcock for ICTSD (2011)

The Center for Agricultural and Rural Development (CARD), Food and Agriculture Policy Research Institute (FAPRI), University of Illinois at Urbana-Champaign, Michigan State University, Oak Ridge National Laboratory and U.N. Food and Agriculture Organization (FAO) are among the many other organizations that have similarly concluded the RFS has had only modest impacts on crop prices and no meaningful impact on retail-level food prices.

It’s also worth noting here that annual food inflation rates in the U.S. have, on average, been lowersince passage of the RFS than they were in the decades preceding the program. Annual food inflation has averaged just 2.90% since 2005, the year the original RFS was enacted. By comparison, annual food inflation rates averaged 3.02% in the 20 years prior to enactment of the RFS. The lack of any perceptible relationship between the RFS and retail food prices is further illustrated by the fact that the average American household spends less of its disposable income on food today than it did prior to existence of the ethanol industry and the RFS. Since enactment of the RFS2 in 2007, Americans have spent an average of just 9.7 percent of their income on food. In the 10 years prior to adoption of the RFS2, spending on food accounted for 10.0 percent of disposable income on average. Further, the share of household income spent on food today is less than half of what it was in the early 1950s, and substantially less than the 1960s, 1970s, and 1980s. Spending on food, as a share of income, has trended down steadily since the 1940s and the emergence of ethanol and passage of the RFS have in no way interrupted this trend.





Source: Bureau of Labor Statistics, Consumer Price Index; and EIA

Much of the general public is unaware that the increase in ethanol output has been accompanied by dramatic growth in the production of co-product animal feeds, such as distillers grains, corn gluten feed, corn gluten meal, and distillers corn oil. Every bushel of corn processed by an ethanol plant produces 2.8 gallons of ethanol and approximately 17 pounds of high-protein, high-energy animal feed.  The U.S. ethanol industry produced some 37-38 million metric tons of animal feed in 2012, including 33-34 million metric tons of distillers grains. According to a recent publication of the U.N. Food and Agriculture Organization (FAO):

Because of the abundant supply, excellent feeding value, and low cost relative to maize and soybean meal, DG (distillers grains) has become the most popular alternative ingredient used in beef, dairy, swine and poultry diets in the United States and in over 50 countries worldwide. Dietary inclusion rates have been increasing in recent years because of the increasing price of maize and the high energy value DDGS provides to animal feeds at a lower cost.

While the emergence of the ethanol industry has increased demand for corn, U.S. farmers have responded by growing significantly larger corn crops. U.S. corn production has increased tremendously in the “ethanol era.” The average annual U.S. corn crop averaged 7.2 billion bushels (bbu.) in the 1980s, 8.6 bbu. in the 1990s, 10.3 bbu. in 2000-2006, and 12.3 bbu. since 2007 (the year EISA was enacted). As a result of larger annual corn harvests and the growing production of animal feed co-products, increased ethanol production has not affected availability of corn for traditional users. Corn supplies available for non-ethanol uses (i.e., the amount of corn and co-products “left over” after net consumption of corn by the ethanol industry) have been larger, on average, since passage of the RFS2 in 2007 than at any other time in history. Corn and corn co-products available for non-ethanol uses averaged 314 million tons (equivalent to 11.2 bbu.) from 2007/08 through 2011/12. This compares to an average of 308 million tons (11.0 bbu.) available for non-ethanol use from 2002/03 through 2006/07 and an average of 300 million tons (10.7 bbu.) from 1997/98 through 2001/02. In other words, the emergence of ethanol as a major source of corn demand has not reduced the supply of corn available for other uses, including livestock feed.

Meanwhile, contrary to claims that the RFS has “diverted” grain away from livestock and poultry production, U.S. meat output has grown steadily since the original RFS was enacted in 2005. In fact, 2013 production of red meat and poultry is projected to be the second-highest on record (only behind 2008) and 7% higher than output in 2005. Steady growth in production of red meat and poultry show the fallacy of the notion that ethanol expansion and the RFS have somehow eroded U.S. meat output (that is, if ethanol expansion has reduced available feed supplies, then how has meat production expanded to near-record levels?)

Globally, the U.S. ethanol industry’s demand for grain is a small drop in a big bucket. When co-products are appropriately considered, the U.S. ethanol industry is projected to use just 2.96% of the global grain supply in 2013/14, according to the latest statistics from USDA. Further, the amount of grain available for non-ethanol uses is projected to set a new record in 2013/14, topping the previous record in 2011/12. Indeed, 2.79 billion metric tons of grain will be available for food and feed uses after accounting for the use of 0.085 billion metric tons by the U.S. ethanol industry. That means the amount of grain available globally for non-ethanol use in 2013/14 will be larger than the total supply available forall uses (including U.S. ethanol) in all previous years.