Monday, June 09, 2008

Where did the other $4 come from?...

A reader sends this story - which I have not been able to source, but have found the quotes in other places.
ECONOMISTS DISPUTE U.S. CONTENTION ON IMPACT OF BIOFUELS ON FOOD Agricultural economists are disputing the contention of USDA and President Bush’s Council of Economic Advisers (CEA) that the federal policy of encouraging the use of corn for fuel contributes only a very small amount to food inflation. They have concluded that the government’s analysis is flawed and incomplete. USDA and the CEA have stated that the federally subsidized ethanol program, which took more than a quarter of the corn crop in 2007-2008, contributed only two or three percent of the rising cost of food. “I think what has happened here is that a limited, partial analysis has been conducted,” said Dr. Keith Collins, who was until recently the chief economist at USDA. He said that the study, conducted by White House Council of Economic Advisers, failed to take into account the fact that the corn boom has also affected other commodities. (Feed ingredient buyers spotted that flaw in an instant. Corn does not trade in a vacuum is a well known fact with anybody who has shadow pricing capabilities in formulation software.) The Council of Economic Advisers currently has only one member, Edward P. Lazear, a labor economist. “The increase in corn prices due to biofuels clearly affects the price of sorghum and barley and oats and other feed grains,” Collins said. “The price increase of corn has increased the price of soybean oil, and cotton seed oil, and rapeseed oil, and canola oil, and animal fats, and tallow, and grease, and dried beans, and peas, and lentils, and edible peas,” Collins said at a meeting with reporters. “It probably has increased the price of hay. None of those commodities other than corn are part of the CEA analysis,” he said. (John, explain how they justified NOT including these other ingredients). Independent economist Thomas Elam, president of FarmEcon LLC, pointed to other deficiencies in the study, noting that it covers, a relatively small part of the overall usage of corn. (that's like having big-oil claim that the price of crude only has a small impact in your diesel fuel price because "nobody burns crude") By far, the most corn in the United States and in other countries is used in livestock and poultry feed and is thus consumed by humans indirectly in the form of meat, poultry, eggs, and dairy products. “The analysis of the U.S. government greatly understates the role of corn in food production and therefore significantly understates the contribution of the skyrocketing cost of corn and other feedgrains to the explosion in food prices,” Elam said. “Crops that used to be grown for food production are now being priced at their value as a fuel supplement, with unpredictable and very negative consequences for the food economy,” he added. “The costs of those crops to the U.S. food production system are also being significantly increased by federal biofuels policy.” [His comments]
I too have found the 2-3 percent number unbelievable. The point about shadow pricing is why my budget for this year needed new width to the columns on the spreadsheet. We are constrained by acres, and when corn is the high bidder, other crops must rise to compete.

First, it is fair to note that Mr. Elam produced the report for the National Chicken Council. It doesn't make it faulty, but since I am wary of in-house economists like John Urbanchuk and the NCGA, due disclosure is needed.

Keith Collins, however can fairly be described as both expert and unbiased. I find his criticism compelling, and also a better answer to the the question: How can ethanol NOT have a significant impact on food prices?

Above all, where is the extra money coming from in my budget? My corn is almost exclusively destined for SE poultry/hog operations, human consumption, and specialty starches (also in foods). They are paying me much more for it because ethanol plants have added new demand. And I know these customers are raising prices to recoup their costs.

The delay factor in the meat chain is perhaps delaying the onset of even more food inflation. At any rate, these emerging price pressures will only become more apparent, I suspect. We can keep coming up with clever blame-allocation arguments, but the elephant in the room will soon overcome any carefully constructed studies.

4 comments:

Anonymous said...

We used to farm, but no longer do. But, remaining in agribusiness, we have a vested interest in the future of agriculture. I, too, have thought about the upcoming inflation at the meat counter. You want to see demand destruction? I think you will. More and more families are making the decision that they just don't need to eat (red) meat. Rising costs in the meat case will only reinforce that decision.

Steve Thompson said...

John,

One omore factor to include in the food price increase is the transportation and processing costs. If ethanol is keeps gasoline prices 15+% cheaper, that will offset some of the factors on the other side of the equation.

John Phipps said...

Steve:

I haven't had time to fully digest it, but I am skeptical of that claim from the corn growers as well.

12B gallons of ethanol displaces less than 9 billion gallons of gasoline and that lowers retail prices by 15%?

It could be possible, but I'll try to find a supporting study and post on this claim later.

Thanks for reading.

Ol James said...

Here's an article from the Corn and Soybean Digest that has some of the conclusions you posted. Tho, it mostly talks about Ethanol,

http://cornandsoybeandigest.com/biofuels/news/0506-ethanol-food-gas-prices/?cid=mostpopular

Hope this helps.