This is an excerpt from EERE Network News, a weekly electronic newsletter.

May 21, 2008

U.S. Experts Say Biofuels Have a Minimal Impact on Food Prices

With global food prices rising rapidly, the chairman of the President's Council of Economic Advisers and the Secretary of Agriculture have both emphasized recently that the production of ethanol from corn has had little impact on food prices. In testimony before the Senate Foreign Relations Committee on May 14, Edward Lazear, the chairman of the President's Council on Economic Advisers, concluded that corn ethanol is only responsible for about 3% of the increase in food prices over the past year. Lazear noted that global food prices climbed 43% between March 2007 and March 2008, with wheat prices up 123%, corn prices up 37%, and rice prices up 36%, but he attributed most of that price increase to increasing demand and reduced global crop production due to adverse weather conditions. The U.S. production of ethanol from corn is responsible for only about a fifth of the price increase for corn, and on a global scale, ethanol production is responsible for about a third of the price increase for corn. Because corn represents only a fraction of the global food supply, ethanol production is estimated to be responsible for only 1.2 percentage points in the 43% rise in global food prices. See Chairman Lazear's testimony on the White House Web site.

Secretary of Agriculture Ed Schafer and his staff seconded that conclusion in a briefing on May 19, and also noted the benefits of ethanol production. U.S. crop and livestock producers have seen a 43% increase in fuel costs this year and a 67% increase in fertilizer costs, both of which are driven by high fuel prices. U.S. farmers are welcoming the increased crop prices, while the impact on the U.S. consumer is tempered, because only about one-fifth of our food cost is driven by the commodity cost. As a result, the U.S. consumer price index for food has risen only 4%, while U.S. prices are expected to rise at most 6% in 2008. At the same time, biofuels have cut the global consumption of crude oil by 1 million barrels per day, helping to relieve the stress on oil supplies. U.S. ethanol production has cut the average retail cost of gasoline by 29-40 cents per gallon, according to a new report from Iowa State University. See the USDA briefing materials and the Iowa State report (PDF 350 KB). Download Adobe Reader.

Looking ahead, the U.S. Department of Agriculture (USDA) expects the total use of U.S. corn to decrease by 2% in the 2008 and 2009 season, despite a 33% increase in the amount of corn going toward ethanol production. Although ethanol biorefineries will require 4 billion bushels of corn, feed and residual use will decline 14%, and exports will drop 16% in the face of growing global competition, according to the May 9 edition of "World Agriculture Supply and Demand Estimates." The total corn crop is estimated at 12.1 billion bushels, down 7% due to less planted acres and a projected decrease in yield. This will cause corn use to exceed production, decreasing corn stocks and pushing prices higher, to a record $5-$6 per bushel. Meanwhile, adverse weather conditions have continued to delay corn plantings, threatening to further lower U.S. corn production. The May 19 edition of "Crop Progress" reports that only 73% of the corn has been planted in the major corn-producing states, placing this year's crop 15 percentage points behind the five-year average. Only 26% of the corn plants have emerged, compared to the five-year average of 56% for this time of the year. See the USDA's world agriculture report (PDF 92 KB) and Crop Progress report (PDF 216 KB).