RFA: No connection between RFS and food price increases

By Renewable Fuels Association | June 13, 2013

ABF Economics has released a detailed analysis showing no direct correlation between the renewable fuel standard (RFS) and the overall increase in food prices.

The study specifically examined “the relationship between the RFS and recent changes in consumer food prices. Specifically this includes an examination of the relationship between corn prices and consumer food prices, the factors that affect corn prices, the role of the major industry participants in determining consumer food costs, and the relative importance of components such as agricultural commodities and energy on consumer food prices.”

Bob Dinneen, president and CEO of the Renewable Fuels Association, weighed in, “Today’s ABF Economics analysis provides definitive evidence that ethanol and the RFS are not driving food prices. That canard has been nothing but a distraction propagated by those wanting to continue profiting from government subsidized grain and those seeking to keep us ever dependent on petroleum. This report should end the food vs. fuel debate for good.”

The RFS is a highly effective national energy policy that has revitalized rural communities, created jobs, lowered greenhouse gas emissions, and reduced our carbon footprint. John Urbanchuk, author of the new ABF Economics analysis, found that:

- Ethanol production and the demand for corn to produce ethanol have increased as a result of the RFS mandates. Corn prices also have increased over this period of time but increased demand to produce renewable fuels consistent with the RFS is only one factor behind the increase in corn prices. These factors included a sharp increase in petroleum prices, rapidly expanding global demand for food and agricultural commodities, commodity market speculation, and an expansive U.S. monetary policy.

- A careful examination of food price inflation measured by the Consumer Price Index indicates that retail level food prices have increased at a slower rate since the RFS took effect than during the comparable five years before the RFS.

- The food processing industry accounts for a larger share of consumer food costs than does production agriculture. Moreover, energy prices play a more significant role in costs for food processors than do the prices for any individual agricultural commodity.

- The RFS has contributed to the production of important co-products of the dry mill corn ethanol industry. Specifically, Distillers dried grains have positively contributed to reducing net feed costs for livestock, dairy, and poultry producers. Higher ethanol output resulting from the RFS has led to increased production of DDGS. Because DDGS has a positive substitution rate for corn and soybean meal, these higher production levels have increased the total availability of feed for livestock and poultry producers by 21 percent compared to feed use of corn alone.

- The ethanol industry is a major source of captured carbon dioxide, which is used in food processing, refrigeration and packaging to enhance the quality of processed foods and improve profit margins for processors.

- The RFS has not had an adverse impact on consumers’ ability to afford a safe and healthy food supply. Although food prices have increased modestly faster than overall inflation in the past several years consumers are not spending a greater share of income on food than was the case before the RFS was implemented.

- The severe recession of 2008-2009 and sluggish recovery in real incomes has played a more significant role than commodity price increases in the decline in red meat and poultry consumption that has taken place since before the RFS was implemented.

The ABF Economics analysis comes on the heels of a recent World Bank study that determined oil prices were the leading cause of increased food prices. The World Bank study states, “most of the price increases are accounted for by crude oil prices (more than 50 percent), followed by stock-to-use ratios and exchange rate movements, which are estimated at about 15 percent each. Crude oil prices mattered most during the recent boom period because they experienced the largest increase.” It goes on to examine the highly scrutinized 2008 World Bank report by Don Mitchell, concluding that Mitchell overestimated the effect of biofuels on food prices.

Dinneen commented, “While the ABF Economics report shows that ethanol and the RFS did not drive food prices, the recent World Bank report makes it plain what did ... OIL! High and highly volatile energy prices have caused pain at the pump and groans at the grocery store. It makes sense, as energy impacts every facet of the food production, transportation, storage and marketing complex. Ethanol and the RFS provide the only rational response to protect our food and fuel dollar.”

The ABF Economics study, commissioned by the Renewable Fuels Association, can be found here.