Steve Meyer

February 27, 2012

5 Min Read
Understanding How Ethanol Impacts Food Prices

I’ve been forced to examine my biases over the past few weeks.  The examination of conscience was driven by an invitation to speak to the Renewable Fuels Association’s National Ethanol Conference last week as part of a food vs. fuel debate.

Suffice it to say, I was not on the fuel side.  I now know how Daniel felt as he contemplated the lion’s den – though my experience at the RFA conference ended up no worse than did Daniel’s “dinner” appointment courtesy of King Darius.  The RFA staff and conference audience were gracious though, I think, not convinced.  I just hope they are considering a few different ideas.

The experience tells me that many of you might need some ideas on how to point out the impact that corn-based ethanol has had on your businesses and, now, on customers for your products.  So here, in general terms, are the things I pointed out to the pro-ethanol crowd:


  1. I am not anti-ethanol, although I quipped that I prefer it aged in oaken barrels or pretty glass bottles.  I am not even opposed to fuel ethanol.  It has indeed reduced our dependence on oil of all sorts, reduced gasoline prices from where they would otherwise have been, and reduced the cost of farm subsidies for taxpayers.  All are outcomes for which credit is due.

  2. I am simply opposed to federal and state policies that mandate and subsidize the use of corn to make ethanol – clearly favoring one corn user at the expense of another.

  3. Ethanol plants have every right to buy as much corn and pay as much for it as they can, but both of those should be based on market signals, not government policies, especially now that the industry is established.

  4. Even with record-large corn crops, corn prices have risen because of the new and rapidly growing demand that federal ethanol policies created.  Corn usage for ethanol increased by 383% from 2005 to 2011, while feed usage fell by 25% (Figure 1).  Exports and non-ethanol food and industrial usage have been roughly stable during that time period. Ethanol hasclearly caused the price increase.

  5. Higher corn prices have driven higher wheat and soybean prices in spite of world wheat and soybean stocks and stocks/use ratios being near record high.  Corn pushes wheat higher since wheat is a substitute feed ingredient in many parts of the world.  Corn pushes soybeans higher by competing for planted acres, especially in the U.S.

  6. Distiller’s dried grains with soluble (DDGS) is indeed a usable feed ingredient, but it does not make up for the reduction in corn availability.  The amount of the five major grains grown in the United States used for feed has fallen in seven of the last eight years – even with DDGS added in at a corn-equivalent basis (Figure 2).  It is hard to overcome trading 56 lb. of corn for 17 lb. of DDGS.

  7. Hog production costs in 2011 were 64% higher than the average cost from 1999 to 2006 – before the 2007 energy bill charted the aggressive increase in ethanol production (Figure 3); 2012 costs, based on corn and soybean meal futures prices on Feb. 16 are forecast to be $85.05/cwt., carcass – 61% higher than the 1999-2006 average of $52.76/cwt., carcass.

  8. Higher energy prices and rising standards of living have indeed played a role in higher prices for corn and other grains and oilseeds.  But the mandated and subsidized usage of corn for ethanol is the primary link between grain and oil prices.  The two were once virtually independent of each other, but are now very correlated due to ethanol.

  9. Mandated and subsidized ethanol played a minor role in the food price increases of 2008, but they are a major driver of record-high pork and turkey prices in 2011, as well as beef and chicken prices that will set new records in 2012.  Producers responded to losses by reducing output.  Those reductions drove farm prices higher and those prices have finally been passed along to consumers – with more to come.  The time lags between cause and effect are very long in the case of grain prices and animal proteins.  I don’t believe most people appreciate the importance of this point.

  10. Technology will eventually allow us to meet all corn usage needs at lower corn prices, but the policies pushed ethanol too far, too fast and caused $6 billion of pork producers’ equity to be lost from September 2007 to February 2010.  Corn yields are trending steadily higher.  Various parts of the globe are adopting technologies that are old hat in the United States, but are revolutionary in developing countries.  This technological progress will, I think, catch up with our needs, but our market interventions forced demands to increase at a faster pace than could be supported by supplies, thus pushing prices and costs to consumers higher.

  11. The issue is not whether there is enough food.  We will always use what is available and the available supplies will meet all needs at the eventually-prevailing price.  The question really is: “Who will be able to pay the prevailing price?”  Wealthy people – like us, believe it or not – will be fine.  But what about the vast majority of the world’s population that has far less than we do?  The Food and Agriculture Organization’s food price index rose 23% in 2011 alone.   It is up nearly 80% since 2006, before ethanol output took off.  World incomes may be improving, but not nearly that quickly.  Many will suffer because they cannot afford enough food.  Some will die.  Some facts are very cold indeed.

About the Author(s)

Steve Meyer Livestock Division

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