Market News

 April 27, 2009
Ethanol Use Does Impact on Food Prices

 Much has been written about the potential impacts of increased ethanol use on food prices. The key issue is whether the conversion of acreage once devoted to food crops to producing feedstock for ethanol production impacts on the availability and cost of food.  

Several studies by various United Nations agencies claim recent price escalations and food shortages in parts of the developing world are due in large part to increased production of ethanol. (See article Food as Fuel - Are biofuels to blame?)

Notwithstanding these concerns, governments around the world have provided support for the establishment of ethanol production to lessen their dependency upon fossil fuel - based energy.  In the United States, the production of feedstock for ethanol has given new life to many agricultural dependent areas previously focussed on the production of corn and other food crops. The ’food versus fuel’ debate continues, however.

A report released this month from the U.S. Congressional Budget Office - The Impact of Ethanol Use on Food and Greenhouse-Gas Emissions confirms that from April 2007 to April 2008, the rise in the price of corn resulting from expanded production of ethanol contributed between 0.5 and 0.8 percentage points of the 5.1 percent increase in food prices measured by the consumer price index (CPI).

Over the same period, however, other factors - for example, higher energy costs - had a greater effect on food prices than did the use of ethanol as a motor fuel.  

In 2008, nearly 3 billion bushels of corn were used to produce ethanol in the United States. That amount constituted an increase over the previous year of almost a billion bushels. The demand for corn for ethanol production, along with other factors, exerted upward pressure on corn prices, which rose by more than 50 percent between April 2007 and April 2008. Rising demand for corn also increased the demand for cropland and the price of animal feed.  

The report concludes that beyond the one-year period that ended in April 2008, food prices are likely to be higher than they would have been if the United States did not use ethanol as a motor fuel.  

Last year, the use of ethanol reduced gasoline consumption in the United States by about 4 percent and greenhouse-gas emissions from the transportation sector by less than 1 percent.  

However, ethanol’s effect on future food price inflation is uncertain because the forces determining that impact move in opposite directions. Federal mandates now in place require additional use of ethanol in the future, which would continue to put upward pressure on prices. In contrast, increases in the supply of corn from cultivating more cropland, increasing crop yields, or improving the technology for making ethanol from corn or other feedstocks (raw materials) would tend to lower food prices.  

The impact of higher food prices attributable to ethanol production in turn will boost federal spending for the Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp program) and child nutrition programs by an estimated $600 million to $900 million in fiscal year 2009, according to the Budget Office.  

The full CBO report is available for download

Source: US Congressional Budget Office