Do renewable fuels make our hamburger more expensive? Already since August 2006 public debate has intensified over the extent to which the expansion of the ethanol industry has resulted in higher agricultural commodity prices. Conventional wisdom and parrot-like communications have further clouded the debate.
There is limited conclusive data available on market movements due to the intensification of the ethanol business and most stories are based on anecdotal information.
Assessment on the effect of ethanol
Informa Economics conducted an assessment on the subject, and the results were released in December 2007.
Based on the American market, parts of the outcome could also be projected to other developed markets in the world; if not now, then in the near future.
Main conclusion of the report
: there is no statistical proof that increases in corn prices have caused increases in food prices. Only 4% of the increase in consumer prices could be explained by an increase in corn prices. The market is far more complicated than that.
Lower harvests, stronger demands
There are a few market movements that have had a major impact on the price developments. Since 2004 the US corn crop harvest has been in decline. Since then the usage as corn for ethanol purposes has also increased considerably.
Yet, the ethanol industry was not the only source of additional demand for corn. US corn exports, rose to one of the highest levels of the previous decade. Thus, the combination of a reduction in supply and an increase in demand from both the ethanol industry and the export market led to corn prices moving higher starting at the end of 2006.
Farm value of commodities
In the US the "farm value" of commodity raw materials used in foods now accounts for 19% of total food costs, coming from 37% in 1973. Depending on the ingredients used the average of 19% can vary considerably. The US Department of Agriculture estimated that the farm value share of the retail food price is 6% for cereals and bakery items, 47% for beef, 30% for pork, 36% for dairy products and 17% for oils and fats.
Marketing bill determines price
What kills the food price is the so-called marketing bill, including the costs of labour, packaging, transportation, energy, profits, advertising, depreciation, rent, interest, repairs, business taxes and other costs not attributable to basic agricultural commodities.
Within the overall marketing bill, the costs of energy and transportation have increased considerably over the last several years, with crude oil prices surging from just under $60 per barrel in autumn 2006 to $100 per barrel at the end of 2007, the same period during which corn prices have increased.
However an increase in corn prices will cause livestock and poultry feeding margins to be lower than they otherwise would have been. Cattle, pig and poultry prices were already on the rise in the late 1990s, well before the corn price began to increase significantly. Notably, dairy and egg prices have been driven higher mainly by strong export demand.
Food in income expenditure
Additionally, in 1950 around 83% of the food expenditure was for home consumption, but by 2006 this share had declined to 58%.
However prices for food consumed at home tend to be more volatile and are currently growing more rapidly than away-from-home food prices, which of course is logical. As a restaurant or take-away it is impossible to adapt your prices to market volatilities.
According to Bruce Scherr, CEO of Informa in an interview in Feedstuffs, there is no relief in sight. Because much of the increase in prices is a result of world growth, the only way to slow that significantly would be through war, pandemics or chronic health issues.
The proportion of the average American’s disposable income that is spent on food has declined steadily over the last half-century, from 21% of disposable income in 1950 to below 10% in 2006.
Informa analysed the historical price relationships between corn prices and livestock, poultry, egg, and milk prices, and only found weak correlations. This implies that based on real data it is wrong to suggest that high and/or rising corn prices are the supposed reason behind high and rising retail meat, egg and milk product prices.