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Busting Big Oil Myths on the RFS and Ethanol, Part II: Food Prices

Last week I kicked off a short series of posts examining some of the biggest myths perpetuated by the oil industry in its crusade against biofuels and the Renewable Fuel Standard (RFS). As part of an aggressive push to repeal the RFS, oil industry trade groups and their allies have used a well-stocked arsenal of half-truths and misinformation regarding ethanol and other biofuels. Big Oil’s PR machine regurgitates these myths via conference calls with reporters, meetings with editorial boards, sham studies, paid advertising, social media and many other channels. Their goal, of course, is to weaken political and public support for the RFS and put the brakes on the transition to renewables.

My first post challenged the ridiculous idea that we don’t need an RFS or renewable fuels anymore because of the boom in domestic oil production from fracking. This post takes aim at another oft-repeated myth: the old “food versus fuel” canard. The oil industry has teamed up with industrial meat and grocery manufacturers to breathe new life into the false notion that crop-based biofuels expansion has “diverted” crops away from feed markets and significantly affected food prices. The facts demonstrate the absurdity of these claims.

Myth #2: Ethanol Expansion and the RFS Have Meaningfully Affected Consumer Food Prices

It is beyond dispute that the emergence of the ethanol industry has positively impacted prices for corn. Indeed, adding value to farm products was a fundamental reason for developing the ethanol industry in the first place. Stimulating demand and enhancing the value of local crops was a principal motivation for the tens of thousands of farmers and other rural Americans who invested in the development of ethanol plants in their communities. The RFS created an environment of certainty that gave those investors the assurance and confidence needed to finance the creation of a new American energy industry.

While the emergence of the ethanol industry has positively impacted corn prices, the magnitude of ethanol’s effect compared to other factors influencing corn prices is often greatly overstated. Transitioning diets in emerging markets, drought, flooding, inefficient food distribution systems and waste, higher energy costs, rising labor costs, monetary policies, trade restrictions, agriculture technology bans, excessive speculation in energy and ag markets, food hoarding, and profiteering are among the many other factors that influence commodity and food prices. Unfortunately, opponents of the RFS have often incorrectly assumed that 1) much or all of the growth in corn prices since 2006 is entirely attributable to the RFS and ethanol, and 2) higher corn prices significantly affect retail food prices. Several independent economic analyses have exposed these notions as erroneous.

A recent study commissioned by the International Centre for Trade and Sustainable Development (ICTSD) examined the impacts of ethanol policies, including the RFS and now-defunct blender’s tax credit, on world crop prices in the 2005-2010 timeframe. Using a partial equilibrium economic model, the study found corn prices in 2009/10 wouldn’t have been any different at all with or without the RFS in place. Corn prices would have been just 3.3% lower, on average, in the entire five-year study period without the RFS and ethanol blender’s tax credit, the study found. The effect of the RFS and other ethanol-related policies on other crops is even less. If the RFS had not existed from 2005-2010, wheat prices would have been an average of just 1.6% lower, soybean prices would have been an average of 1.7% lower, and rice prices wouldn’t have been any different at all. These results are explained by the fact that economic factors other than the RFS and tax credit were primarily responsible for ethanol growth, and that even market-based ethanol expansion had only modest effects on corn prices: “Higher crude oil prices would have increased the demand for biofuels and would have created strong market-driven investment incentives that would have resulted in a large expansion of the US ethanol industry even without the [RFS and tax credit].”

The ICTSD study found retail prices for broiler meat wouldn’t have been any different at all without the RFS. Similarly, retail beef and pork prices wouldn’t have been any lower without the RFS, with the exception of one year when prices for each would have been lower by just $0.01 per pound. As explained by the author, “[t]he reason for such a small price impact is that feed prices make up a small share of retail prices and because the feed cost impacts from ethanol [policy] over this period are small.”

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Source: Babcock for ICTSD (2011)

The Center for Agricultural and Rural Development (CARD), Food and Agriculture Policy Research Institute (FAPRI), University of Illinois at Urbana-Champaign, Michigan State University, Oak Ridge National Laboratory and U.N. Food and Agriculture Organization (FAO) are among the many other organizations that have similarly concluded the RFS has had only modest impacts on crop prices and no meaningful impact on retail-level food prices.

It’s also worth noting here that annual food inflation rates in the U.S. have, on average, been lower since passage of the RFS than they were in the decades preceding the program. Annual food inflation has averaged just 2.90% since 2005, the year the original RFS was enacted. By comparison, annual food inflation rates averaged 3.02% in the 20 years prior to enactment of the RFS. The lack of any perceptible relationship between the RFS and retail food prices is further illustrated by the fact that the average American household spends less of its disposable income on food today than it did prior to existence of the ethanol industry and the RFS. Since enactment of the RFS2 in 2007, Americans have spent an average of just 9.7 percent of their income on food. In the 10 years prior to adoption of the RFS2, spending on food accounted for 10.0 percent of disposable income on average. Further, the share of household income spent on food today is less than half of what it was in the early 1950s, and substantially less than the 1960s, 1970s, and 1980s. Spending on food, as a share of income, has trended down steadily since the 1940s and the emergence of ethanol and passage of the RFS have in no way interrupted this trend. 

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Source: Bureau of Labor Statistics, Consumer Price Index; and EIA

Much of the general public is unaware that the increase in ethanol output has been accompanied by dramatic growth in the production of co-product animal feeds, such as distillers grains, corn gluten feed, corn gluten meal, and distillers corn oil. Every bushel of corn processed by an ethanol plant produces 2.8 gallons of ethanol and approximately 17 pounds of high-protein, high-energy animal feed.  The U.S. ethanol industry produced some 37-38 million metric tons of animal feed in 2012, including 33-34 million metric tons of distillers grains. According to a recent publication of the U.N. Food and Agriculture Organization (FAO):

Because of the abundant supply, excellent feeding value, and low cost relative to maize and soybean meal, DG (distillers grains) has become the most popular alternative ingredient used in beef, dairy, swine and poultry diets in the United States and in over 50 countries worldwide. Dietary inclusion rates have been increasing in recent years because of the increasing price of maize and the high energy value DDGS provides to animal feeds at a lower cost.

While the emergence of the ethanol industry has increased demand for corn, U.S. farmers have responded by growing significantly larger corn crops. U.S. corn production has increased tremendously in the “ethanol era.” The average annual U.S. corn crop averaged 7.2 billion bushels (bbu.) in the 1980s, 8.6 bbu. in the 1990s, 10.3 bbu. in 2000-2006, and 12.3 bbu. since 2007 (the year EISA was enacted). As a result of larger annual corn harvests and the growing production of animal feed co-products, increased ethanol production has not affected availability of corn for traditional users. Corn supplies available for non-ethanol uses (i.e., the amount of corn and co-products “left over” after net consumption of corn by the ethanol industry) have been larger, on average, since passage of the RFS2 in 2007 than at any other time in history. Corn and corn co-products available for non-ethanol uses averaged 314 million tons (equivalent to 11.2 bbu.) from 2007/08 through 2011/12. This compares to an average of 308 million tons (11.0 bbu.) available for non-ethanol use from 2002/03 through 2006/07 and an average of 300 million tons (10.7 bbu.) from 1997/98 through 2001/02. In other words, the emergence of ethanol as a major source of corn demand has not reduced the supply of corn available for other uses, including livestock feed.

Meanwhile, contrary to claims that the RFS has “diverted” grain away from livestock and poultry production, U.S. meat output has grown steadily since the original RFS was enacted in 2005. In fact, 2013 production of red meat and poultry is projected to be the second-highest on record (only behind 2008) and 7% higher than output in 2005. Steady growth in production of red meat and poultry show the fallacy of the notion that ethanol expansion and the RFS have somehow eroded U.S. meat output (that is, if ethanol expansion has reduced available feed supplies, then how has meat production expanded to near-record levels?)

Globally, the U.S. ethanol industry’s demand for grain is a small drop in a big bucket. When co-products are appropriately considered, the U.S. ethanol industry is projected to use just 2.96% of the global grain supply in 2013/14, according to the latest statistics from USDA. Further, the amount of grain available for non-ethanol uses is projected to set a new record in 2013/14, topping the previous record in 2011/12. Indeed, 2.79 billion metric tons of grain will be available for food and feed uses after accounting for the use of 0.085 billion metric tons by the U.S. ethanol industry. That means the amount of grain available globally for non-ethanol use in 2013/14 will be larger than the total supply available for all uses (including U.S. ethanol) in all previous years.

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 Source: USDA and RFA

Geoff Cooper's picture

Thank Geoff for the Post!

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Geoffrey Styles's picture
Geoffrey Styles on May 30, 2013

Mr. Cooper,

I wonder how carefully you’ve read the ICTSD study to which you linked.  For example, in its discussion of the supply and demand curves for corn on page 4, it states, “This framework shows why it is necessarily true that expansion of ethanol can only come about through higher maize prices.”  Meanwhile the diagram clarifies that as corn prices rise with increasing demand from ethanol production, non-ethanol corn demand must also fall.

Then on page 19 in the discussion of the impact of the RFS mandate under different scenarios of corn yield and gasoline prices, we read, “It is apparent that the effects of US ethanol policy are not constant across scenarios. As expected, elimination of the blender tax credit when supplies are tight has almost no impact because the mandate keeps ethanol production high. But elimination of the tax credit and the mandate under tight conditions dramatically lowers maize prices, from about $8.06 per bushel to $5.46 per bushel or by 32 percent. This means that current US ethanol policy exacerbates tight market conditions by forcing all demand adjustment to tight supplies on non-ethanol users of maize, which disproportionately impacts the livestock sector.” 

In other words, in a drought such as we saw last summer that reduces corn yield, corn prices rise much faster with the mandate than without, and the impact falls disproportionately on non-ethanol consumers of corn, such as livestock (and presumably poultry and other sectors, including exports.) 

It appears that exhibit 1 for your case that the RFS has no impact on food markets is at least much more nuanced than that. 

I would also point out that the ICTSD analysis only covered the period through 2010, when ethanol blending in gasoline still had significant headroom before reaching the blend wall at 10%.  The analysis–and the reality–of RIN pricing as the mandate nears the blend wall and physical blending opportunities dry up, forcing refiners to bid for more RINs, looks rather different than it did just a few years ago.  This supports the view that the RFS policy is broken, because it was not designed for the circumstances of falling gasoline demand and minimal E85 demand in which we find ourselves. It may even create a feedback loop, by driving gasoline prices even higher (via high RIN prices) and depressing demand further, putting additional pressure on the RIN market.

Geoff Cooper's picture
Geoff Cooper on May 30, 2013

Thanks for your comment.

A key criticism of the ICTSD study’s “tight conditions” scenario was that it completely ignored the fact that refiners have the ability to meet a substantial portion of their annual RFS requirement with banked RINs. In other words, it assumed only physical gallons of ethanol could be used to meet the RFS, and thus assumed corn demand for ethanol would not be allowed to respond rationally to tight corn supply conditions.

As you may know, corn demand for ethanol did react quite rationally to the drought and fell dramatically. Ethanol output rates fell quickly late in the summer of 2012 and have remained well below pre-drought levels. This response has been enabled by the RFS RIN credit banking and trading provisions, which the ICTSD study ignored.

The author of the ICTSD study, Prof. Bruce Babcock at Iowa State, recognized this shortcoming in subsequent analyses using the same model (FAPRI). Allowing the model to replicate the flexibility associated with the RIN program dramatically changes the results of a “tight supply” scenario (e.g., as would result from a drought). In the fall of 2012, Prof. Babcock analyzed whether a waiver of the RFS requirements in 2013 would reduce corn prices and to what degree (http://www.card.iastate.edu/policy_briefs/display.aspx?id=1169). He found a full waiver of the RFS might only reduce corn prices by 7.4%, or 58 cents/bushel. That’s a far cry from the 32% and $2.60/bushel result you referenced from the same scenario in the ICTSD study! Other economists (e.g., from FAPRI at U. of Mo., from U. of IL and UN FAO) conducted comparable analyses last fall and similarly concluded that waiving the RFS would have little or no impact on corn prices.

I don’t think there is much more nuance to Table 3 than what appears in the table. Simply put, Babcock ran his model with the RFS and tax credit in place and derived one set of results for retail beef, poultry, egg, and pork prices; then ran an alternative scenario where the RFS and tax credit did not exist, ceteris paribus. Not much more to it than that.

In response to: “This supports the view that the RFS policy is broken, because it was not designed for the circumstances of falling gasoline demand and minimal E85 demand in which we find ourselves.” You seem to be implying the RFS is “broken” because it requires the use of greater than 10% ethanol blends (E10), or that this was somehow unanticipated. I strongly disagree. Congress, EPA, obligated parties (oil companies), biofuel producers, and anyone else who knew anything about the RFS2 knew from Day 1 that the so-called E10 “blend wall” was imminent and that blends above E10 would be necessary for compliance. To suggest otherwise is revisionist history. As early as May 2009, EPA was writing that “…under the proposed RFS2 program, we are projected to hit the E10 ‘blend wall’ of about 14-15 billion gallons by 2013.” Yet, most refiners and blenders sat on their hands and failed to prepare for the eventuality that higher blends would be needed. The notion that the blend wall was a surprise is ludicrous. Indeed, one of the primary objectives of the program was to drive the use of renewable fuels beyond their historic role as additives.

Geoffrey Styles's picture
Geoffrey Styles on May 30, 2013

I appreciate your response.  Having followed this issue every step of the way, I don’t consider it revisionist to observe that the enhanced RFS that originated in EISA 2007 was predicated on E85 providing the necessary “higher blend” outlet beyond E10, and that sales of the former have stalled at a low level.  Nor do we see a groundswell of either consumers or retailers towards the E15 that is now being held out as an alternative safety valve for the RFS.  From where I sit, a rethink of the policy is overdue. 

Rick Engebretson's picture
Rick Engebretson on May 30, 2013

Perhaps a layperson, Biophysicist, farmer could try interpret the wonderful economics, politics discussion differently. I’m simply glad the important food production contribution is now part of the discussion. Thanks, from one of 7 billion people. Unthinkable, historic, congratulations.

I’ve offered that you can “blend” cake mix ingredients but still not have a cake until you chemically react it by cooking. There is no reason the oil industry can’t cook (refine) ethanol (or methanol, etc.) with low grade oil and tar. They know chemistry.

Second, the growth of biofuels to displace gasoline is a long way from impacting domestic US petroleum production. Given that we import 50 percent of our oil, we displace imports. If there are transportation fuel options, we have been waiting for 40 years, and the world is getting scary.

Finally, I think the EU is lucky to re-invent this bio/fossil fuel concern. With climate, land use, and a database of many other details, it will be fun to see how next generation technology is engineered.

We know there is opportunity, we know there are challenges, but we don’t yet know a good alternative.

Schalk Cloete's picture
Schalk Cloete on June 1, 2013

Hi Geoff,

Just a few comments regarding your graphs:

The inflation graph is misleading because the US economy has simply been in a lower inflation environment in recent years. In fact, the food price index, after having lagged the general CPI for many years, is now leading it. The downtrend of the percentage of US expenses on food has also stopped and is showing signs of reversal. 

Yes, the impact will be small as long as ethanol makes a marginal contribution (around 6% of gasoline energy and 1% of total primary energy), but biofuel advocates would obviously like to see these numbers increase significantly. Much like solar and wind, the negative impacts of biofuels will only become apparent at higher penetration rates.

About the second graph, even though it is true that global grain production has increased by 12.5% from 2000 to 2012, the global population has increased by 15%, implying that grain production per capita is decreasing. When viewed in this light, the further 2.6% taken by US ethanol suddenly looks a lot more significant.

Also, I’m looking forward to seeing the questions I posed previously addressed in future posts. This post did not yet address any of those questions. 

Stanley Seibel's picture
Stanley Seibel on June 1, 2013

It’s time for a New Approach and maybe the end to Ethanol and RFS Mandates.  With the droughts and population growth we should not use farm land for fuel.   With new oil and gas drilling, the US has plenty of energy. For example, new methods for making fuel-grade ethanol from hydrocarbons like natural gas, an abundant U.S. resource( celanese tcx – benefits-cleaner,safer and cheaper than Bio-ethanol )  should be used until better energy options are feasible . The current RFS does not include hydrocarbons on its list of approved ethanol sources, stifling competition and giving the advantage to a small sliver of industries.When Congress picked corn as the winner in 2007, it did not account for the advances in technology that would occur, enabling the cost-effective production of ethanol on a mass scale from new sources. It should be amended to make room for new ethanol sources in the marketplace. Excluding them because of the RFS program inhibits the growth of our domestic energy economy.  And for the carbon and global warming problem we need to fast track new, safe nuclear energy,( Terra Power,) The biosynthetic process,at ( Proterro ) And ( Air Fuel Synthesis )    

Geoff Cooper's picture
Geoff Cooper on June 3, 2013

Schalk,

“…the food price index, after having lagged the general CPI for many years, is now leading it.” This is extraneous to the argument made by some anti-biofuel advocates, who suggest the RFS has contributed to abnormally high food inflation rates–that’s just not true. In any case, it is not historically abnormal for the food index to advance more rapidly than the overall CPI; that has happened several times in the past.

My numbers on global population and grain production growth disagree with those you cited. What is your source?

According to World Bank, global population grew from 6.118 billion in 2000 to 6.974 billion in 2011 (latest available). That’s 13.99% growth.

At the same time, World Agriculture Outlook Board data shows global grain production (wheat, rice, and coarse grains) grew from 1.84 billion metric tons in 2000 to a record 2.32 billion mt in 2011. That’s 26% growth. (Incidentally, 2013 production is forecast to be a record 2.43 billion mt). Global grain supply (production + stocks) grew from 2.40 billion mt to 2.78 billion mt, or 15.8% growth.

Even if you look at the growth rates on a CAGR or annual average basis, grain production has still outpaced population growth. Even after grain use for U.S. ethanol is backed out, the grain availale per capita continues to trend upward.

In any case, the U.N. and others have shown 25-40% of food commodities and processed food worldwide is wasted post-production. We do not have a food shortage problem. We have a food distribution/logistics/trade problem.

Geoff

Geoff Cooper's picture
Geoff Cooper on June 3, 2013

You assume the corn used for ethanol would have otherwise been used for feed (the corn we use for ethanol isn’t consumed directly by humans). That isn’t a safe assumption. There is no “diversion”–the grain used for ethanol is additive to the base supply needed to meet feed/food needs. More likely, if the corn wasn’t used for ethanol it likely wouldn’t have been grown in the first place. And the land would have been idled, enrolled in CRP (at a cost to the taxpayer), or sold to a developer.

Schalk Cloete's picture
Schalk Cloete on June 4, 2013

I am not disputing your point that US ethanol production does not yet have a large impact on food prices. Ethanol is currently such a tiny fraction of the global energy supply that its effect on the economy is not yet clearly visible. I was merely pointing out that the graph you presented (showing an apparent inverse relationship between ethanol production and food inflation) can be misleading because the US economy has simply been in a low inflation environment. 

I got population data from here. The small difference in our calculations is because you looked at the growth from 2000-2011, while I took growth from 2000-2012. 

The grain production data I actually lifted from your second graph using a digital graphical data extraction tool. There are a lot different estimates out there and I thought it would be best to use the data you presented yourself in order to avoid any disputes about sources. 

I agree about the global food distribution inefficiency (and would also add that the amount of food processing going on is creating major nutritional problems), but I cannot really see how biofuels will do anthing other than worsen this situation. 

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