Food vs. Fuel: Corn Prices Plummet, Why No Grocery Relief?
In a new report, the Renewable Fuels Association (RFA) says the events of recent months clearly indicate that production of corn ethanol is not a major driving factor behind the continued high food prices at the supermarket.
In the report, “Will the Plunge in Grain Prices Mean Lower Food Prices at the Supermarket?,” the RFA points out that, while prices for agricultural staple commodities such as corn, wheat, and soybeans have all plummeted by about 50% in the last half year, food prices at the grocery store have remained highly elevated. At the same time, ethanol production has dramatically increased.
When the above factors are taken together, the link between grocery store food prices and corn ethanol production becomes dubious. Not only that, and also somewhat unintuitively, it seems that the diversion of relatively large portions of the US corn crop to ethanol production has very little effect on even the market price of corn.
- » See also: Biofuels Breakthrough: Making Fuel From Air With Engineered Microbes
- » Get Gas 2.0 by RSS or sign up by email.
So, if ethanol production doesn’t have a large effect on food prices or even corn prices, what, then, accounted for the meteoric rise of corn and food prices earlier this year and what factors are controlling the current fall in commodity prices without an accompanying food price drop?
According to the RFA, the drop in commodity prices is all due to rampant speculation. Last July and August, when the crop yield outlook was improving, the credit markets were tightening, and oil prices were declining, speculators started to jump out of the commodities market when they realized there wasn’t going to be money in it anymore.
As the speculators lost interest in the commodities markets, guess what happened? Uh-huh. The prices for corn, wheat and soybeans plummeted.
As the RFA report states:
“The speculation-fueled increase in agriculture commodity prices in the spring and early summer occurred in conjunction with a pronounced rise in retail food prices, leading critics to rashly assume that the two trends were tightly related.”
“Without question, the plunge in commodity prices in the last several months has disproven the unsupported claim that biofuels production was the dominant factor driving grain and oilseed prices higher. Ethanol production has continued to expand dramatically while the price of corn and other agricultural commodities has plummeted in the last four months. Still, food prices have continued to rise, undermining the assertion by biofuels critics that food prices and ethanol production are somehow strongly linked.”
The RFA’s arguments seem pretty sound to me. What do you other folks think when you read the report?
One of the first things that crossed my mind was that perhaps the grocery industry and meat processors saw a way to raise their prices and pad their coffers while pointing fingers at another industry. If that was the case, it was a great short term strategy because, at the time, there was no way for the ethanol industry to defend itself.
But now that the actual statistics are starting to roll in, it seems that the grocery and meat industries’ arguments of how ethanol was solely to blame for escalating food prices are not being born out by reality. The one question left in my mind is, why are food prices still so high? Anybody in the grocery and meat industries care to comment on that one?
Source: Imperial Valley News (via Biofuels Digest)
Image Credit: beggs’ Flickr photostream under a Creative Commons license.
I have no expertise, but I think the food prices were more linked to the price of oil than to the production of biofuels (although, in a tight market, any extra demand will have an effect…but the tight market is apparently gone). Don’t trucking companies buy gasoline on the futures market through contracts? In which case, many of them may not even be feeling the drop in fuel prices till their current contract ends. Airlines are the same way.
I agree with Tim (Cleland) %100. Even farmers buy their fertilizer in the futures market. Farmers are still paying the high cost of fertilizer b/c they buy through contracts.
The blame on biofuel was an easy target to direct frustrations during the time of rising oil prices. What about the blame biofuels were receiving when global inflation was in full gear? Biofuel production was catching a lot of heat when inflation sent food prices skyrocketing around the globe. The argument ‘was why utilize all that corn for biofuels when starving countries could use it more’…
Trucking companies may buy their fuel on the futures market like the airline industry, but the cost of oil has been high for a while now.
The reason food is still expensive is because of sticky prices. An economic phenomenon, sticky prices are when after a long and gradual increase in price is followed by a sharp drop in price, and the price doesn’t adjust to the change. It “sticks” to its new equilibrium price. Often the price sticks because retailers need the higher profit margin to recover losses from the previous cost increase.
Take Tyson: chicken has become more expensive because it is more expensive to ship (gasoline, electricity for cold storage, etc). As their costs increased they had to raise their prices, but any astronomical jump would turn off consumers, and they might loose customers. So they accept a narrow profit margin or even outright losses.
When the cost of shipping goes down, Tyson sees the opportunity to recoup their losses. They see consumers as adjusted to the new price so they don’t fear loosing customers any longer.
Ahh finally an article with its wits about it in regards to corn ethanol! Don’t get me wrong I still want to see Algae Biodiesel/Cellulosic Ethanol/ Better Batteries….But for the time being, people can now finally realise corn ethanol is not the evil food price riser that everyone made it out to be.
When you consider the price of gas has plummeted with a small decrease in consumption (Saudi Arabia plans to ‘fix’ the situation by reducing production 1.5 million barrels) it says ethanol is contributing to keeping fuel prices lower.
Every little bit of biofuel/conservation cuts slowly but surely into Middle Eastern energy market share. They cut production (to artificially decrease supply) and we fill the gap with biofuels and efficiency improvements…that’s my dream anyway.
Food prices are cyclical in a competitive free market, always have been, always will be.
They hold steady for several years, kept from rising with inflation by competitve forces.
Then something happens to excuse an across the board rise in thise prices. Often it is a major crop failure and foreign purchases; China for example. They caused just such an across the board price increase a few years ago when they had a massive crop failure followed by huge buys of foreign corn.
Those price increases will then usually hold fairly steady for a few years, then there will be another jump.
We will not see a decrease in food prices from the drop in corn because corn prices have little actual effect on food prices, only being an excuse to raise prices to keep up with inflation.
As has been pointed out over and over again, high priced petroelum is the main factor that drove all prices up in all markets, including food.
larry
After the sugars are pulled from corn, the remaining solids are fed to livestock. We do not eat ‘field’ corn anyway. Farmers have always received a very, very small percentage of the final product’s cost to the consumer. Look at a pie chart for potato chips. In many years, potatoes are given away in truckloads to food bank charities! That is one reason why Pepsi stock is high priced…sugar and water is another…
Tim C,
I work for a mid-sized trucking company. We have tried the futures for fuel (diesel, not gasoline), and won some and lost some. We don’t go that route anymore, and it’s not commonplace in the industry.
Good commentary across the board here from Ross, Jon, and Larry. I don’t expect the food prices to drop any time soon, if at all, for the various reasons listed above. This report, combined with other evidence, will help validate the industry’s argument that the grocery industry threw this out there as an excuse to raise prices….meanwhile they threw the ethanol industry under the bus with the media and general public.
I’m also all for conservation and 2nd generation biofuels, but corn ethanol is an amazing story, and a huge win for our economy, environment, and national security.
When corn prices per bushel were at their 20-year average of $2.28, the value of the corn in an 18-ounce box of cereal was 3.3 cents.
When a bushel of increased to $3.40 in 2007, the price of the corn in a box of cereal increased to 4.9 cents.
The result of this was a 0.5% increase in the total cost of the box of cereal, even though corn prices increased by 49%.