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.

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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.

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.

 

Nick Chambers

Not your traditional car guy.