Archive for Thursday, May 22, 2008

Don’t blame ethanol for higher food prices

May 22, 2008

Normally I discuss weed and insect control, fertilization, trees and many other garden and yard issues. This week though, I'll talk about another problem that nearly everybody in the country is dealing with: food prices.

Lately, if we aren't talking about how much it costs to get to the grocery store, it seems we're talking about how expensive it is once you're inside! The general consensus has been to blame high food prices on the government's ethanol mandates and tax credits for ethanol production. These government actions are thought to be the cause for the record-high corn prices we've seen recently, but the prices are only too high if you're on the wrong side of the transaction.

If you're buying corn for milling, you're probably thinking corn is too expensive. However, if you're a producer, you're probably thinking it's about time you sold your commodity for a fair price, because the only way it was profitable in the past was through subsidies and loan-deficiency payments.

The ethanol industry and the government mandates that support it are easy targets to blame and may very well be part of the problem, but some researchers at Iowa State University don't agree. They believe that even if the mandates and tax credits were removed from ethanol, corn prices would only drop 14 percent from current prices, or about 77 cents per bushel. It seems the main reason for the rise in food costs is the increase in fuel costs. It simply costs so much to haul food from point A to point B that it has to be reflected in our grocery bills.

Art Barnaby, an agriculture economist at K-State outlined some reasons why corn prices would stay high, even if government support for ethanol were removed. The first reason corn prices would remain constant is the increase of input costs. Because of high fertilizer costs (due to fuel prices), corn prices would have risen in response to input prices anyway. Barnaby sums it up with the following statement, "Over the long run, one cannot drive price below the cost of production, so in the long run average corn price would have increased even without ethanol."

Another reason corn prices would stay steady is that the U.S. dollar is weak right now, and that has made corn affordable to international markets. The heavy export demand will most likely help hold corn prices where they are now.

A third reason is the increased fuel prices. If gasoline prices rise to $4 per gallon, then the demand for ethanol will go up too. An increase in the demand of ethanol would increase ethanol prices (even without mandates and tax credits), thus increasing corn prices.

The last reason may be the most important one. Even at these prices, there is only about 17 cents worth of wheat in a loaf of bread and 10 cents worth of corn in a box of corn flakes, according to Barnaby. Those numbers suggest that corn and wheat prices have little to do with the cost of the food produced from them.

I'm not trying to blindly defend ethanol production with this information. I'm simply trying to show the main reasons why food is so costly. I know ethanol is not a 100 percent efficient process, because it takes fossil fuel to produce ethanol. I'm also aware of data from another Iowa State study that claims that gas would be 30 to 40 cents higher per gallon if not for ethanol production. The bottom line is, as long as fuel is expensive, (even if ethanol is removed from them), our lives will be difficult for quite some time.

If you have questions about this information, or any other natural resources topics, stop by the Extension Office on the corner of Hughes and Eisenhower roads in Leavenworth, call (913) 250-2300, or send an e-mail to me at mepler@ksu.edu.

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