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New Ethanol Studies: Little Effect on Gas Prices, Significant Pressure on Food

June 26, 2008
Economists Argue Ethanol Mandates Costly to the U.S. Economy
WASHINGTON, DC – Two studies released today show that federal ethanol mandates have placed significant pressure on food prices, while any effect on gasoline prices has been "almost too small to measure."

Dr. Thomas Elam of FarmEcon LLC, and Keith Collins, former chief economist of the U.S. Department of Agriculture, submitted their new analyses to the Environmental Protection Agency (EPA). Today is the end of EPA’s public comment period on a request from Texas Gov. Rick Perry to partially suspend the Renewable Fuels Standard (RFS) in light of serious economic harm caused by the current policy.

“The 2008/2009 increase in fuel production made possible by the RFS is almost too small to measure against the global energy market, but the effects on food prices and security are huge,” Elam notes. “The U.S. government should re-examine and reduce the RFS in light of the damage it can do to our food production capacity and the overall welfare of the country.”

Elam’s study concludes that ethanol actually has had little effect on gas prices – only about 4 cents per gallon.

Elam: Maintaining RFS would be “devastating”
Dr. Elam’s study also describes the expected impact of crop shortages on commodity and food prices if congressional food-to-fuel mandates remain at their current levels. The study concludes that maintenance of the current RFS in light of recent flooding in the Midwest would prove “devastating” to livestock and poultry farmers and would increase the burden of food prices for American consumers.

Elam’s study, entitled “Biofuel Support Costs to the U.S. Economy: The Key Role of the RFS in a Feedstock Shortage Scenario,” investigates two distinct scenarios: one in which there is crop damage and the RFS remains in place, and one in which there is crop damage but the RFS mandate is reduced by 50 percent.

“Maintenance of the current RFS schedule in the face of a smaller 2008 corn crop will be devastating to meat, dairy and poultry producers,” Elam wrote. “Consumers will suffer as food and fuel costs rise and supplies of corn-based foods diminish. The overall economy will be damaged from higher inflation and lost jobs in the food production sector.”

A recent Goldman Sachs analysis predicted that 2-4 million acres of corn may be lost in the wake of the Midwest flooding. The USDA is expected to provide a detailed estimate of losses in the coming weeks and has already revised down its expected crop yield data.

Collins: Government support for corn-based ethanol ensures a permanent, significant, and increasing demand for corn
The Collins study, “The Role of Biofuels and Other Factors in Increasing Farm and Food Prices,” indicates that unless the RFS is suspended or revisited, U.S. grain stocks – already pushed to dangerously low levels – will fall even further as ethanol consumes a larger share of the dwindling corn supply.

"Government support for corn-based ethanol ensures a permanent, significant, and increasing demand for corn,” Collins said. “These policies interfere with the normal price rationing function of markets when supplies are short such as in 2008, with production being reduced by flooding and excess moisture. In this short-crop environment, biofuels policy, including mandated use of ethanol, causes even higher corn prices, shifts the demand adjustment burden to non-ethanol users of corn--particularly the livestock sector--and puts continuing pressure on food prices."

Studies: Biofuels “a significant factor” in higher food prices
Elam and Collins also weigh in on ethanol policy’s impact on food prices.

The USDA has argued that biofuels policy has had very little effect on food prices – as little as 2-3 percent. The Collins study contradicts this finding directly and points to potentially serious impacts on consumer prices.

“The increase in retail food prices due to biofuels is estimated to be 23-35 percent above the normal increase in food prices that would occur over 2-3 years,” Collins wrote. “Accordingly, biofuels are now becoming a significant factor in higher food prices.”

The Elam study also warns that reduced crop yields coupled with the RFS and corn prices at $8 per bushel would have an overwhelming effect on food producers and American consumers: “While mid-2008 profitability indicators for meat and poultry production were depressed well below normal levels, production was still generally higher than prior year levels,” the study noted. “Without a reduced RFS, that will all change in the coming months. Meat, poultry and dairy producers will find it necessary to deal with not only higher feed costs, but the sheer availability of feed ingredients at any price. “

Reducing the RFS by half would bring down the price of corn by $2.25 per bushel, Elam argues, saving more than $9 billion in feed and food costs. The average cost of a ton of soybean meal would fall by $150, saving over $5 billion.

Both the Elam and Collins studies can be found at the Food Before Fuel website. Elam’s study was made possible by the Balanced Food and Fuel Coalition. Collins prepared his study for Kraft Foods Global, Inc. as supporting material for its comment submission to the EPA on Texas Governor Rick Perry’s request for a waiver of the Renewable Fuel Standard.
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