MoveBeyondOil.org | News Analysis: Why Ethanol Does NOT Drive Food Prices

8/1/08 Why Ethanol Does NOT Drive Food Prices

By Peter Forman
Published: August 1, 2008
New York—Ethanol has recently come under attack for the global rise in food prices. But just like blaming speculators for oil prices, using ethanol as a scapegoat is a misleading distraction.

Ethanol is not a major contributor to rising food prices.

According to the U.S. Department of Agriculture, corn ethanol accounts for only 2-3% of the rise in food prices, while biofuels together account for about 10% of the increase.

So, what is driving up food prices?

1) The U.S. dollar has weakened substantially. Therefore, our food exports are less expensive for others to purchase. That means more demand and higher prices.

2) The Chinese and Indians have more disposable income and are using that increased wealth to eat better (American agricultural products). Again, more demand and higher prices.

3) Higher oil prices increase the cost of production, transport, wages, and packaging--the main costs of retail food. Higher costs mean higher prices.

—Corn is just not that big a portion of the costs. As an example, in a $3 box of cornflakes there are 15 ounces of corn that cost 8 cents from the farmer. Even if corn increased by 15%, its impact on the cost at retail would be limited.
—According to economists from Purdue University, about $3 of the $4 increase in a bushel of corn is due to higher crude oil prices.
—Oil is up 14 fold over its cost 10 years ago, with the preponderance of the increases in the past two years.

Critics often have their own agendas. One of ethanol's biggest critics is OPEC. According to the International Energy Agency, if biofuels disappeared, demand for oil from OPEC would increase by a million barrels per day. And according to Merrill Lynch analysts, without biofuel programs, the price of oil would be about $13 a barrel higher than it now is.
As we invest in ethanol and other alcohol-based fuels, they will become more cost and energy efficient. Brazil has achieved energy independence by specializing in cane ethanol, which costs about $70 a barrel to produce.
America so far has focused on corn ethanol, which, while not materially contributing to the overall increases in food costs, is a favorite of American farmers.

America can diversify into cane ethanol and into a new technology called cellulosic ethanol, which makes use of plant waste and requires no new land.

Just this week, the State of Massachusetts passed laws that eliminate taxes on the production and sale of this cellulosic ethanol.

MoveBeyondOil.org does not believe that ethanol is the largest of the long-term solutions to our oil-dependence issues. But it is, (along with other alcohol-based fuels), a critical short-term band-aid and a likely part of a diverse energy future.

As part of Congress needs to pass the Open Fuel Standard Act, which requires that 50-80% of new cars be able to run any mix of gasoline, methanol, butanol, or ethanol.

Biofuels can be and should be one stop on our journey to move beyond oil.

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