The Renewable Fuel Standard and Consumer Food Prices

April 14, 2014

Print This Article Share it With Friends

by John M. Urbanchuk (ABF Economics, Agriculture and Biofuels Consulting, LLP) The impact of biofuel production mandated by the Renewable Fuel Standard (RFS) on U.S. consumer food prices has once again emerged as an issue in public debate. The impact of biofuels on food prices remains a policy issue for several reasons. First, some concern persists about the impact of demand for feedstocks to produce biofuels on prices of major agricultural commodities. Critics continue to blame biofuels for the spike in agricultural prices between 2005 and 2008 and between 2010 and 2011. However, while the increase in prices between 2005 and 2008 is coincident with rising biofuel production, it is now generally recognized as having been primarily affected by the petroleum-led commodity price bubble and a combination of other factors. The second major reason is the impact of weather on agricultural markets. This was highlighted most recently by the 2012 drought which was the most severe in several decades. The purpose of this study is to examine the relationship between the RFS and recent changes in consumer food prices. Specifically this includes an examination of the relationship between corn prices and consumer food prices, the factors that affect corn prices, the role of the major industry participants in determining consumer food costs, and the relative importance of components such as agricultural commodities and energy on consumer food prices. Also addressed is the impact of the RFS on the major co-products of dry mill corn ethanol production, Distillers grains and carbon dioxide, and their contribution to the livestock and poultry sector and food processing industry.
---
Ethanol production and the demand for corn to produce ethanol have increased as a result of the RFS mandates. Corn prices also have increased over this period of time but increased demand is only one factor behind the increase in corn prices. A careful examination of food price inflation measured by the Consumer Price Index indicates that retail level food prices have increased at a slower rate since the RFS took effect than during the comparable five years before the RFS.
The food processing industry accounts for a larger share of consumer food costs than does production agriculture. Moreover, energy prices play a more significant role in costs for food processors than do the prices for any individual agricultural commodity.
Higher ethanol output resulting from the RFS has led to increased production of DDGS, a feed ingredient co-product of dry mill corn ethanol production. Because DDGS has a positive substitution rate for corn, these higher production levels have increased the total availability of feed for livestock and poultry producers compared to corn grain.
Finally, while it is true that food prices have increased modestly faster than overall inflation in the past several years consumers are not spending a greater share of income on food than was the case before the RFS was implemented.
---
Key findings

Ethanol production and the demand for corn to produce ethanol have increased as a result of the RFS mandates. Corn prices also have increased over this period of time but increased demand to produce renewable fuels consistent with the RFS is only one factor behind the increase in corn prices. These factors included a sharp increase in petroleum prices, rapidly expanding global demand for food and agricultural commodities, commodity market speculation, and an expansive U.S. monetary policy.
A careful examination of food price inflation measured by the Consumer Price Index indicates that retail level food prices have increased at a slower rate since the RFS took effect than during the comparable five years before the RFS.
The food processing industry accounts for a larger share of consumer food costs than does production agriculture. Moreover, energy prices play a more significant role in costs for food processors than do the prices for any individual agricultural commodity.
The RFS has contributed to the production of important co-products of the dry mill corn ethanol industry. Specifically, Distillers dried grains have positively contributed to reducing net feed costs for livestock, dairy, and poultry producers. Higher ethanol output resulting from the RFS has led to increased production of DDGS. Because DDGS has a positive substitution rate for corn and soybean meal, these higher production levels have increased the total availability of feed for livestock and poultry producers by 21 percent compared to feed use of corn alone.
The ethanol industry is a major source of captured carbon dioxide which is used in food processing, refrigeration and packaging to enhance the quality of processed foods and improve profit margins for processors.
The RFS has not had an adverse impact on consumers’ ability to afford a safe and healthy food supply. Although food prices have increased modestly faster than overall inflation in the past several years consumers are not spending a greater share of income on food than was the case before the RFS was implemented.
The severe recession of 2008-2009 and sluggish recovery in real incomes has played a more significant role than commodity price increases in the decline in red meat and poultry consumption that has taken place since before the RFS was implemented. READ MORE