farmers and ethanol firms blame oil for food costs

US farmers and ethanol firms blame oil for food costs, according to my pal Joe Kamalick on ICIS news.
(Disclosure: I work for ICIS: About ICIS)

Looks to me that John Block Regan’s Secretary of Agriculture has a point about speculators piling into the grains markets as Wall St hits a rocky patch, and I like the quote from Rick Tolman, chief executive of the National Corn Growers Association (NCGA). He blames a

“clever misinformation campaign that is trying to turn Bo Peep into an axe murderer”

But these arguments really only hold water in countries where food is predominantly processed.
I’m going to suggest that in the developed world there are inputs to and from granaries but also ones to and from factories where the products are made and within factories to manipulate the ingredients. Then there are movements to supermarket distribution hubs and out to the shops. In that scenario then the price of energy (oil) will almost always be a bigger part of the cost of food than the ingredients.

The US Department of Agriculture has some interesting numbers on the effects of changing the cost of corn on a number of foods in the US.

For example, an 18-ounce box of corn flakes contains about 12.9 ounces of milled field corn. When field corn is priced at $2.28 per bushel (the 20-year average), the actual value of corn represented in the box of corn flakes is about 3.3 cents (1 bushel = 56 pounds). (The remainder is packaging, processing, advertising, transportation, and other costs.) At $3.40 per bushel, the average price in 2007, the value is about 4.9 cents. The 49-percent increase in corn prices would be expected to raise the price of a box of corn flakes by about 1.6 cents, or 0.5 percent, assuming no other cost increases.

Most of the real difficulties arise in countries where people buy grain directly and mill it themselves into edible food. The oil input there is much less, possibly from the field to the granary and then to the market. There it is the price of grain that matters much more than the price of energy and if the price of grain goes up by a third in the course of a year, then the price to you the consumer goes up by a third. There’s nothing in the chain between the field and the bowl to cushion the blow and the price of the ingredients is a much larger part of the price to you and to the aid agencies which may be helping you out.

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5 Responses to farmers and ethanol firms blame oil for food costs

  1. tornadoes28 1 May, 2008 at 10:28 pm #

    With the millions of people around the world on the verge of starvation, ethanol takes a huge quanitity of food and uses it, not for people to consume, but for fuel for cars and trucks. This has contributed to driving the cost of corn way up over the last year or two (there are other factors for the increase as well such as drought in Australia and booming demand among new middle classes in China and elsewhere but ethanol production is a big culprit).

    Ethanol is bad news.

  2. Bill 2 May, 2008 at 4:55 am #

    The oil input to food is more than processing and transportation. For many crops oil’s effect begins with fertilizer, seed delivery, and in many cases planting itself. Further, it has an effect on the tools and equipment used in agriculture.

    By eliminating these from consideration you (accidentally I am sure) bias the impact of oil price changes, in either direction, on the cost and the price of food.

  3. David B. Benson 6 May, 2008 at 1:27 am #

    tornadoes28 wrote “Ethanol is bad news.” Only ethanol from corn. Ethanol from sugarcane is good news.

  4. Alex Tiller 20 May, 2008 at 9:23 pm #

    Ethanol driving up Food Prices? –No way
    Everybody in my world, agriculture and farming, is getting raked over the coals because ethanol prices are supposedly driving up food prices. This is only partially true. (Look to global demand for meat increased by developing nations as the real culprit) Making a change like “energy independence” won’t come fast, easy, or cheap; but it will be good for our country in the long run. People also seem hung up on the idea that all biofuels must be corn based ethanol which is not true. These heightened food and fuel prices will encourage the development of new technologies. Balance will come eventually.

    I am also always surprised by the groups of “environmentalists” who all get together and chant for a “smaller carbon footprint” and “less drilling” but aren’t willing to make the sacrifice of paying more for their Wheaties or Cheerios when someone actually listens to them. I am even more surprised when these same people, who claim to be looking-out-for, or at least thinking about our future, are so short sighted enough to believe that new efficiency wont develop and new technologies wont emerge.

    Thanks for the opportunity to comment.

    Alex Tiller

  5. Biofuelsimon 21 May, 2008 at 11:50 am #

    Hi Alex, thanks for visiting the Big Biofuels Blog. There’s little doubt that buying food close to where it is grown has a number of benefits for consumers. Firstly, it should be fresher, secondly there will have been less gas/diesel used to get it to an from the market than if food is heavily processed. There’s also less energy used in processing) so the environment should benefit too. Because less energy is used to process the food, its price will more accurately reflect the underlying price of the commodity itself not the energy costs associated with its manufacture.

    That’s true of all unprocessed foods, and why the rising cost of grain in the poorer parts of the world caused food riots in Hati, Egypt, Cameroon, Ivory Coast, Mauritania, Ethiopia, Madagascar, the Philippines and Indonesia in March.

    We can argue about whether diverting corn in the US into ethanol is the root cause of this or not, but it looks like it could be a contributing factor, along with the growing demand for grain-fed meat as parts of the developing world get richer. Poor harvests contribute, as does protection for farmers and irrational agreements, like the sugar regime…

    I think that we should move as quickly as possible from grain-powered ethanol into non-food crops and make improved Corporate Average Fuel Efficiency standards considerably more strict. If my European car will average 40mpg on the motorway, why should US vehicles be much less efficient.

    Food is for eating, not for burning.

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