Food and Feed vs Fuel: Renewable Fuels Perspective

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1 1 Food and Feed vs Fuel: Renewable Fuels Perspective Texas Ag Forum Austin June 9, 2008 John M. Urbanchuk Director, LECG LLC 1255 Drummers Lane, Suite 320 Wayne, PA Tel:

2 2 Ethanol critics and the media have been having a field day

3 3 But everything is not always what it seems

4 4 Biofuels are only part of the reason for increasing corn and food prices. Increasing energy prices are driving retail costs Strong global demand is driving price increases Weather has reduced output in Australia, Europe and elsewhere shorting world grain supplies A weak U.S. dollar is fueling exports Speculation is affecting the markets Finally, biofuels demand

5 5 EISA 2007 contains a 36 billion gallon RFS. Corn ethanol is capped at 15 BG MGY Corn Cellulose Biodiesel Other Adv Biofuels

6 6 Waiving the RFS is not the answer to high corn prices A 50% waiver would reduce required ethanol use by 4.5 bil gal (equiv of 1.6 bil bu corn) Actual cut in production would be much less. Industry capacity is 8.6 bil gal Industry is still profitable at $5.50 corn Economics favor blending ethanol at $127/bbl oil Consumers would be hurt by sharply higher gasoline prices as refiners would be forced to quickly produce an additional 3.1 bil gal of gasoline

7 7 Ethanol s Role in Food Price Inflation Ethanol accounts for somewhere between 2% and 3% of the overall increase in global food prices. Had it not been for ethanol, U.S. food prices would have gone up by 4.25% as opposed to 4.5%. Source: White House Chairman of the Council of Economic Advisers Ed Lazear

8 8 Increased Energy Costs Have Twice the Impact of Corn on Retail Food Prices Source: LECG, The Relative Impact of Corn and Energy Prices in the Grocery Aisle

9 9 Corn and oil prices have increased handin-hand for most of the last 2 years $/bu $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $ $140 $120 $100 $80 $60 $40 $20 $0 $/bbl Corn, No.2 Yel, Cent Ill. (Left) Crude Oil, Spot, WTI (Right)

10 10 There is a Direct Link Between Energy Prices and Food Prices Historically, food prices have surged during times of higher crude oil prices. Moreover, research shows that energy prices are quickly passed through to higher retail food prices. On January 1, 2007, the price of crude was just over $60 per barrel. In late May 2008, oil traded at more than $130 per barrel. Source: Main Street Economist: What is Driving Food Price Inflation? Federal Reserve Bank of Kansas City, 2008

11 11 The Role of Energy and the Marketing Bill Just 19 cents of every dollar spent on food makes its way back to the farm, while the remaining portion of total retail food costs (the marketing bill) including labor, packaging, transportation, energy, profits, advertising, depreciation, rent, interest, repairs, business taxes and other costs not attributable to basic agricultural commodities. The marketing bill has a higher correlation with the CPI for food than does corn. Source: Analysis of Potential Causes of Consumer Food Price Inflation, Informa Economics (

12 12 Global corn demand is growing strongly for both feed and industrial uses. World Corn Demand and Supply MMT 1,200 1, ,200 1, MMT Exports Feed FSI* Supply Source: USDA/ERS. FSI is food, seed, and industrial (including ethanol)

13 13 Per capita income growth is stimulating food and energy demand. Per Capita GDP $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 US $ Source: IMF China India

14 14 Global food prices are increasing largely due to rice, wheat, and edible oils, not corn via ethanol! Pct Chg 120% 100% 80% 60% 40% 20% 0% -20% -40% FAO Food Price Index 2008* All Food Cereals Fats & Oils * YTD. Source: FAO

15 15 Cereals provide most of the world s average caloric intake. Corn plays a minor role as a cereal. FAO Cereals Price Index 9 wheat quotations 16 rice quotations 1 corn price Global Per Capita Daily Caloric Intake Corn Milk & eggs Meat Fats & oils Rice Wheat Sugar Source: FAO

16 16 Speculation has been a major factor driving corn prices since mid ,000 Contracts 1,200 1, Jan-01 Jan-00 Jan-99 Jan-98 CBOT Corn Long Positions Non-commercial vs commercial Jan 98-Apr 06: 46% under May 06 to today: 6% over Jan-05 Jan-04 Jan-03 Jan-02 Jan-08 Jan-07 Jan-06 NonCommercial Commercial Source: CFTC

17 17 Corn exports are at record levels as a weak $ offsets high prices. Mil bu 3,000 2,500 2,000 1,500 1, Index Corn Exports Trade Weighted $ Source: USDA/ERS; Federal Reserve

18 18 U.S. Corn Production Outpaces Demand Only 4.6% net new ethanol corn demand Source: USDA, Goldman Sachs Commodities Research Report, April 10, 2008

19 19 The foods directly impacted by corn and soybeans account for only about 25% of the consumer s food basket. Relative Importance: CPI for Food Meat, poultry, fish, eggs Other Foods Fruits and Vegetables Cereals and bakery prods Non alcoholic beverages Dairy products Sugar and sweets Fats and oils Food away from home Food at home (55%) 0% 10% 20% 30% 40% 50% Source: Relative importance of components in the Consumer Price Indexes: U.S. city average, December Bureau of Labor Statistics

20 20 Corn has a Minor Impact on Retail Food Prices * * Source: USDA,NCGA * Based on corn value of $4/bushel. USDA choice boneless sirloin steak. Feb. 08;

21 21 Let s put food price inflation in a historical context. 16% 14% 12% 10% 8% 6% 4% 2% 0% Consumer Price Index, All Urban (Average Annual Increase) Pct Chg * All Items Food Source: BLS; *2008 YTD

22 22 Retail food prices are accelerating faster than the overall CPI. CPI-U, Percent Change from Previous Year 6% 5% 4% 3% 2% 1% 0% Jan-08 Oct-07 Jul-07 Apr-07 Jan-07 Oct-06 Jul-06 Apr-06 Jan-06 Oct-05 Jul-05 Apr-05 Jan-05 Oct-04 Jul-04 Apr-04 Jan-04 Oct-03 Jul-03 Apr-03 Jan-03 All Items Food Food at Home Source: BLS

23 23 Ethanol is Keeping Fuel Prices Lower Iowa State (CARD) estimates that the growth in ethanol production and use has caused gasoline prices to be $0.29 to $0.40 lower than they might otherwise have been. Without ethanol to expand the available fuel supply the world s refiners would need an additional 1.9 million barrels of crude oil per day, or 2.2 percent of current world production and crude oil prices would be 27.5% ($35.70 per barrel) higher than they are currently!

24 24 Ethanol s Impact on Household Gasoline and Food Spending IMPACT ON HOUSEHOLD GASOLINE SPENDING A. Avg. Miles per Household per Year B. Average Fuel Economy (2007) C. Gallons Gasoline Purchased per Household D. Ethanol Savings per Gallon TOTAL SAVINGS PER HOUSEHOLD VALUE 21,252 miles 20.2 mpg 1,052 gallons $ per gal. $ $ SOURCE FHWA (2001 NHTS) EPA (2007) A B Iowa State (2008) D x C IMPACT ON HOUSEHOLD FOOD SPENDING A. Avg. Household Spending on Food (2006) B.Current Food Inflation (5.1% Apr 08) SHARE OF FOOD SPENDING DUE TO ETHANOL* $6,111 $ $18.33 BLS BLS White House CEA *The White House Council of Economic Advisors estimates that just 0.25% of food price inflation is a result of U.S. ethanol production.

25 25 Thank you! Questions?