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Don’t Blame Biofuels
On High Food Prices;
Blame The Government

Jim Prevor’s Perishable Pundit, April 22, 2008

Our piece, Low Dollar And Diversion Of Crops To Biofuels Contribute To Food Inflation, brought forth this thoughtful letter:

I am a frequent reader of your reports which are insightful and very good coverage on a variety of produce related topics.

I have to take exception with the piling on of finger pointing at biofuels for food price increases, however. When you really dig into the numbers, that just isn’t the case. Many other factors are driving food price increases far more than biofuels. I’ve attached a couple documents that detail such.

In sum, the US had the largest corn production in history in 2007, 25% larger than the previous year. That increased production more than offset all corn use in ethanol. If you take it out of the picture, food price issues would still be the same because ethanol is not the driving force. Droughts, increased demand, low dollar (exports/competition for product) and more expensive imports (30% of US consumption of produce), consumer choices (organic and rbst-free milk are more expensive), opportunistic price increases in the food chain, increases in labor costs, and $110+/barrel oil all permeate the food system far more than biofuels.

The big picture is that oil production has reached a plateau of about 82 million barrels per day for the past several years. China and India are buying oil (and everything else) to satisfy a growing population. Vehicle production in China jumped from 10 million cars in 2004 to 50 million cars to heading toward 2012, and projected at 150 million cars in 2018. In 2007, China accounted for 38% of the worldwide growth in oil demand. India isn’t far behind.

“With gas prices expected to hit $4 per gallon this year, consumers will be spending nearly a fifth of their household budget on gas,” said Todd Hale, senior vice president, Consumer & Shopper Insights, Nielsen Consumer Panel Services. “That kind of increase has a direct impact on what they can afford to spend and is something retailers will need to address.”

http://us.acnielsen.com/news/20080416.shtml

The world is not in a business-as-usual situation with food or fuel; global population is changing both. We have to find new solutions. Biofuels are a transition to the next stage of transportation fuel development. The biorefineries that have been built for today’s biofuels will be the backbone of cellulosic ethanol, algae biodiesel and other biofuels of tomorrow. Every day, biofuels are improving in efficiency, sustainability, and better production and processing practices. The opposite is true for oil — all the cheap and “easy” quantities are gone.

Are biofuels the silver bullet for transportation fuels? Certainly not. They are a piece of the puzzle. It will take monumental leaps in technology for vehicle mileage improvements, changes of driving behaviors and modes of transportation, increased use of barge and rail shipping (and major investments in both) with reduced reliance on trucks (least efficient form of shipping), more mass transit in cities, and new fuels we haven’t even developed yet.

The food price issue is real and has to be addressed, but it is a much broader issue than biofuels. It will take biofuels and many more components to solve the impending oil crisis.

If food is the issue, we should be focusing world attention on potatoes — they produce more nutrients and calorie per acre than almost any other food: http://www.nutraingredients.com/news/ng.asp?n=84493-solanic-avebe-fao-potato-proteins

Additionally, the US is losing 1.5 million acres per year of ag lands due to urbanization and conversion to other uses. Where’s the outcry over that loss and connection to food prices? And, we grow many things in the US and abroad that aren’t food but use ag lands (grasses, trees/nursery products, etc.)… are these taking away from food production?

Farmers respond to market signals and grow what is most profitable. Wheat hasn’t been profitable for many years, hence lower acreage worldwide, coupled with droughts in Australia and production problems elsewhere. It’s been a decade or more coming. The climax hit at an inopportune time, but hardly anything to do with biofuels.

It’s a very complex and “perfect storm” situation with many factors. Biofuels is the easy scapegoat for lots of players looking to blame someone else for their own problems, whether it’s oil companies diverting attention from $100+ oil, or other government’s lack of investment in ag research and production, or whatever.

Hope it’s helpful on the topic.

Brent Searle
Special Assistant to the Director
Oregon Department of Agriculture

We thank Brent for sharing his reasoned approach to this issue and providing such copious data. In addition to the letter, Brent sent along two attachments, both of which are worth reading; we provide them for you here.

  1. What Is Driving Food Price Inflation?
  2. U.S. Corn Growers: Producing Food and Fuel

Brent’s point about multiple dynamics causing food prices to rise is well-taken. Even in our piece, the first cause we noted in the headline was the “dollar” — we apologize for the editing error that said “high” dollar rather than “low” in the headline — it was correct in the text — which serves to reduce imports and increase exports.

Without a doubt, the numerous factors Brent implicates are important in this situation:

  1. Drought
  2. Increased demand — especially in places such as China and India.
  3. Low Dollar (more exports/fewer, more expensive imports)
  4. Opportunistic price increases in the food chain
  5. High Oil Prices

Yet we focused on the dollar and the issue of biofuels because they are more specifically a product of public policy.

There is, of course, no “correct” or “incorrect” price for a commodity — there is just a market-clearing price.

To the extent that prices are up due to drought, that is in all likelihood a short-term phenomenon, and next year we will have rain again. If the drought is due to global warming or some permanent change in climate, it is no longer correct to call it a drought; it just means that this is the new situation and reduced supply in that area will mean a change in the supply/demand equilibrium.

That areas of the world, such as China and India, are becoming more affluent and looking to eat more animal-based protein is undoubtedly true. Yet the impact of inflation on this dynamic is difficult to assess. People, after all, have brains and hands as well as mouths and stomachs. These newly affluent people are major contributors to the world economy — that is why they are newly affluent. If they pull the cost of food up by increasing demand, they also push down the price of many items by increasing supply. Net/net, it is a complex case to make.

The dollar has certainly impacted the situation, especially in the US in an industry such as produce. Yet if the issue was primarily the dollar, we might see food price inflation in areas linked to the dollar and food price deflation in areas not linked to the dollar. After all, if our prices go up because we no longer import as much food or we export more of our food, the rest of the world would have to experience the opposite effect and retain more of their domestic production and absorb imports of extra food from us. The unusual point about this global price increase is that it is, in fact, global.

Although some companies will be able to grab “opportunistic” price increases — that is to say, price increases in excess of what commodity prices have increased — we know of no evidence that en mass the industry will have higher profits. Anecdotally, for every restaurant or frozen-dinner manufacturer who was able to grab extra margin, it seems as if there are ten that can’t pass along all the increases in the price of inputs.

We could have included the high price of oil in our analysis as the price of oil is to some extent dictated by public policy. If it was easy to drill for oil in Alaska or off the coast of Florida, we might have lower oil prices. If one could build an oil refinery “as of right,” there would be more refinery capacity and probably more competition, thus keeping prices down. For the sake of discussion, we thought of oil prices as a “fact of life” that the ag industry has to deal with.

The reason for the focus on biofuels is that, unlike a failure to produce food due to drought or an increase in demand due to rising prosperity or export/import switches caused indirectly by a low dollar or opportunistic price increases in the food chain and high oil prices, increased demand for biofuels is mostly a matter of the government putting its thumb on the scale by declaring that it will mandate or subsidize such fuels.

Just last Tuesday, April 15, 2008, for example, Britain began a mandate for biofuels:

A new law went into effect in Britain on Tuesday that requires 2.5 percent of all gasoline and diesel sold for any vehicle to come from biofuels. That will rise to 5 percent by 2010, and the European Union has proposed a target of 10 percent across Europe by 2020. While those targets initially were criticized as a timid response to global warming, now there is some relief that the policies haven’t gone further.

Brent correctly points out that lots of things impact food prices and that we should be aware of things such as land lost to development, land used for ornamental horticulture, etc.

However, simply doing anything that will make food cheaper is unlikely to be the public policy goal.

We would argue that the focus of public policy should be on reducing externalities — and then let the private sector determine the best course of action.

If the problem is carbon, then tax it; if you believe that lack of oil independence imposes high defense costs on the country, tax imports of oil and products containing or made from oil.

Then the private sector will respond to those new conditions. Perhaps the answer is corn-based ethanol or maybe cellulosic ethanol or perhaps plug-in hybrid cars or maybe electric cars or hydrogen-fuel-cell powered vehicles — who knows?

Just as the French and British decision to invest government money in the Concorde didn’t put us all on supersonic jets, so in all likelihood government dictates in this area will lead to payoffs to political constituencies and significant diversion of resources from their most productive use.

Put it another way, we don’t see biofuels as a problem; we see government mandates and subsidies for biofuels as a problem.

We will say that we enjoyed the note on potatoes — a fine crop indeed. But excess dependence on any one crop, as our Irish friends can tell us, is a dangerous situation.

Once again, a sincere thanks to Brent Searle and the Oregon Department of Agriculture for such a comprehensive and thoughtful response.

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