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John M. UrbanchukDirector, LECG LLC 1255 Drummers Lane, Suite 320Wayne, PA 19087Tel: 215-254-4021E-mail: jurbanchuk@lecg.com

Food and Feed vs Fuel:Renewable Fuels Perspective

TexasAg

Forum

Austin – June 9, 2008

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

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But everything is not always what it seems …

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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

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EISA 2007 contains a 36 billion gallon RFS. Corn ethanol is capped at 15 BG.

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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 cornEconomics 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

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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

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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”

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Corn and oil prices have increased hand-in-hand for most of the last 2 years

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Corn, No.2 Yel, Cent Ill. (Left) Crude Oil, Spot, WTI (Right)

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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

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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 (www.informaecon.com)

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Global corn demand is growing strongly for both feed and industrial uses.

World Corn Demand and Supply

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Exports Feed FSI* Supply

Source: USDA/ERS. FSI is food, seed, and industrial (including ethanol)

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Per capita income growth is stimulating food and energy demand.

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China IndiaSource: IMF

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Global food prices are increasing largely due to rice, wheat, and edible oils, not corn via ethanol!

FAO Food Price Index

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* YTD. Source: FAO

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Cereals provide most of the world’s average caloric intake. Corn plays a minor role as a cereal.

FAO Cereals Price Index9 wheat quotations16 rice quotations1 corn price

Global Per Capita Daily Caloric Intake

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Source: FAO

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CBOT Corn Long Positions

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Speculation has been a major factor driving corn prices since mid-2006.

Non-commercial vs commercialJan 98-Apr 06: 46% under May 06 to today: 6% over

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Corn exports are at record levels as a weak $ offsets high prices.

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Source: USDA/ERS; Federal Reserve

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U.S. Corn Production Outpaces Demand Only 4.6% net new ethanol corn demand

Source: USDA, Goldman Sachs Commodities Research Report, April 10, 2008

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The foods directly impacted by corn and soybeans account for only about 25% of the consumer’s food basket.

Relative Importance: CPI for Food

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Food away from homeFats and oils

Sugar and sweetsDairy products

Non alcoholic beveragesCereals and bakery prods

Fruits and VegetablesOther Foods

Meat, poultry, fish, eggs

Source: Relative importance of components in the Consumer Price Indexes: U.S. city average, December 2007. Bureau of Labor Statistics

Food at home(55%)

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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;

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Let’s put food price inflation in a historical context.

Consumer Price Index, All Urban(Average Annual Increase)

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Source: BLS; *2008 YTD

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Retail food prices are accelerating faster than the overall CPI.

CPI-U, Percent Change from Previous Year

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All Items Food Food at Home

Source: BLS

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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!

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IMPACT ON HOUSEHOLD GASOLINE SPENDING

VALUE SOURCE

A. Avg. Miles per Household per Year 21,252 miles FHWA (2001 NHTS)

B. Average Fuel Economy (2007) 20.2 mpg EPA (2007)

C. Gallons Gasoline Purchased per Household 1,052 gallons A ÷ B

D. Ethanol Savings per Gallon $0.29-0.40 per gal. Iowa State (2008)

TOTAL SAVINGS PER HOUSEHOLD $305.08 – $420.83 D x C

IMPACT ON HOUSEHOLD FOOD SPENDING

A. Avg. Household Spending on Food (2006) $6,111 BLS

B.Current Food Inflation (5.1% Apr ‘08) $311.66 BLS

SHARE OF FOOD SPENDING DUE TO ETHANOL* $18.33 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.

Ethanol’s Impact on Household Gasoline and Food Spending

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Thank you!

Questions?