The Impacts of Food-to-Fuel Policies on Food Prices

Scott Faber

Vice President for Federal Affairs

Grocery Manufacturers Association

Global Food Prices Rising

• FAO: “Agricultural commodity prices rose sharply in 2006 and 2007 and continued to rise even more sharply in the first three months of 2008.”

Global Food Prices Rising

• FAO: “For many of the 800 million people who are already affected by chronic hunger, higher food prices can be devastating. Already their ranks are being swelled by many other millions of poor people who now find themselves unable to buy the food that their families need for a healthy life. It is not surprising that this is provoking social unrest across the developing world.”

Sources of Food Inflation

• Changing Weather Patterns

• Export Restrictions

• Changing Commodity Markets

• Weak Dollar

• Energy Prices

• Global Demand

• Food-to-Fuel Mandates

Demand for Coarse Grains Outpacing Production

COARSE GRAIN GROWTH RATES: World Usage vs. World Yields

1.52% 1.52% 1.52%1.18%

0.62%

3.4%

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%

83-92 93-02 03-07

Ave

Ann

ual %

Cha

nge

Yield

Usage

Annual Growth in Production is Slowing

• USDA-ERS: “Between 1970 and 1990, production rose and average of 2.2 percent per year. Since 1990, the growth rate has declined to about 1.3 percent . . . Projections for US and world agriculture see the rate declining to 1.2 percent per year between 2009 and 2017.”

Grain Stocks Falling Lower2007/2008 Global Grain Stocks-to-Use at Record Low

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Year

Sto

cks t

o U

se R

ati

o

What is the role of ethanol?

• IFPRI: Demand for ethanol accounted for 30 percent of increase in grain prices between 2000 and 2007.

• USDA-ERS: Between 2002 and 2007, ethanol “accounted for 30 percent of the growth in wheat and feed grain use.”

• USDA-WASDE: Half of increased global grain use in last two years attributed to US production of corn ethanol.

• USDA-OCE: US food-to-fuel production increased IMF global food index from 40 to 45%

U.S. Ethanol Production: 1980 to 2007

0

2

4

6

8

1980 1985 1990 1995 2000 2005

Billi

on G

allo

ns

6.5 billion gallons in 2007

(24% of U.S. corn crop)

0

5

10

15

20

25

30

35

40

45

Year

Pe

rce

nt

of

Cro

p D

ive

rte

d t

o F

ue

l

Projected

Source: USDA-ERS, projections derived from USDA yield projections and EISA mandates

Ethanol’s Growing Share of the U.S. Corn Crop

Recent Food Inflation – 5%

CPI 2004-2007

0

1

2

3

4

5

6

2004 2005 2006 2007

Year

12

mo

nth

pe

rce

nt

ch

an

ge

fro

m

pre

vio

us

ye

ar

Food

CPI (Less Foodand Energy)

Corn Futures – May 2008

Record High Farm Prices into 2008

0

3

6

9

12

1970 1975 1980 1985 1990 1995 2000 2005

Corn

$ per bushel

Source: National Agricultural Statistics Service, USDA

Wheat

Soybeans

Annual Consumer Food Inflation(%Change in CPI Food, 2008-2009 Forecast)

1.4

3.52.6 2.3 2.1

4.9

7.58

0

1

2

3

4

5

6

7

8

9

10

2002 2003 2004 2005 2006 2007 2008 2009Year

(Source: Bureau of Labor Statistics, Advanced Economic Solutions)

Pe

rce

nt

Ch

an

ge

Note: Food prices rose at a 6.1% annualized rate from January-April ‘08

Source: Energy Information Administration, Energy Independence and Security Act of 2007

05

101520253035

2008 2009 2010 2011 2012 2013 2014 2015

Year

Btu

s (q

uadr

illio

n)

EnergyImports(projected)Corn Ethanol

Energy Imports and Displacement

Source: Energy Information Administration, Energy Independence and Security Act of 2007

0.002.004.006.008.00

10.0012.0014.0016.0018.0020.00

2008 2009 2010 2011 2012 2013 2014 2015

Year

En

erg

y U

se

(q

ua

dri

llio

n B

tus

)

Gasoline Projected Use

EISA Corn EthanolMandate

Gasoline Usage and Displacement