Environmental Engineering Reference
In-Depth Information
conventional gas stations. In some locations, E85 and gasohol are more expen-
sive per gallon than conventional gasoline. E85 can damage vehicles that are not
designed to burn it as a fuel. Also, ethanol contains less energy than gasoline.
This means that a car will not go as far on a gallon of E85, and fuel economy will
decrease by 20 to 30%. Ethanol is produced from plant matter that could otherwise
be consumed as human and animal food products. Critics argue that food products
used for fuel instead of to feed people and animals will contribute indirectly to
mass world hunger. Moreover, it will lead to higher food prices. However, even
though higher corn prices increase animal feed and ingredient costs for farmers
and food manufacturers, these costs are passed through to retail at a rate less than
10% of the change in corn price.
c
orn
For
e
thanol
p
roduction
or
F
ood
s
upply
?
*
In 2007, record U.S. trade driven by economic growth in developing countries and
favorable exchange rates, combined with tight global grain supplies, resulted in
record or near-record prices for corn, soybeans, and other food and feed grains. For
corn, these factors, along with increased demand for ethanol, helped push prices
from under $2 per bushel in 2005 to $3.40 per bushel in 2007. By the end of the
2006-2007 crop year, over 2 billion bushels of corn (19% of the harvested crop) were
used to produce ethanol, a 30% increase from the previous year. Higher corn prices
motivated farmers to increase corn acreage at the expense of other crops, such as
soybeans and cotton, raising their prices as well.
The pressing and pertinent question becomes: What effect do these higher com-
modity costs have on retail food prices? In general, retail food prices are much
less volatile than farm-level prices and tend to rise by a fraction of the change in
farm prices. The magnitude of response depends on both the retailing costs beyond
the raw food ingredients and the nature of competition in retail food markets. The
impact of ethanol on retail food prices depends on how long the increased demand
for corn drives up farm corn prices and the extent to which higher corn prices are
passed through to retail.
Retail food prices adjust as the cost of inputs into retail food production change
and the competitive environment in a given market evolves. Strong competition
among three to five retail store chains in most U.S. markets has had a moderating
effect on food price inflation. Overall, retail food prices have been relatively stable
over the past 20 years, with prices increasing an average of 3.0% per year from 1987
through 2007, just below the overall rate of inflation. Since then, food price inflation
has averaged just 2.5% per year.
Field corn is the predominant corn type grown in the United States, and it is
primarily used for animal feed. Currently, less than 10% of the U.S. field corn crop
is used for direct domestic human consumption in corn-based foods such as corn
meal, corn starch, and corn flakes; the remainder is used for animal feed, exports,
*
Adapted from Leibtag, E., Corn prices near record high, but what about food costs?
Amber Waves
,
February, 2008 (http://webarchives.cdlib.org/sw1vh5dg3r/http://ers.usda.gov/AmberWaves/February08/
Features/CornPrices.htm).
