Special edition: Food prices

USDA forecasts happy ending to ethanol/food price battle

By Lorraine Heller

- Last updated on GMT

Related tags: Food

The link between growing ethanol demand and higher food prices has
been overstated, according to the US Agriculture Secretary, who
forecasts that supply and price pressures will even out as markets
'do their work'.

Addressing the Consumer Federation of America at the end of last month, acting Agriculture Secretary Chuck Conner said that despite short term difficulties, farmers are responding to rising commodity demands by adding acreage and boosting yields. "Higher corn prices are not the only or even, I would argue, perhaps the most important factor in higher prices of certain retail food items,"​ he said. "When we break down what is happening with food prices, we do see a complex set of factors at work. It's not quite a simple equation of rising ethanol demand equals higher food prices." ​ Conner was addressing rising concerns related to the impact of increased ethanol demand on ingredient and food prices, as more and more corn is being pumped into the biofuels industry. According to USDA statistics, ethanol demand for corn will rise to 3.3bn bushels this year. Some 30 new ethanol plants have been opened since last year, and another 76 are thought to be under construction, which are expected to double current production capacity to 13bn gallons by 2009. But with this intense shift in the market for corn, prices have naturally shot up, and this has led both to higher raw material costs for ingredient makers who use corn as a raw material, as well as higher prices for animal feed and therefore higher prices for meat and dairy products. Yet Conner said that USDA economists believe this connection has been "overstated".​ Ethanol demand, he said, "has been assigned more than its fair share of blame for what has been happening in our grocery aisles". ​ In the first eight months of this year, retail food prices were about 3.6 percent higher on average that they were a year earlier. That is higher than the 2.7 percent average for the food price increases seen over the course of last three years, he said. The current forecast from USDA's Economic Research Service is that the consumer price index for food will be up for all of this year somewhere between 3.5 and 4.5 percent. But the economists at ERS also expect these increases to moderate next year back to about 3 to 4 percent. "That would be in keeping, ladies and gentlemen, with the historical patterns for food price increases. They do tend to moderate and stabilize over time as markets and consumers adjust,"​ said Conner. He also stressed that there have been numerous other pressures on prices beyond the additional corn demand coming from the ethanol industry. These include higher oil prices, which last month hit a new high of $84 per barrel, and which continue to have a knock-on effect on energy-intensive food processing, packaging and transportation. Prices for wheat have also been high - last month topping $9 per bushel - due to bad weather conditions. However, Conner said that farmers are already responding to market conditions. More wheat is being planted in order to address last season's shortfall, and US farmers have already planted an additional 15m acres of corn. Economists at USDA, as well as economists at the University of Michigan, and in the private sector have forecast the impact of rising biofuels production, up to the level of 15bn gallons by the year 2015, of having a "modest"​ effect on future food prices, he said. "They project that by adding acreage and boosting yields, American farmers can deliver enough to meet the competing demands that will be placed on them for the foreseeable future." ​ He acknowledged that competing studies have come up with a different conclusion, but said that those are "pessimistic scenarios",​ and that the marketplace is "dynamic"."It is moving faster, I believe, than the experts can keep up with their forecasts. And if you believe - as I do - in the power of markets to put resources to their best use, you should be very encouraged by the signs we see of vibrancy and growth in this market." "I believe Americans want to see this nation boost our renewable energy production, to do it as quickly as possible, to meet ambitious goals like the one the President has proposed of using 35 billion gallons of renewables by 2017. " "To do that, there will be some short term situations that will need to be dealt with. But if we provide the time and space for markets to do their work, and support publicly funded research and pro-growth policies, I believe our farmers and our agriculture industry will respond and bring new choices for us and greater energy security for all Americans, which we all support."

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