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DAVID KRUSE

By Staff | Apr 1, 2011

According to the USDA, 11.6 cents of every food dollar is spent on the actual food in the food products that consumers buy. It is also important to point out that that percentage is shrinking so that the portion that food stuff prices contribute to food costs is trending lower.

Processing, packaging, distribution, transportation, advertising, labor and energy account for 88.4 cents of every consumer dollar spent on food. Yet, the Grocery Manufacturers Association claims that ethanol and corn prices are accountable for food price increases.

Here is why that is an outlandish and wildly inaccurate accusation. Of the 11.6 cents spent on the food in food products, approximately 15 percent of the 11.6 cents – about 1.7 cents – can be attributed to the cost of corn. 1.7 cents of the food dollar is for corn. That means that doubling corn prices would add 1.7 cents per dollar spent on food to the grocery bill.

That is not quite the astounding food price inflation that the food versus fuel ethanol critics portray it to be. Now, deduct $1.40 per gallon from what gasoline prices would be if not for the contribution to the U.S. motor fuel supply from ethanol. 10 percent of the U.S. motor fuel supply now is ethanol, equivalent today to more oil than we import from Saudi Arabia. It would not be easily eliminated without significant market consequences or geopolitical energy security risks that domestic ethanol production mitigates.

Yet, ethanol is only a portion of the reason that corn prices have nearly doubled, likely not even the majority factor influencing the price appreciation, but for the sake of our argument, let’s give ethanol all the credit for higher corn prices reducing farm subsidy outlays and boosting net farm income and the Heartland economy.

While the RFS mandates 15 billion gallons of ethanol consumption, it also will limit production, likely capping it near 16 billion gallons. With ethanol production now estimated to be near 14 billion gallons annually, the corn-based ethanol industry is 87.5 percent of what it will be.

If you burn a tank of gas each week (20 gallons), that’s $112 monthly savings in motor fuel costs that you have gotten from the ethanol industry’s contribution to the fuel supply. If ethanol adds 1.7 cents per dollar to food costs you would have to buy $6,588 worth of food each month before you would pay more for food as a result of corn prices doubling than you saved on fuel costs because of ethanol.

I would venture to say that no one is paying more for food than they are saving in fuel costs. You don’t drive? That savings in fuel costs comes through all costs of goods, including food, for which transportation is a significant cost ingredient. That means that ethanol is lowering the cost of food directly by reducing the cost of transportation fuel consumed when shipping it.

USDA said that the average household spends $550 a month on food. That means doubling the price of corn would increase their monthly food bill $9.35/month.

Again, that is not all attributable to ethanol, but we are pretending that it is. If that family burns a tank of gas (and they may actually burn twice that much or more in two car families,) they would save $102.65/month because the ethanol industry exists.*

Corn prices represent only 1.7 percent of the food dollar. While it is possible that ethanol can raise corn prices, it is statistically and numerically impossible for corn prices to have any where close to the impact on food prices that ethanol opponents suggest.

Impact on corn prices from ethanol? Yes. Impact on food prices? Hardly – as corn prices are just a couple trees in a big woods that make up the forest of food price cost inputs. And, if you buy any gasoline at all, you are quickly saving money from the contribution made by ethanol, reducing motor fuel costs. Ethanol wins the food versus fuel debate!

Ag Sec. Tom Vilsack finally came down squarely on the side of ethanol in the food versus fuel debate. He said, “The people who blame ethanol for rising food costs do not accept the notion farmers are producing enough commodities for both food and fuel. Don’t bet against the American farmer. If you do, it is a losing bet.”

Vilsack has asked Congress not to repeal the blender’s credit observing, “I have a deep concern about the cliff that some folks want to create for the incentives that are currently in place for the biofuel industry. I think if you create a cliff, what you’re going to see is a drop in production.”

Ethanol haters should not want to go over that cliff either because then gasoline prices would soar and the contribution of ethanol to the fuel market, much to their dismay, would be fully revealed.

*Ag Resources Estimate of the Cost of Replacing Ethanol.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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