Corn ethanol not culprit for food inflation

CHICAGO Mon Dec 10, 2007 1:17pm EST

Raw corn is shown as it is unloaded for processing at the Lincolnway Energy plant in the town of Nevada, Iowa, December 6, 2007. U.S. food inflation is rising but don't blame the ethanol-based boom in corn prices, the head of global agriculture and food-industry research firm Informa Economics said on Monday. REUTERS/Jason Reed

Raw corn is shown as it is unloaded for processing at the Lincolnway Energy plant in the town of Nevada, Iowa, December 6, 2007. U.S. food inflation is rising but don't blame the ethanol-based boom in corn prices, the head of global agriculture and food-industry research firm Informa Economics said on Monday.

Credit: Reuters/Jason Reed

CHICAGO (Reuters) - U.S. food inflation is rising but don't blame the ethanol-based boom in corn prices, the head of global agriculture and food-industry research firm Informa Economics said on Monday.

Memphis, Tennessee-based Informa, formerly called Sparks Companies, said a study based on 20 years of price data shows that corn prices have minimal impact on the U.S. Consumer Price Index for food, which has been on the rise.

The study, released on Monday, "debunks the concept that the ethanol expansion is the underlying and main significant reason for food price increases," Bruce Scherr, Informa's chief executive, told Reuters in an interview.

"We're not saying that corn prices are cheap, that ethanol hasn't helped underpin the growth in the corn economy," Scherr said. "What we are saying is to blame corn and corn-based ethanol for all of the inflation associated with food and food prices ... is to grossly under-consider all the other forces at work."

The CPI for food, a broadly used gauge for inflation, is up almost 6 percent for the first nine months of 2007, with the food inflation pace at a 25-year high, industry analysts said.

Many have blamed the rising price of food on raw commodity prices which have soared to multiyear highs in 2007.

Chicago Board of Trade corn futures rose to $4.37-1/4 in February, the highest level in a decade. The catalyst was President George W. Bush's State of the Union speech in January, which called for a more than five-fold expansion of U.S. biofuels like corn-based ethanol to some 35 billion gallons by 2017.

Scherr does not see the upward price trend "to be broken in the near future" given the world's demand for raw commodities. But outlooks for bigger corn yields due to increased seed technology will push world production by 2015 to 2020 to levels that will be better able to keep up with demand, he said.

The Informa study was funded by the Renewable Fuels Foundation, which is linked to the Renewable Fuels Association that groups ethanol producers. But Scherr and Informa Senior Vice President Scott Richman said consumer food costs are far more complex in the long U.S. food chain than just corn costs.

For every dollar an American consumer spends on food, only 19 cents goes to a farmer, according to the U.S. Department of Agriculture. The balance -- 81 cents -- goes to labor, fuels, transportation, packaging, and other non-farm costs.

The study said greater impacts on food inflation than the price of corn have been these soaring non-farm costs, including record oil prices and soaring consumer demand from the world economy, notably the emerging middle class in Asia. The United States is the top world exporter of food, including wheat and corn.

"There's no one culprit ... that is causing an uptick in food price inflation this year," said Richman. "An uptick in the price of corn is not causing people to have to pay substantially more overall at retail."

Ethanol demand has boosted corn prices. But given the competitive nature of the retail industry, much of the higher price of corn is being absorbed into the margins of food processors and livestock producers, Richman said.

Of the projected record 2007 U.S. corn crop of 13 billion bushels, about 43 percent will fed to livestock to produce meat and dairy products and 24 percent will be turned into ethanol.

Two years ago, feed demand took 55 percent of the crop while ethanol consumed only 14 percent.

But the Informa study said that historical and statistical data simply does not bear out a significant tie between corn prices and food inflation as measured by the CPI.

"There has historically been very little relationship between corn prices and consumer food prices," the study says.

"It's a David and Goliath; the ethanol business is a David. The world economy and the shifting of demand curves -- that's what caught up in the pricing to the consumer far more than a 7 billion gallon corn-based ethanol industry," Scherr said.

(Reporting by Christine Stebbins, editing by Matthew Lewis)

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