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John M. Urbanchuk
Director, LECG LLC1255 Drummers Lane, Suite 320
Wayne, PA 19087
Tel: 215-254-4021
E-mail: [email protected]
Food and Feed vs Fuel:The Reality of Ethanol and Food Prices
18th Annual EPAC Conference
Kalispell, MTJuly 20-22, 2008
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Ethanol critics and the media have been havinga field day
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But everything is not always what it seems
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Biofuels are only part of the reason for increasing
corn and food prices.
Increases in petroleum prices and related increases inagricultural inputs
Drought in Australia in 2006 and 2007 and poor crops in the EUin 2007 which reduced supplies of grain.
Increased demand for oilseeds in China.
The decline in the value of the dollar.
Speculation by institutional investors.
Export bans and restrictions that restricted access to suppliesof food crops.
Increased demand for biofuels.
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Corn and oil prices have increased hand-in-
hand for most of the last 2 years
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
200501
200505
200509
200601
200605
200609
200701
200705
200709
200801
200805
$/bu
$0
$20$40
$60
$80$100
$120
$140
$160
$/bbl
Corn, No.2 Yel, Cent Ill. (Left) Crude Oil, Spot, WTI (Right)
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Oil and gasoline prices are outpacing
ethanol.
0
50
100
150
200250
300
350
400
200501
200505
200509
200601
200605
200609
200701
200705
200709
200801
200805
cts/gal
$0
$25
$50
$75
$100
$125
$150
$/bbl
Ethanol, Chi Spot Gasoline, Spot NY Crude Oil, Spot, WTI (Right)
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There is a Direct Link Between EnergyPrices and Food Prices
Historically, food prices have surged during times of highercrude oil prices. Moreover, research shows that energy pricesare quickly passed through to higher retail food prices.
Research by Texas A&M supports the hypothesis that cornprices have had little to do with rising food costs.
The underlying force driving changes in the agriculturalindustry, along with the economy as a whole, is overall higherenergy costs, evidenced by $100 per barrel oil.
Sources: Main Street Economist: What is Driving Food Price Inflation? Federal Reserve
Bank of Kansas City, 2008 The Effect of Ethanol on Texas Food and Feed, AgriculturalFood and Policy Center, Texas A&M University, April 10, 2008.
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Global food prices are increasing largely due to rice,
wheat, and edible oils, not corn via ethanol!
FAO Food Price Index
-40%
-20%
0%
20%
40%60%
80%
100%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008*
PctChg
All Food Cereals Fats & Oils
* YTD. Source: FAO
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Ethanol is Keeping Fuel Prices Lower
Iowa State (CARD) estimates that the growth inethanol production and use has caused gasolineprices to be $0.29 to $0.40 lower than they might
otherwise have been.
Without ethanol to expand the available fuel supply theworlds refiners would need an additional 1.9 millionbarrels of crude oil per day, or 2.2 percent of current
world production and crude oil prices would be 27.5%($35.70 per barrel) higher than they are currently!
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Ethanol and Oil Prices
Ethanol displaces gasoline which is refined fromcrude oil.
One barrel of crude produces 19.2 galgasoline
Because of energy difference this isequivalent to 29.1 gal of ethanol
9 bil gal of ethanol = 309 mil bbl crude
At $127/bbl this amounts to $39.4 bil
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Impact of Ethanol on Oil Prices
World Oil Prod (MBD) 87.22
World EtOH Prod (MBD) 1.33
Gasoline (MBD) 39.77
Etoh Gas Equiv (MBD) 0.87
Crude to make gasoline 1.92
Incr supply from ethanol 2.2%
Demand Elasticity -0.08
Price Flexibility -12.5
Price Impact -27.5%
Base Oil Price ($/bbl) $130.00
Impact of Ethanol ($/bbl) ($35.70)
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E-10 saved Consumers saved 12.6 cents/gal atthe pump in June 2008
U.S. regular gasoline (Rack) $3.55
Ethanol (fob plant, Iowa) $2.60
Less VEETC of $0.51 = net etoh $2.09
E-10 Wholesale
(.1 X Rack + .9 X (net ethanol +$0.125)) X 1.034 +wholesale margin
E-10 RetailE-10 Wholesale + retail margin + taxes
Savings: U.S. retail gas E-10 retail
$4.054 - $3.928 = $0.126
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The Role of Energy and the Marketing Bill
Only 23 cents of every dollar spent on food makes its
way back to the farm.
the remaining portion of total retail food costs
includes the costs of labor, packaging, transportation,energy, profits, advertising, depreciation, rent,interest, repairs, business taxes and other costs notattributable to basic agricultural commodities.
The marketing bill has a higher correlation with the
consumer price index (CPI) for food than does corn..
Source: USDA/ERS Agricultural Outlook. Table 8. (March 2008 estimate)Informa Economics Analysis of Potential Causes of Consumer Food Price Inflation,(www.informaecon.com)
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Increases in marketing costs for foodsubstantially outpace the farm value
0
50
100
150
200
250
300
350
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Index,
1982-84=100
Marketing Bill Farm Value
Source: LECG from USDA/ERS data
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Global corn demand is growing strongly for bothfeed and industrial uses.
World Corn Demand and Supply
0
200
400
600
800
1,000
1,200
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
MMT
0
200
400
600
800
1,000
1,200
MMT
Exports Feed FSI* Supply
Source: USDA/FAS.FSI is food, seed, and industrial (including ethanol)
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Per capita income growth is stimulating food andenergy demand.
Per Capita GDP
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
US$
China India
Source: IMF
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Global food prices are increasing faster largely
due to rice, wheat, and edible oils, not ethanol!FAO Food Price Index
-40%
-20%
0%
20%
40%60%
80%
100%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008*
PctChg
All Food Cereals Fats & Oils
Source: FAO
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Cereals provide most of the worlds averagecaloric intake. Corn plays a minor role as a
cereal.
FAO Cereals Price Index
9 wheat quotations
16 rice quotations
1 corn price
Global Per Capita DailyCaloric Intake
0
100
200
300
400
500600
RiceWheat
Sugar
Fats&oils
Meat
Milk&eggs
Corn
Source: FAO
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CBOT Corn Long Positions
0
200
400
600800
1,000
1,200
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
1,0
00Contracts
NonCommercial Commercial
Source: CFTC
Speculation has been a major factor driving
corn prices since mid-2006.
Non-commercial vs commercialJan 98-Apr 06: 46% under
May 06 to today: 6% over
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Rising feed prices are hurting livestock producers butprofitability also suffered when corn prices were low.
Livestock Profitability and Corn Prices
($150)
($100)($50)
$0$50
$100$150$200$250
$300$350$400
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Profit ($/head)
$0.00
$1.00
$2.00
$3.00
$4.00$5.00
$6.00
$7.00
$/bu
Hogs, Farrow-Finish Beef, Finishing Steer Calves Corn, No 2 Yel, Cent Ill
Source: Iowa State Univ.; USDA/ERS
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Increased supplies of distillers grains offset corn usedfor ethanol. DGs concentrate nutrients, are higher in
protein, fat, and fiber than corn
Source: 2008 Feedstuffs Reference Issue; Ingredient Analysis Table
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Distillers grains production will track corn use for
ethanol and approach 24 million tons by 2017.DDG Production
0
5
10
15
20
25
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
MilTons
LECG LLC June 2008
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The foods directly impacted by corn and soybeansaccount for only about 25% of the consumers food
basket.Relative Importance: CPI for Food
0% 10% 20% 30% 40% 50%
Food away from homeFats and oils
Sugar and sweets
Dairy products
Non alcoholic beverages
Cereals and bakery prods
Fruits and Vegetables
Other Foods
Meat, poultry, fish, eggs
Source: Relative importance of components in the Consumer Price Indexes:U.S. city average, December 2007. Bureau of Labor Statistics
Food at home(55%)
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Lets put food price inflation in a historicalcontext.
Consumer Price Index, All Urban
(Average Annual Increase)
0%2%4%6%8%
10%
12%14%16%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008*
PctChg
All Items Food
Source: BLS; *2008 YTD
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Retail food prices are accelerating fasterthan the overall CPI.
CPI-U, Percent Change from Previous Year
0%1%2%3%4%
5%6%
Jan-03
Apr-03
Jul-03Oct-03
Jan-04
Apr-04
Jul-04Oct-04
Jan-05
Apr-05
Jul-05Oct-05
Jan-06
Apr-06
Jul-06Oct-06
Jan-07
Apr-07
Jul-07Oct-07
Jan-08
Apr-08
All Items Food
Source: BLS
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Ethanols Role in Food Price Inflation
Ethanol accounts for somewhere between 2 and3% of the overall increase in global food prices.
The White House Council of Economic Advisorsestimates that just 0.25% of food price inflation isa result of U.S. ethanol production.
Had it not been for ethanol, food prices
would have gone up by 5.0% as opposed to5.3%.
Source: White House Chairman of the Council of Economic Advisers Ed Lazear
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EISA 2007 contains a 36 billion gallon RFS. Corn
ethanol is capped at 15 BG.
0
5
10
15
20
25
30
35
40
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
MGY
Corn Cellulose Biodiesel Other Adv Biofuels
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Waiving the RFS is not the answer to high cornprices
A 50% waiver would reduce required ethanol use by4.5 bil gal (equiv of 1.6 bil bu corn)
Actual cut in production would be much less.
Industry capacity is 8.6 bil gal
Industry is still profitable at $6.00 corn
Economics favor blending ethanol at $127/bbl oil
Consumers would be hurt by sharply higher gasolineprices as refiners would be forced to quickly producean additional 3.1 bil gal of gasoline
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IMPACT ON HOUSEHOLD GASOLINE SPENDING
VALUE SOURCE
A. Avg. Miles per Household per Year 21,252 miles FHWA (2001 NHTS)
B. Average Fuel Economy (2007) 20.2 mpg EPA (2007)
C. Gallons Gasoline Purchased per Household 1,052 gallons A BD. Ethanol Savings per Gallon $0.29-0.40 per gal. Iowa State (2008)
TOTAL SAVINGS PER HOUSEHOLD $305.08 $420.83 D x C
IMPACT ON HOUSEHOLD FOOD SPENDING
A. Avg. Household Spending on Food (2006) $6,111 BLS
B.Current Food Inflation (5.3% Jun 08) $323.88 BLS
SHARE OF FOOD SPENDING DUE TO ETHANOL* $15.28 White House CEA
*The White House Council of Economic Advisors estimates that just 0.25% of foodprice inflation is a result of U.S. ethanol production.
The savings from ethanol for Americans overwhelms
the costs.
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Thank you!
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