May 20, 2008

LINCOLN, Neb. — Ethanol's increasing demand for corn is responsible for about 1.2 percent of the increase in U.S. food prices during the last two years, a University of Nebraska-Lincoln agricultural economist estimates.

However, Richard Perrin said, in poorer parts of the world, ethanol's impact on food prices likely is much higher – perhaps accounting for as much as 15 percent of rising prices.

"The food bill of poor people in poor countries is more sensitive to grain prices, simply because grain constitutes more of their food, and food takes more of their income," the Institute of Agriculture and Natural Resources economist said.

Perrin outlined his findings in a new report titled "Ethanol and Food Prices – Preliminary Assessment".

Food prices in the U.S. and worldwide have risen dramatically in the last year, Perrin noted. Many have pointed to the corn ethanol industry as one culprit.

Ethanol's demand for corn is a factor, Perrin said.

Grain prices have roughly doubled in the last two years, Perrin said. His calculations found that ethanol is responsible for about 40 percent of that increase. Doubled grain prices contributed about 3 percent to the increase in U.S. food prices; 40 percent of 3 percent comes to about 1.2 percent.

Americans spend a much smaller proportion of their income on food than people in other parts of the world, Perrin noted, so the ultimate impact of rising grain prices on their food budget is muted.

"The value of grain in U.S. consumers' expenditures constitutes less than one-half of 1 percent of consumer income," Perrin said. "In food-insecure countries, it may constitute 20 percent or more of total consumer income. Thus, a doubling of grain prices can absolutely devastate families in poor countries and put them at the edge of starvation, even though it constitutes a barely noticeable inconvenience to most families in the U.S."

Perrin added, "If you are one of those poor consumers and grain prices double, it's a big deal, regardless of how little responsibility lies with ethanol."

On the other hand, "if you are a poor producer in one of those countries, as many of the world's poor are, higher grain prices are a good deal."

Perrin said his calculations are "broadly consistent" with other attempts to measure's ethanol's impact on food prices, including studies by Iowa State University's Center for Agricultural and Rural Development and the U.S. Department of Agriculture.

Perrin said his study is preliminary, and he's still exploring other causes of increasing food prices, which may include increased energy costs, higher demand for food, unusually low world wheat production and speculative purchasing.

UNL's Department of Agricultural Economics is a part of the Institute of Agriculture and Natural Resources.

5/20/08-DM

Dick Perrin - Ph.D.
Agricultural Economics
Professor
(402) 472-9818

Dan Moser
IANR News & Photography Coordinator
(402) 472-3007

Department: Agricultural Economics