Record energy costs and rising food prices are taking a painful toll on consumers' pocketbooks. Fuel and food are basic necessities, and there is a limit to how much Americans can tighten up their family budgets. As Congress considers how to turn the U.S. economy around, some suggest the choice we must make is to surrender our commitment to renewable fuels such as ethanol. That would be a mistake, costing Americans dearly by squandering our long-term economic and national security, while doing little to affect the food supply or prices.
Those calling for biofuels to take a back seat in our energy plan have waged a relentless campaign of misinformation, blaming U.S. policies in support of ethanol and biodiesel for inflation in the grocery aisle. Frightening Americans by arguing that ethanol made from corn is somehow taking food from the world's hungry might be sensational, but it is not supported by the facts.
Ed Lazear, chairman of President Bush's council of economic advisers, estimates that ethanol has accounted for just 2 percent or 3 percent of the overall increase in global food prices. The reason, he recently explained, is that while ethanol has increased corn prices about 33 percent, corn accounts for only 30 percent of all grain, and grain is only 20 percent of all food.
Lazear noted that there has been 4.5 percent food price inflation in the United States this year. Without ethanol, he said food prices still would have gone up 4.25 percent.
The primary factors contributing to food price increases today are triple-digit oil prices, burgeoning demand for richer diets in China and India, and weather-related disasters. Consider these examples of how petroleum prices impact the production, processing, distribution, marketing, and price of food items.
According to the United States Department of Agriculture, the price of nitrogen fertilizer (which is made with natural gas) is up a record 168 percent since 2000, making it considerably more expensive for farmers to grow crops. Additionally, the American Trucking Association says record diesel prices have multiplied the costs to plant and harvest crops, and ship food products to the retail level — dramatically increasing the price of food. It now costs $560 in fuel just to deliver grapefruit from Florida to Washington, D.C., up $158 in the last twelve months.
The Federal Reserve Bank of Kansas City reports that food prices have historically surged during times of high crude oil prices, and high energy prices tend to quickly transfer to higher retail food prices. In fact, retail prices rise 0.52 percent for every 1 percent rise in energy prices. As a result, a 10 percent gain in energy prices could contribute 5.2 percent to retail food prices.
Further, as oil prices hit new record highs — far in excess of $100 per barrel — the United States transfers more than $1 billion per day to foreign oil suppliers, effectively paying a tax that hurts every sector of the American economy.
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