FARGO, N.D. -- A frequent question following recent speeches on the future of biofuels concerns the impact of increasing ethanol production on food prices. We always have replied that the rising value of raw commodities is small, compared with both the total food costs and price increases for other costs food processors face.
Even at these prices, the value of the corn in a box of Corn Flakes, by weight, is less than 30 cents. Several studies by the Federal Reserve Bank in Kansas City, Mo., and Texas A&M University confirm that the increasing costs for transportation, labor and energy overshadow higher agricultural commodity prices.
Nevertheless, rising food prices are a public concern at present in the U.S. and abroad. Therefore, it is important to review the broad range of federal policy changes that could be undertaken to increase the quantity of foods produced and moderate the rapid inflation of food prices.
Options
Several options and their merits include:
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- Change farm programs -- In the past, provisions of the farm program, such as direct payments and loan programs, could be adjusted up or down to manage U.S. food production goals; however, when prices for most commodities are far above support levels, such as now, these, provisions matter less to producers.
- Open Conservation Reserve Program acreage -- Almost 35 million agricultural acres are being idled under CRP. USDA's most recent survey of land use found that 442 million acres were devoted to crop production in 2006. A significant amount of acres went into CRP as whole-farm units during the financial crisis of the late '80s and early '90s. Much of this acreage is productive, even though it is highly erodible. Returning these lands to production would increase total food supplies.
- Remove the ethanol blender's tax credit -- Removing the 51-cent-per-gallon blender's tax credit for ethanol production would lessen the overall demand for corn. However, with less ethanol production, fewer distiller's grains would be available. At present, distiller's grains, a byproduct of the ethanol production process, is widely available as a livestock feed. For each bushel (56 pounds) of corn ground for ethanol, 18 pounds of distiller's grains are left over for animal feed. Since demand for a livestock protein would remain, corn that is not directly used for ethanol likely still would be demanded for animal feed.
- Remove the tariff on foreign ethanol -- Removing the 54-cent-per-gallon tariff on foreign ethanol would allow more ethanol to enter the U.S. Unlike the removal of the blender's tax credit, this policy change would dampen demand for corn acreage, but it also would result in lower, not higher, fuel prices. Again, the eventual impact would be small because ethanol constitutes only 5 percent of U.S. gasoline consumption at present.
- Remove the tariff on urea from former Soviet Union countries -- The U.S. imposes a tariff on imports of urea fertilizer from former soviet union countries that effectively keeps imports from these countries out. The former soviet union countries are the world's leading exporters of urea fertilizer. U.S. farmers are not able to utilize this lower-priced source of nitrogen, which is a key yield-enhancing input for many crops, particularly corn and wheat. Allowing it in would lead to higher overall farm production.
- Raise interest and exchange rates -- The most direct policy for increasing food supplies is monetary policy set by the Federal Reserve Board and its chairman, Ben Bernanke. The Federal Reserve has lowered interest rates to avoid a U.S. recession, restore confidence in distressed financial markets and aid a struggling housing sector. However, lower interest rates have had the unintended consequence of lowering the exchange rate for U.S. currency.
Falling dollar
Since 2000, the exchange value of the dollar has fallen by almost 40 percent. As the value of the U.S. dollar falls, U.S. food becomes cheaper overseas. U.S. agricultural exports have risen nearly 40 percent ($62 billion in 2004 to '05 to $82 billion in 2007), which is about as much as the fall in the value of the dollar.
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Likewise, a falling dollar has made it more difficult to purchase the 60 percent of U.S. oil that is imported. Raising interest rates and the exchange value of the U.S. dollar would result in less export demand for U.S. agricultural commodities, but lower the cost of foreign oil purchases.
Editor's Note: Gustafson is an agriculture economist and Aakre is a farm management specialist at North Dakota State University in Fargo.
