Thursday, February 12, 2009

Ethanol vs. Food (Part 1)

There has been considerable debate whether the Renewable Fuels Standard (RFS) has created as "food vs. fuel" competition. Several studies, including ones by my colleagues at Purdue University and Texas A&M University suggest that the answer is no. They conclude most of the increase in grain price is attributable to a combination of the declining value of the U.S. dollar, increased demand overseas, and increases in the price of oil. Indeed, some of our own work suggests that oil prices and exchange rates lead corn prices. But consider the following:
The graph (and thanks to my friend John Anderson of Mississippi State for "loaning" it to me) shows the relationship between the stocks-to-use ratio and corn price. As the ratio increases, stocks are increasing relative to use, so we expect a decline in price...and that is what we see. But, when you get to the 2006-2008 period, something occurs. Same basic underlying fundamentals (i.e., consistent stocks-to-use), but a huge increase in price. This graph suggests a structural shift in corn prices which are directly tied to the RFS time period...more on this later.