Food Prices and Ethanol Mandates

By Andy May

This post is a follow up to my previous post on biofuels, here we discuss the impact of biofuels on food prices in more detail. Ethanol has been produced in large quantities in the United States for fuel since 1978. That was the year the Congress passed the Energy Tax Act (Tyner 2008) which provided for a 40 cent per ethanol gallon exemption to the gasoline excise tax. This tax exemption for ethanol was increased to fifty cents in 1982.

The Alternative Motor Fuels Act was passed in 1988. It funded biofuels research and provided incentives to automobile and truck manufacturers to build vehicles that used higher ethanol blends (E85 or 85% ethanol) and other biofuels. There were other changes to the program, but ethanol, as a fuel, never really took off. It was too expensive, too dangerous due to its low flashpoint (only 12°C or 54°F), and too corrosive to metal pipes and engine parts.

Finally, the Energy Policy Act was passed in 2005. Ethanol and biodiesel were not doing well and could not compete with petroleum, so this Act mandated their use. Bush’s volumetric ethanol excise tax credit and mandate was passed and took effect in 2005. The mandate to buy ethanol increased every year until it hit the 10% blend wall in 2011. This mandate caused farmers to grow corn for ethanol manufacture rather than for human or animal consumption increasing food costs. The magnitude of the increase in food costs caused by the mandate is endlessly debated, but no one claims it is zero. Figure 1 shows the FAO worldwide food price index for the period in nominal (unadjusted) prices and in inflation adjusted prices.

Figure 1. FAO worldwide food prices without adjustment (nominal) and adjusted for inflation (real). Data source FAO.

FAO food prices increase just as the Renewable Fuel Standard (RFS) mandate was put into place and it increased after that until the 10% blend wall caused the EPA to stop increasing the mandate, even though Congress howled (Congressional Research Service 2019). Due to more efficient cars, hybrids and electric cars the demand for gasoline, in the U.S. and Europe dropped. Since most car manufacturers would not allow more than 10% ethanol, less could be used and the EPA was forced to relax the mandated volumes. Petroleum prices also began to rise in 2005 and declined in 2015, this played a role in increasing food prices as well, since agriculture is an energy intensive business. World crude prices are shown in Figure 2 from ourworldindata.org.

Figure 2. World Crude Oil prices, 2018 U.S. dollars. Data source: ourworldindata.org

Besides higher fuel prices and farmers switching their land from food crops to biofuel crops, other factors affecting food prices from 2005 to 2013 were greater demand in Asia and speculation in the commodity markets according to the World Bank. Incomes are rising rapidly in the developing world, especially in Asia, and they are buying more food, this has increased prices, just as the demand for biofuels has reduced the rate of growth in the food supply. In addition, this period (2005 to 2013) saw some periods of drought in the U.S. and Russia, which affected corn and wheat prices.

Fuel prices affected the cost of shipping food and, to a lesser extent, the cost of growing it. The primary impact of the biofuels explosion after 2005, was on supply as farmland was switched from growing food to growing corn and soybeans for the biofuels industry. How quickly the switch to biofuel production is reflected in the grocery store varies is explained by Corinne Alexander and Chris Hurt of Purdue University (Alexander and Hurt 2007). Chicken, egg and beef prices responded quickly, but pork prices more slowly.

A major 2017 review of the literature concluded that food prices were affected by the use of biofuels. Dr. Chris Malins (Malins 2017) reviewed over one-hundred economic modeling studies and twenty-four assessments of the role biofuel demand plays in food prices and concluded:

“… biofuel demand (and hence biofuel policy) results in increased food prices. The size of the impact on prices scales with the size of biofuel demand, though not necessarily linearly, and inversely with the size of the market being affected. The U.S. maize ethanol mandate is expected to impact cereals markets much more strongly than EU ethanol demand, because U.S. demand is much higher. In contrast, EU biodiesel demand is expected to have a larger impact on vegetable oil prices than EU grain ethanol demand has on grain prices, because global vegetable oil production is much less than global grain production. These general conclusions are consistent with research undertaken for the European Commission (Valin, et al. 2015), as well as numerous studies by other institutions and independent researchers.” (Malins 2017)

Land use change (from food farming to biofuel farming) have caused an estimated global increase in corn and wheat prices of 1-2% and global vegetable price increases of about 10% (Malins 2017). There is a broad consensus that U.S. mandated corn ethanol consumption played a major role in the global food price crisis of 2006-2008. However, there is no agreement on precisely how much of the 2006-2008 price increase could be attributed to the mandate. It is also generally agreed that the EU biodiesel demand caused an increase in vegetable oil prices, but again no agreement on the magnitude. Malins’ Table 1 provides a summary of the conclusions of 26 studies. The studies estimate that the switch to biofuels caused from 18% to 75% of the food price crisis.

According to the FAO (FAO 2011) prices of rice, wheat and corn rose 40% (adjusted for inflation) between January 2007 and July 2008. These price increases occurred worldwide, regardless of where the grains were grown. Transmission of prices occurred more rapidly during the crisis than during normal times. The price increases were not a large problem in western countries where most people spend less than 10% of their income on food, but in poorer countries where some spend more than 50% of their income on food, it was a big problem. The poorest 20% of the population, saw a 9% decline in their real income due to higher food prices (FAO 2011).

Post 2012

By 2011, the rate of growth of biofuels had stalled, the market was saturated and additional mandates, although attempted, were ineffective and could not be implemented (Congressional Research Service 2019). Biofuels in the OECD countries were 5% of all transportation, commercial and residential energy use in 2010, according to Exxon Outlook, and the same in 2017. Exxon projects that this will not change over the next twenty years, mandates or no mandates. As I noted in a previous post, burning wood, waste and dung is practical if it is done close to the fuel source, because this process also functions as a waste removal mechanism. If the fuel source is close, waste and biofuels provide both incineration and power generation, but otherwise these fuels are not economically viable. This is an industry almost totally dependent upon government subsidies and mandates.

Biofuel advocates point out that the production of biofuels results in co-products called “distiller’s grains” and “oilseed meals.” These products are used as livestock feed and account for about 5% to 12% of EU consumption. This is not negligible, but it is also not large enough to affect EU imports of feed grain (Malins 2017). It is also not enough to eliminate the negative impact biofuels have on food prices. Malins writes:

“Indirect land use change studies for the European Commission already include the effect of co-products in reducing the impact of biofuel policy on feed availability, as do 95% of studies identified in a comprehensive review of the field (Persson 2014). Studies of ILUC with the MIRAGE and GLOBIOM models (Laborde 2011) and (Valin, et al. 2015) find that co-product availability prevents consumption of animal feed by livestock from being reduced due to biofuel policy, but in neither study does this prevent overall human consumption of food commodities from reducing. The price increase predictions documented in this study are all made despite an explicit recognition of the importance of co-products. It is quite simply inconsistent with the evidence available to claim that biofuels increase food security due to the role of co-products – the food security impact is reduced by co-products but not eliminated.” (Malins 2017)

Conclusions

There is considerable pressure being applied on the government to increase the ethanol mandate and blend more ethanol in our gasoline. But, the technical problems with this action and the risks to engines have prevented this from happening. The statutory volume requirements have not been met since 2013 (Congressional Research Service 2019). The EPA has the authority to waive the statutory requirements and has used this authority. Technology cannot be legislated, whether it is E15 gasoline or switchgrass cellulosic ethanol. According to the Congressional Research Service:

“For instance, the 2019 targets set by EPA for total renewable fuel and for total advanced biofuel were approximately 71% and 38% of the statutory targets, respectively. A variety of factors, such as infrastructure, technology, and limited federal assistance, have led to challenges in meeting the total volume requirement established by Congress. These challenges have included a lack of cellulosic biofuel production and delays by the EPA in approving fuel pathways. There are, however, two fuel categories that consistently have met their statutory targets: conventional biofuel and biomass-based diesel. Also, since 2014, two advanced biofuel pathways—renewable compressed natural gas and renewable liquefied natural gas—have constituted the majority of the cellulosic biofuel volume target established by EPA.” (Congressional Research Service 2019)

In 2018, the EPA required that 15 billion gallons of ethanol be put in U.S. fuel, but the market could only use 14.3 billion gallons due to the blend wall and current expected gasoline sales. The U.S. is now energy independent, thanks to shale gas and oil. However, to make up for the extra 700 million gallons of ethanol required in 2018 by the EPA, and because the mandated ethanol volume from cellulose was not available, the refining industry was (and is) importing biodiesel and cellulosic ethanol. That is correct, simply to meet the mandated volumes, we are importing biodiesel and ethanol that we do not need. In the 2019 EPA Rules, we read this (BBD stands for biomass-based diesel):

“The cellulosic biofuel and BBD categories are nested within the advanced biofuel category, which is itself nested within the total renewable fuel category. This means, for example, that each gallon of cellulosic biofuel or BBD that is used to satisfy the individual volume requirements for those fuel types can also be used to satisfy the requirements for advanced biofuel and total renewable fuel.” (2019 Rules, page 34208)

Thus, “advanced” biofuels, like biodiesel and cellulosic ethanol can be substituted for conventional ethanol and satisfy both requirements at once, they are “twofers.” The 2020 Renewable Fuel Standard Rules include the following, by way of explanation for this regulatory insanity:

“Given current and recent market conditions, the advanced biofuel requirement is driving the production and use of biodiesel and renewable diesel volumes over and above volumes required through the separate BBD standard, and we expect this to continue. While EPA continues to believe it is appropriate to maintain the opportunity for other advanced biofuels to compete for market share, the vast majority of the advanced biofuel obligations in recent years have been satisfied with BBD. Thus, after a review of implementation of the program to date and considering the statutory factors, we are establishing, in coordination with USDA and DOE, an applicable volume of BBD for 2020 of 2.43 billion gallons.” (2020 EPA Rules)

The Congressional mandate is one billion gallons of BBD. Thus, the EPA is mandating biodiesel and ethanol imports.

Note (3/31/2020): A reader showed me where the EPA reports biofuel imports (see here). In 2018 they report that 305,428,514 gallons of biofuels were imported. This generated 392,999,626 ethanol RIN credits. In 2019, 430,681,927 gallons were reported to have been imported, generating 521,853, 172 RINs. This is a different volume than reported above, but still substantial. The remaining 200,000,000 to 300,000,000 required RINs may have been purchased from other sources.

Works Cited

Alexander, Corinne, and Chris Hurt. 2007. “Biofuels and Their Impact on Food prices.” Bioenergy. https://www.extension.purdue.edu/extmedia/ID/ID-346-W.pdf.

Congressional Research Service. 2019. “The Renewable Fuel Standard (RFS): An Overview.” https://fas.org/sgp/crs/misc/R43325.pdf.

FAO. 2011. Lessons from the world food crisis of 2006-08. FAO. http://www.fao.org/3/i2330e/i2330e04.pdf.

Laborde, David. 2011. Assessing the Land Use Change Consequences of European Biofuel Policy. Atlass. http://re.indiaenvironmentportal.org.in/files/file/biofuelsreportec2011.pdf.

Malins, Chris. 2017. Thought for Food. London: Cerulogy. https://www.transportenvironment.org/sites/te/files/publications/Cerulogy_Thought-for-food_September2017.pdf.

Persson, U. Martin. 2014. “The Impact of Biofuel Demand on Agricultural Commodity Prices: A Systematic Review. Advances in Bioenergy: The Sustainability Challenge.” By U. M. Persson, 465-482. Wiley. https://onlinelibrary.wiley.com/doi/abs/10.1002/wene.155.

Tyner, Wallace E. 2008. “The US Ethanol and Biofuels Boom: Its Origins, Current Status, and Future Prospects.” Bioscience 58 (7). doi:https://doi.org/10.1641/B580718.

Valin, H., Peters, van den Berg, M. D., S. Frank, P. Havlík, N. Forsell, and C. Hamelinck. 2015. “The land use change impact of biofuels consumed in the EU – Quantification of area and greenhouse gas impacts.” International Institute for Applied Systems Analysis. http://pure.iiasa.ac.at/id/eprint/12310/.

#biofuels, #food-prices