particular concern for households that allocated a large percentage of income to food (Crompton, 2008; Lustig, 2008; Reinbold, 2008; von Braun, 2008; Wiggins and Levy, 2008).
During this commodity price spike, which peaked between 2007 and 2009, controversy ensued over the role of increased ethanol production in increased food prices. However, much of the debate used the term “food prices” in an imprecise and often contradictory manner. Specifically, some analysis of that period focused on the effect of ethanol production on raw agricultural commodity prices at either the farm level or the international market level. Other analysis focused on the effect of ethanol production on prices of processed food products at the consumer retail level. Frequently, both types of analysis were reported to the public under the label of “the effect on food prices.”
As discussed below, the nature of the U.S. food marketing system implies that changes in agricultural commodity prices and changes in retail food product prices do not correlate on a 1:1 basis. Much of the confusion in that debate, and the wide range of estimated effects of ethanol production on “food prices” during that period, was due to these uses of imprecise terminology. Consequently, the remainder of this section uses specific terminology to discuss the potential price effects of expanded biofuel production. First, the term “agricultural commodity prices” refers to the prices of raw agricultural products at the farm or international market level. Second, the term “retail food prices” refers to the prices of consumer food products at the grocery retail level.
Effects on Agricultural Commodity and Retail Food Prices: Lessons from 2007-2009
Estimates of ethanol’s influence on global agricultural commodity prices during the 2007-2009 period were as high as 70 percent (Table 4-4). Determining the extent to which biofuel production affected agricultural commodity and retail food prices is difficult because most prices at the time were also influenced by the high price of oil, greater speculation activity in commodity markets, the changing value of the dollar relative to other currencies, drought in some major production regions, export restrictions imposed by some countries, and more demand for food from the growth in population and incomes in developing countries (Trostle, 2008; Baffes and Haniotis, 2010). Some combination of these events is likely to continue to influence prices. Though the increase in the Food CPI dropped to historically low levels (1.8 percent for 2009 and 0.8 percent for 2010, the lowest rate since 1962 [USDA-ERS, 2011b]), food prices are still much higher than they were at the beginning of the decade (IMF, 2010), and food inflation in 2011 is projected to return to the historic average of between 2 and 3 percent (USDA-ERS, 2011b).
Furthermore, because of the interrelationships of agricultural commodity markets and the competition for production resources among agricultural commodities, a price change in one agricultural commodity can affect prices in other agricultural commodity markets (see “Agricultural Commodities and Resources” above). Thus, any secondary price effect needs to be taken into account in the analysis of the effects of ethanol on commodity or retail prices. Also, the magnitude of price changes at the farm, international market, or retail level resulting from increased ethanol production is determined by the complex nature of the food marketing system and the transmittal of price changes through that system. Thus, though price changes at each level of the food system are jointly determined, the size of the price changes at each level may differ.
The range of agricultural commodity price increases assigned to increased ethanol production tended to decrease with the passage of time as additional data became available and more accurate analysis could be conducted (Abbott et al., 2009; Baffes and Haniotis,