Ethanol and food prices

The increase in ethanol production from corn is not the only reason for rising food prices, Helen Jensen and Bruce Babcock point out in a recent article from Iowa State University. Some observers have been concerned that demand for biofuels will bid up prices for food uses of corn, with especially bad consequences for the price of meat and dairy products that use corn as feed. Jensen and Babcock don't dismiss this concern entirely, but they put it in perspective by noting the comparatively small contribution of corn to final meat and dairy prices and the wide variety of other supply and demand factors that influence these prices.

The authors cite recent analyses suggesting that a 30% increase in the price of corn might raise egg prices by about 8%, beef prices by 4%, dairy prices by 3% and total food prices by 1%.

I might point out a flip side of this comparatively unconcerned perspective on high corn prices: it suggests that farm subsidies that lower corn prices probably have not been helping consumers much either, as subsidy supporters claim.

Also, though not dramatic, a 1% increase in food prices is enough to matter. The article concludes:

And finally, food price increases, from whatever source, will directly affect the cost of U.S. nutrition programs. Higher commodity prices combined with shrinking inventories mean that the U.S. government will be forced to pay high market prices for food for school lunch programs. And the automatic food price escalators built into the food stamp program mean rising expenditures there. The silver lining, as far as the federal budget is concerned, is that at least a portion of the higher costs of nutrition programs will be offset by lower support payments for farmers because of high commodity prices.