The True Story Behind Food Versus Fuel Debate

By Ron Miller
Managing Director and co-founder of Prisma Advisors, LLC
former CEO, Aventine Renewable Energy Holdings, Inc.

“Hunger, despair for millions” reads the headline in a national newspaper looking to link high food prices with the
growth of renewable fuels. Anti-ethanol factions oftentimes cite food costs in the ongoing food versus fuel debate
but they rarely dig too deep into the data.

81 percent of food costs go to non-farmers

On average, a farmer’s financial share of the retail cost of food is about 19%, according to the USDA. The other 81% goes to the food industry in the form of labor, packaging, transportation, marketing and energy costs and corporate profits.

Since the Great Recession began three years ago, labor costs have barely nudged but packaging and transportation costs — both directly impacted by energy costs – have spiked up, thereby increasing grocery bills nationwide. The average cost of crude oil in 2009 was $53.48 per barrel and in recent months has exceeded double that figure.

Huge margins remain for food producers

Are high energy and energy-related costs really hurting food companies? A quick scan of annual reports indicates that food companies like Chicago-based Kraft Foods have simply passed on higher costs to consumers. Kraft’s annual report for last year indicates gross profit margin, the difference between what it sold products for and the cost to produce them, was 34.8%. This is nearly double what farmers received for grain before factoring in production costs.

Even with sizable margins, food companies are crying poor and pointing to ethanol in Washington and editorial board rooms as the villain in the rising cost of food. The food industry has gone to some lengths to suggest that the small amount of cost associated with buying grain is the majority of the reason for higher food prices.

Why would a profitable food company with a large margin from which to extract corporate profits be anti-ethanol, and not, say, anti-packaging or anti-shipping, where most of the cost increase can be attributed? It is because ethanol has removed the financial boondoggle from taxpayer-subsidized grain prices that food companies have enjoyed for decades.

Unintended consequences: Subsidized grain for food manufacturing

To keep farmers in business — planting crops and not going broke even in terrible years — the USDA implemented its “loan” program which essentially guaranteed the farmer a minimum price sufficient keep operating. This created some degree of financial security for farmers, and ensured food security for the U.S. in an increasingly challenging world. Farm innovation and productivity improvements allowed the supply of grain to rise faster than demand for several decades. Because of this oversupply, the minimum price paid to the farmer was generally above the market price. Essentially, this difference was paid by the American taxpayer with the benefit of low, subsidized market prices primarily going to the grain buyer, not the farmer. Major grain buyers included food companies.

Ethanol has in great part put an end to that. Even when U.S. exports of corn were flat in recent years, a growing ethanol industry raised demand for U.S. corn and this demand has served to solidify price. The result is that farmers are focusing on the total corn market opportunity and foregoing government loans. As this occurs, government money that once dropped directly to a food company’s bottom line is no longer there to drop. But that doesn’t mean “Hunger, despair for millions;” perhaps smaller profits for a handful.

So the next time you go to the store and experience sticker shock, think about the 81% that goes to companies beyond the farmer and the 34.8% gross profit margin. Large corporate interests have a vested interest in deflecting consumer angst elsewhere and small ethanol is an easy target. Eliminating ethanol will have little impact on consumer food prices but replacing that ethanol with one million barrels per day of imported gasoline will make $108 per barrel look cheap.

One of our favorite radio personalities from childhood might say, “Now you know the rest of the story.”