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June 2008

June 13, 2008

The Fuel vs. Food Fight Takes a Turn…Towards Real Data

Fair and Balanced: Ethanol/biofuels production has a small impact on food prices and lowers gasoline prices

“The answers that I have received from the Departments of Agriculture and Energy indicate that U.S. biofuels policy explains between 4 and 5 percent of the 45 percent global increase in food prices in the last year.  At the same time, biofuels have increased the U.S. fuel supply and are reducing the prices that Americans pay at the gas pump by between 20 and 35 cents per gallon." -- Opening statement of Senate Committee on Energy and Natural Resources Committee Chairman Senator Jeff Bingaman, Hearing on the Relationship Between U.S. Renewable Fuels Policy, Food Prices, June 12, 2008

"It is clear, however, that biofuels are already moderating gasoline prices. That impact is likely to grow substantially as more biofuels come to market. Our preliminary analysis further suggests that current biofuels-related feedstock demand plays only a small role in global food supply and pricing. Moreover, the impact of biofuels on U.S. consumers is even smaller since the farm price of commodities accounts for less than twenty percent of U.S. consumers' food costs." In response to information requests from Senate Committee on Energy and Natural Resources from Secretary of Energy Samuel W. Bodman and Secretary of Agriculture Edward T. Schafer, June 11, 2008.

The Senate Committee on Energy and Natural Resources held a Full Committee Hearing to receive testimony on the relationship between US renewable fuels policy and food prices (SD-366) Thursday, June 12, 2008.  You can View Archive Webcast or get copies of the testimony at the end of this commentary.

The hearing was in response to a letter from the Committee (Download letter_to_bodman_and_shafer_re_biofuels_05_12_08.pdf)  to the Secretaries of Agriculture and Energy asking them to quantity the impacts of the federal biofuels (biodiesel and ethanol) program on consumer food prices.  The complete response from DOE Secretary Bodman and USDA Secretary Schafer can be downloaded in a PDF here (Download Chairman_Bingaman_Signed_w_Enclosure.pdf) and they are summarized in Chairman Bingaman’s opening statement below.

However, there was one missing piece to yesterday’s effort to investigate the price increase in food puzzle – what is the impact of oil price increases on food prices and the profitability of grocery manufacturers?  Round II -- Food vs. Fuel vs. Oil?

Relationship Between U.S. Renewable Fuels Policy, Food Prices
“Thank you all for coming today to discuss our nation’s biofuels policy, and how that policy is affecting domestic and global food prices.  The recent increase in commodity prices, with food and fuel prices at historic highs, highlights the importance of getting our policies right.  I called today’s hearing in an effort to help us do just that: to make sure we are getting our biofuels policy right.

Last month, I asked the Secretaries of Agriculture and Energy a series of questions about the impact of the Renewable Fuel Standard on domestic and international food and fuel prices.  Those questions were intended to establish some of the facts on this issue, so that we could base today’s discussion on facts, rather than the agenda-driven calculations that we see more often than not. 

The answers that I have received from the Departments of Agriculture and Energy indicate that U.S. biofuels policy explains between 4 and 5 percent of the 45 percent global increase in food prices in the last year.  At the same time, biofuels have increased the U.S. fuel supply and are reducing the prices that Americans pay at the gas pump by between 20 and 35 cents per gallon. 

As we continue on this path toward expanding our alternatives to gasoline and reducing its cost, we obviously need to find a way to eliminate any impact on the global food prices.  The intent of the Renewable Fuel Standard that was enacted in December 2007 is to move beyond our current technologies, to technologies that have no implications for our food supply. 

I think the critics of our current biofuels policy do not question the validity of our end goal of a healthy second-generation biofuels industry, but rather question our path for arriving at that end goal.  Our current path does require increased use of existing biofuels, including corn ethanol and soy-based biodiesel. 

I am concerned that altering that path now would not only be unfair to the industry that is responding to the government policies that have already been put in place, but also would have negative implications for second-generation fuels.  It is a fact that many of the companies that are expected to be next-generation biofuel industry leaders, especially for cellulosic ethanol, are current industry leaders in corn ethanol production.  To hurt those companies’ bottom lines now would endanger their investments in expanding their business to include next-generation production. 

I also suspect that investment in other kinds of next-generation technology would suffer, as investors would feel less confident of Congress’s commitment to its biofuels policies.  I believe that many next-generation fuels hold great promise for further diversifying our fuel supply.  As we diversify away from biofuel feedstocks that compete with our grain supply, we also diversify the geographic production areas beyond the current base in the Midwest.

In my home state of New Mexico, which has no corn ethanol production, limited sorghum-ethanol production, and very small amounts of biodiesel production, is an example of how the geography of biofuels production can change.  We are hopeful that we will be home to the country’s first biobutanol plant, which could be located near Portales, New Mexico, and could use sweet sorghum as a feedstock.  We also understand that New Mexico is one of the most promising states in the U.S. for large-scale algae production, which we will hear more about in today’s hearing.  We need the market certainty that comes with the existing renewable fuels mandate in order to realize the benefits of this next-generation industry.

At the same time, I do think we need to be mindful of any unintended consequences of our biofuels policy.  No one wants our biofuels policy to increase the prices that Americans are paying at the grocery store – although I think we can agree that this domestic price increase is to some degree offset by the savings we’re seeing at the fuel pump.  But we must also ensure that our policies, including but not limited to our biofuels policies, are not negatively impacting the world’s poor, who are most vulnerable to food price increases.  I take seriously the United Nations call for further study on the topic of biofuels, and look forward to constructive thoughts on how we can create a more sustainable global biofuels industry." – Opening statement of Senate Committee on Energy and Natural Resources Committee Chairman Senator Jeff Bingaman, June 12, 2008.

Response from Secretary of Energy Samuel W. Bodman and Secretary of Agriculture Edward T. Schafer (excerpts from the letter are below).

"The food and fuel pricing issues about which you have raised questions are complex. We would again caution, therefore, against hasty judgments driven by highly questionable, agenda-driven calculations, some of which have been featured prominently in the popular press. Many analysts both within and outside of government are currently working to model these questions, and the one certainty is that our data will improve substantially in the months ahead.

Our shared vision is a sustainable domestic biofuels industry centered in rural America.  To that end, both our agencies as well as the Federal Biomass Research and Development Board, co-chaired by the Department of Agriculture's Under Secretary for Rural Development Tom Dorr and the Department of Energy's Assistant Secretary of Energy Efficiency and Renewable Energy Andy Karsner, are collaborating to build an integrated biofuels action plan. In order to achieve these goals, continued private sector investment is needed. Creating a stable, predictable policy environment for investors, as Congress did with the expanded Renewable Fuels Standard, is essential to scaling our biofuels use and deploying next-generation biofuels. Efforts to repeal that mandate would hinder progress toward reducing our dependence on imported oil and reducing greenhouse gas emissions.

At the same time, our agencies are committed to collecting and presenting accurate data, projecting potential impacts, and initiating the necessary and appropriate actions to ensure the sustainable growth of biofuels. To that end, both of our agencies have significantly ramped up our analytical efforts to ensure that we proceed with caution but also determination. Our agencies will continue to work closely with the Environmental Protection Agency as we undertake our respective responsibilities under Title II of the Energy Independence and Security Act of 2007."

The complete answers to the six questions below are contained in the full DOE/USDA response which is available in PDF download here Download answers_from_doe_and_usda.pdf .

Question 1: How has increased U.S. ethanol and biodiesel consumption affected domestic agriculture, and domestic food prices?

Question 2: Has increased ethanol and biodiesel consumption in the United States contributed to increased global prices for agricultural goods? And if so, to what extent?

Question 3: How might increased biodiesel consumption, as required by EISA beginning in 2009, affect domestic and international food prices?

Question 4: How has increased ethanol and biodiesel consumption affected gasoline and diesel prices?

Question 5: What prices levels for gasoline and diesel fuel would be expected if biofuels were removed from the market, both in the short-and long-term?

Question 6: What effects are biofuels expected to have on gasoline and diesel markets as consumption increases to meet the targets laid out in EISA?

Testimony of Witnesses 

The Honorable Alexander Karsner - Assistant Secretary for Energy Efficiency and Renewable Energy, U.S. Department of Energy --- Dr. Joseph Glauber - Chief Economist, U.S. Department of Agriculture --- Dr. Joe Outlaw - Co-Director of the Agricultural and Food Policy Center, Texas A&M University (not provided) --- Dr. Joachim von Braun - Director General, International Food Policy Research Institute --- Dr. Jason Pyle - Chief Executive Office, Sapphire Energy --- Mr. Jack Huttner - Vice President of Biorefinery Business Development, Genencor.