Impacts of High and Volatile Energy Costs: The Food Industry System

1
Impacts of High and Volatile Energy Costs The
Food Industry (System)
April 9-10, 2008 National Research Center for
Coal and Energy (NRCCE) West Virginia University
Morgantown, WV

• Professor Jean Kinsey, Director, The Food
  Industry Center,
• Department of Applied Economics
• University of Minnesota

2
Scale and Scope of the Food System

• 1.4 trillion sector
• 2006

• 12.3 GDP
• 28 of all retail trade
• 17 workforce largest
• employer except government

Agriculture Secretary Mike Johanns adjusted
5-24-2005 USDA trade outlook
Source BT Safety slide
3
Supply chain
Science Labs
Demand chain
Whole- saler
Retail Food
-
Seed/Feed
Self-
Retail
distrib.
Store
MANU-
Farmers
61
Consumer
FACT-
URER

-
First Line
Citizens 111 Million Households
Whole- saler System Distrib.
Food Service
Handler
Food
Service
39
Ingredient/
Flavor
Companies
Wasted food
Transportation mode
Food System
Information
4
http//www.ers.usda.gov/AmberWaves/April06/Feature
s/Energy.htm
5
http//www.ers.usda.gov/AmberWaves/April06/Feature
s/Energy.htm
6
Types of Energy Costs in Agriculture

• Wheat- midwest per acre dollar Percent
• costs 2004 operating costs
• Fertilizer 45.47 50
• Fuel, lubrc., elect. 11.53 13

7
Fuel use in Agriculture Production
Source Doug Tiffany, UMN
8
Minnesota Ag.Transportation

• of Statewide Total Transport Fuel
• Corn 26.6
• Milk 23.1
• Soybeans 14.9
• Sugarbeets 12
• Spring Wheat 12
• Source Doug Tiffany, UMN

9
http//www.ers.usda.gov/Briefing/FoodMarketingSyst
em/pricespreads.htm
10
Source The Food Institute Report, 819 3/3/08 p.
3
11
Food Prices Rising How Much?
CPI for Food 2008 estimates Food away from
home 3-4 Food at home 4-5 Fats oils
7-8 Cereals/Bakery 6.5-7.5
12

http//www.ers.usda.gov/AmberWaves/February08/Feat
ures/CornPrices.htm
13
http//www.ers.usda.gov/AmberWaves/February08/Feat
ures/CornPrices.htm
14
Food Prices Rising WHY?

• Income growth in developing countries results in
  increased demand for animal protein -gt increased
  demand for grains for feed. (Modern retailing
  pays more for grain)
• 2. Bio fuel production -gt imbalance in cereal
  production -gt rising prices of grains

15
http//www.ers.usda.gov/AmberWaves/February08/Feat
ures/RisingFood.htm
16
Source The Food Institute Report 8111, 3/17/08
p. 24
17
http//www.ers.usda.gov/AmberWaves/February08/Feat
ures/RisingFood.htm
18
Drivers of Bio fuel Production

• 1. Ethanol from corn Industry very profitable for
  2.5 years before spring of 07
• - Higher petroleum and wholesale gasoline prices
• - Phase out of MTBE required 6 Bill.
  Gallons/Yr.
• - Tax Credit - .51/gal to blenders (some pass
  through)
• 2. Energy Policy Acts of 2005 and 2007 have
  included Renewable Fuel Standards (RFS to
  decrease emissions of GHG)
• -decrease gasoline by 20 by 2017 need 35 bil.
  gal. of alternative fuels.
• 3.Policy Goal Production and Use of 15 Bill.
  Gallons from corn by 2015. Later--- 21 Billion
  from Advanced Biofuels and Cellulose.

19

• Ethanol Role in
• Gasoline and Corn
• Markets 2006
• 2017

http//www.ers.usda.gov/AmberWaves/ September07/Fe
atures/Ethanol.htm
20
http//www.ers.usda.gov/AmberWaves/September07/Fea
tures/Ethanol.htm
21
Drivers of Bio fuel Production
1. Ethanol from corn Industry very profitable for
2.5 years before spring of 07 - Higher oil
prices - Cheap and abundant corn 2. Energy
Policy - Mandates for RFS corn ethanol
already producing Tax Credit - .51/gal to
blenders (some pass through to ethanol plants)
(VEETC)
22
Source Doug Tiffany, UMN
23
Source Doug Tiffany, UMN
24
Biofuel profitability
http//www.ers.usda.gov/AmberWaves/November07/Feat
ures/Biofuels.htm
25
Other Bio fuels - globally
http//www.ers.usda.gov/AmberWaves /November07/Fea
tures/Biofuels.htm
26
Biomass for fuels Land Use Issue

• Acres per megawatt generated of electricity from
  various energy sources
• Biomass 625
• Wind 64
• Solar 10
• Jay Apt Carnegie-Mellon University

27
Biomass for fuels Competition for Food and
Forest Land

• Winners
• Farmers who grow corn, soybeans, switch grass,
  etc.
• Oil Companies tax credits to use ethanol, own
  some of production
• Ethanol Producers if the input prices are right
• Consumers with cleaner air and slower climate
  change
• Loosers
• Poor consumers everywhere especially in grain
  dependent countries

28
Food Prices Hurt Emerging Economies

• Ag. Production in Asia has fallen
• Imports more expensive as grain prices rise
  (Philippines buys rice from Cambodia at 2x world
  price last December.)
• Some imposing export bans on grains (India,
  Vietnam) Others are omitting import tariffs
  (India, Egypt)
• Others subsidizing increased production
  (Philippines, China, India)
• gt Inflation in these economies here too!

29
Food Prices Hurt Emerging Economies

• Inflation in these economies here too!
• Weak dollar raises oil prices
• Countries that tie currency to dollar to protect
  exports, but pay more for imports.
• Imports in U.S. rose 5.6 last 2 months.
• Inflation in China 9 Philippines 6.4,
  Vietnam 19
• Riots in Haiti over food prices.

30
Conclude

• Fuel use in the food system
• Agriculture more efficient use
• Producing fuels from bio mass
• Policy incentives to produce ethanol
• Resources compete with need for food
  exacerbates a short grain supply and rising
  demand

• Spillover effects
• Higher food prices-especially in developing
  countries
• Land use issues

31
Conclude

• Fuel use in the food system
• Post Farm Gate energy and fuel about 7.5 of
  retail prices less impact in the U.S.
• Prices more volatile and upward pressure
• Retail Competition slower increase at retail
• Other energy uses of concern
• Refrigeration, lighting, truck transfer,

32
Impacts of High and Volatile Energy Costs The
Food Industry (System)Questions?

• Professor Jean Kinsey, Director, The Food
  Industry Center,
• Department of Applied Economics
• University of Minnesota
• jkinsey_at_umn.edu
• http//foodindustrycenter.umn.edu