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

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

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

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  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 Whole- saler System Distrib. Citizens 111 Million Households Food Service Handler Food Service 39% Ingredient/ Flavor Companies Wasted food Transportation mode Food System Information

  4. http://www.ers.usda.gov/AmberWaves/April06/Features/Energy.htmhttp://www.ers.usda.gov/AmberWaves/April06/Features/Energy.htm

  5. http://www.ers.usda.gov/AmberWaves/April06/Features/Energy.htmhttp://www.ers.usda.gov/AmberWaves/April06/Features/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/FoodMarketingSystem/pricespreads.htmhttp://www.ers.usda.gov/Briefing/FoodMarketingSystem/pricespreads.htm

  10. Source: The Food Institute Report, 81:9 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/Features/CornPrices.htmhttp://www.ers.usda.gov/AmberWaves/February08/Features/CornPrices.htm

  13. http://www.ers.usda.gov/AmberWaves/February08/Features/CornPrices.htmhttp://www.ers.usda.gov/AmberWaves/February08/Features/CornPrices.htm

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

  15. http://www.ers.usda.gov/AmberWaves/February08/Features/RisingFood.htmhttp://www.ers.usda.gov/AmberWaves/February08/Features/RisingFood.htm

  16. Source: The Food Institute Report 81:11, 3/17/08 p. 24

  17. http://www.ers.usda.gov/AmberWaves/February08/Features/RisingFood.htmhttp://www.ers.usda.gov/AmberWaves/February08/Features/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/Features/Ethanol.htm

  20. http://www.ers.usda.gov/AmberWaves/September07/Features/Ethanol.htmhttp://www.ers.usda.gov/AmberWaves/September07/Features/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/Features/Biofuels.htm

  25. Other Bio fuels - globally http://www.ers.usda.gov/AmberWaves /November07/Features/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) => 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@umn.edu http://foodindustrycenter.umn.edu

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