Impacts of the Federal Energy Acts and Other Influences on Prices of Agricultural Commodities and Food

Most of the increase in ethanol production in the 2008-2012 period can be attributed to the Energy Independence and Security Act of 2007 (EISA) and earlier federal energy legislation. The expansion in U.S. biofuel production, particularly ethanol, was the predominant cause of the elevated commodity prices. Other influences documented were a weak dollar, speculation and an increasingly inelastic commodity demand function. The supply function displayed more elasticity as crop farmers responded to rising profits. Upward pressures on commodity prices from EISA will ease as grain ethanol production will level off but will continue to support the market. The biodiesel industry, as well as dry mill ethanol plants, will benefit from the expansion in the extraction of corn oil from distillers’ dried grain. A major offset to the amount of corn diverted from livestock to ethanol was the increased availability of distillers’ dried grain (DDG), a mid-protein feed. As a percent of total protein feed, utilization of DDG increased from 8% in crop years 2001-2005 to 18% in 2007-2011. While retail food prices increased by 20% between 2002-2006 and 2008-2012, higher agricultural commodity prices accounted for only a 3.80% increase. Over a percentage point of this increase was due to higher energy prices which raised the cost of production on crops, reducing the agricultural commodity price contribution to 2.77%. The net effect was further adjusted downward to 2.38% to account for savings in federal farm subsidies; then adjusted upward to 2.50-2.57% to factor in the costs of the blenders’ tax credit in EISA in 2007-2011 and projected to 2021. The conclusion is that EISA and earlier energy legislation has had and will continue to have a minor impact on U.S. retail food prices, less than 2.5%.