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Abstract
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%.