Is ethanol production increasing food prices?

There has been much speculation about this very question for quite some time. Recently, a group of 23 GOP Senators have asked the EPA to roll back requirements on an energy bill that stipulates the increased produciton of biofuel/ethanol five fold by 2022. You can read the article here.

But, is that the real source of corn prices going up? The answer is complicated. Though ethanol has increased corn prices marginally, the impact is very little.

There are many different factors that go into the production of products that contain corn. The most widely used example of this is the cereal Corn Flakes. According to Ephraim Liebtag in his article "Corn prices near record high, but what about food costs?" states that in a box of Corn Flakes, the amount of corn in price is equal to about 3.3 cents after taking into consideration the price per bushel and corn used for the flakes. The rest is transportation, packaging, advertising etc. The then increase in corn of 49 cents a bushel, only pushes the cost up 1.6 cents. A negligible difference.

In addition to that, the USDA had predicted correctly for last year that 2007 would yield the largest corn crop ever seen. A 10.6% increase to 13.1 billion bushels from the previous record in 2004 of 11.8 billion bushels. More corn in the supply would dictate that even if demand increases, prices would stay relatively constant.

I am going to say that the reason food prices are increasing is because it is more expensive to bring the food to us. Oil is used to transport the food, make the packing and sometimes even cool the food in the fridge (We do, after all, use electricity). Soaring oil prices are the culprit for our woes. Ethanol, though not a permanent energy solution, is a nice first step. It has seen no real impact on the edible corn grown for humans.