Ethanol mandate debate of great importance to baking
BakingBusiness.com, Aug. 7, 2012
by Josh Sosland

In the debate roiling over whether the ethanol mandate should be reduced for 2013 because of the corn drought, considerable attention has been given to the effect of the corn crop failure on meat and poultry prices. Some attention also has been given to what will happen to costs of the myriad processed foods with corn-based ingredients. Hardly mentioned in such analysis has been the considerable effect on costs of bread and other wheat-based foods of the rigid ethanol production mandate under the federal Renewable Fuels Standard.

The U.S. baking industry has for years expressed concern about ethanol policy because of its potential effects on wheat prices. This theoretical concern has now become reality, a connection that becomes clear glancing at the historical relationship between wheat and corn prices.

While the spread swings widely from one year to the next, the national farm price for wheat exceeds corn by more than a fifth nearly every year, helping keep good quality wheat supplies out of feed rations.

The price spread has averaged a 42% premium over the past 100 years but was only 10% in 2010-11 and 17% in 2011-12. With this year’s drought, it is very likely the price relationship will be tight for a third consecutive year – the July spread was preliminarily indicated by the U.S. Department of Agriculture at only 13%.

Wheat supplies in the U.S. and globally in 2012-13 have been deemed “adequate,” so it is apparent that wheat prices are being carried by corn. The national average farm wheat price of $8.31 in July was 69% higher than the 10-year average.

The Environmental Protection Agency, which has the power to issue an ethanol waiver, has said it will do so only if the mandate is demonstrated to “severely harm the economy of a state, region, or the United States.” Feed use of corn is expected to be greatly reduced in the year ahead by market forces alone. This difference prioritizes fuel above food and feed use of corn in years of drought.

Reflecting this difference, the latest U.S.D.A. supply-demand figures lowered the forecast of 2012-13 corn feeding by 12% from June while cutting the fuel use forecast by only 2%. Further corn crop losses will make this spread wider (absent ameliorating steps by E.P.A.). While a reduction of the mandate will not magically make 2012-13 an easy year for ingredient buyers, this mismatch demands attention and action, and bakers’ voices must be heard on this issue.