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Green Madness: Renewable Fuel Standard Driving Up Food Prices

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Mark J Perry, Carpe Diem

Since the Renewable Fuel Standard went into effect in 2006, corn, not oil, drives food prices. Near perfect correlation. 

fuelsamerica

The pro-renewable fuels, pro-ethanol, anti-fossil fuel organization Fuels America, which is “committed to protecting America’s Renewable Fuel Standard (RFS),” featured the chart above on Twitter with this text:

FACT: Oil, not corn, drives food prices. Near perfect correlation

The chart presented by Fuels America shows the historical relationship (August 1999 to April 2011) between oil futures prices and the Reuters/Jeffries CRB commodity futures price index, and is supposedly presented as “evidence” to counter the frequent claim that higher corn prices, due to the RFS’ ethanol mandate, are driving up food prices. Where to start with such sloppy “statistics”?

1. The CRB commodity futures index is based on the prices of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat. Fewer than half (9) of those commodities are food (with a combined weight of only 36%) and the other 10 are metals, petroleum products, and fibers. Conclusion: the CRB commodity price futures index is not a measure of food prices, it’s a broad-based commodity index.

Crude oil has a weight of 23% (the highest weight of any of the commodities) in the CRB index, and when you include heating oil and unleaded gas, those three oil-based commodities have a 33% weight in the CRB Index. Wouldn’t we expect a strong or “near perfect” historical relationship between oil prices and a commodity price index that is weighted 33% by oil and oil products?

2. What does “near perfect correlation” mean? The chart shows a pretty close historical association between oil futures prices and the CRB index, but there is no correlation coefficient presented.

3. How do we know that the relationship between corn prices and oil prices isn’t even stronger than the relationship between “food” prices and oil prices? In other words, how can we conclude that “Oil, not corn, drives food prices” when we aren’t presented with any measure of corn prices, or any historical relationship between corn prices and food prices?

4. The Renewable Fuel Standard didn’t go into effect until 2006, so why would be interested in the relationship between oil and “food” prices from 1999 to 2005 period? And why does the “analysis” stop in April 2011, more than two years ago?

Let’s conduct a more complete analysis by starting with the following two charts, showing the historical monthly relationships between: a) oil prices and foods prices, measured by the Consumer Price Index for Food, and b) spot corn prices (from Global Financial Data) and food prices:

cornoil1cornoil2

Conclusion: The correlation between corn prices and food prices (0.871) from 2000 and 2013 (bottom chart) was actually slightly higher than the correlation between food prices and oil prices (0.858).

Here are two slightly different versions of the two charts above that cover only the 2006-2013 period when the RFS was actually in effect:

cornoil3cornoil4

Conclusion: During the period when the RFS has actually been in effect (2006 to present), the statistical relationship between corn and food prices (correlation = 0.828) has been much stronger than the statistical relationship between oil and food prices (0.441).

Here’s my bottom line with all of the usual caveats about correlation not implying causation, etc.

FACT: Since the Renewable Fuel Standard went into effect in 2006, corn, not oil, drives food prices. Near perfect correlation. 

AEIdeas, 10 August 2013