Carpe Diem

FACT: Since the Renewable Fuel Standard went into effect, corn, not oil, has driven food prices with a near perfect correlation

fuelsamericaThe 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 the 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 food prices, measured by the Consumer Price Index for Food, and b) spot corn prices (“Chicago Yellow Corn No. 2 Spot Price” from Global Financial Data) and food prices:

cornoil1 cornoil2Conclusion: 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:

cornoil3cornoil4Conclusion: 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. 

15 thoughts on “FACT: Since the Renewable Fuel Standard went into effect, corn, not oil, has driven food prices with a near perfect correlation

  1. People ridicule the Chevy Volt and the $5k tax rebate. Probably they should.

    But that is peanuts next to the 850,000 barrels a day of ethanol that is first subsidized by the federal government, and then consumed by federal diktat at 10 percent of gasoline. Hard to know what this costs consumers and taxpayers, a situation made worse in that ethanol decreases your mpgs. If we assume the program costs taxpayers/consumers $1 a gallon, it is a $13 billion annual pink moonshine gift to rural states.

    Imagine if President Obama instituted a federal urban liquid fuels program, converting urban wastes into ethanol, production of which was subsidized, and use of which was mandated.

    The outrage! The pique!

    The problem with the Chevy Volt? They did not know how to develop a permanent subsidy that was hidden from taxpayers.

    And ethanol will be permanent. Your great-grandchildren will use ethanol, I assure you. No ag program ever dies.

    • “Imagine if Obama…”

      He kept the existing crap in place and added a green jobs crony empire.

      “The outrage! The piqué!”

      Yeah, that’s a real problem, isn’t it, Benji?

      Your boyfriend is held to a selectively high standard by the media.

  2. Weather and regional differences (for example, I doubt much corn is grown in California) may show causality.

    However, in Afghanistan, drug crops replaced food crops (the most fertile land is used to grow cannabis crops, which farmers earn three times as much, on average), and yet Afghanistan receives substantial foreign food aid.

    • Factually incorrect:

      Because of the climate, it is routine for Afghans to raise opiates early in the year — and then — on the same ground — subsistence crops.

      The opiates are a compelled crop. Failure to bring them in means that your first born daughter has to be given over. That’s not an idle comment. Thousands of toddlers are given over every year by unlucky farmers who lost a crop.

      The girls are negotiable assets in the drug trade. The sons are left behind — as crop mules. Without his sons, there can be no expectation that the crops will come in.

      For Afghans, particularly in the opiates zones, the limiting resource is WATER, not acreage. That’s why everyone is settled along the water collection system/ chain of villages (ancient) that concentrates the snow melt. (This scheme may date from Cyrus the Great.)

      • Factually correct:

        Afghanistan’s New Bumper Drug Crop: Cannabis
        Apr. 01, 2010

        “Afghanistan is using some of its best land to grow cannabis,” says Antonia Maria Costa, director of the U.N. drug office in Vienna. “If they grew wheat instead, insurgents would not have money to buy weapons and the international community would not have to spend hundreds of millions of dollars on food aid.”…Farmers can earn about three times as much money growing cannabis as growing wheat.”

        • …says Antonia Maria Costa, director of the U.N. drug office in Vienna. “If they grew wheat instead, insurgents would not have money to buy weapons…

          Hmm. Others had different opinions on the matter.

          From that same Time article:

          ” Richard Holbrooke, the U.S. special representative for Pakistan and Afghanistan, told G-8 leaders in Italy last year that the antidrug efforts in Afghanistan “did not result in any damage to the Taliban, but they put farmers out of work.”

          And what do the people directly involved think?

          “Worse, many believe the policies have helped stoke the Taliban’s war against the coalition by uniting residents against the Afghan soldiers who destroyed their opium crops. “Eradicating marijuana and opium fields can breed resentment by people and be destabilizing,” says John Dempsey, a rule-of-law adviser to U.S. and Afghan officials for the U.S. Institute of Peace. He cites the town of Marjah, in Helmand province, where U.S. forces rolled tanks over poppy fields in a major offensive in February, two years after Afghan forces destroyed the local farmers’ opium crops. After those antidrug offensives, Dempsey says, “local residents felt they preferred the Taliban, because they let them grow opium.” About 70% of the farmers surveyed by local U.N. workers in 20 largely Taliban-controlled provinces said they paid about 10% of their earnings to the local forces that controlled their areas.“

  3. So have you reworked the “indexed” correlation coefficients amongst the three variables?

    Back of the envelope, since 2006, food prices have risen 25%, oil prices have risen 60% and corn prices have risen 250%.

    • Note: Indexing changes the scale but not the statistical relationship among the variables.

      The indexed correlation coefficients are exactly the same, e.g. for the 2006-2013 period:

      Food and corn prices indexed: 0.828

      Food and oil prices indexed: 0.441

      • Note that if you used the futures prices today the results would be different, as last Jan was still showing the effect of the 2012 drought in the corn belt, or will we see food prices fall this year? (Since corn has fallen 50%)

    • When did you take the benchmark of corn prices? They have fallen fairly drastically this year in fact today they are at contract lows having fallen close to 50% from the highs a year ago. (4.53 per bushel friday, last year it was around 8.40).

  4. The Fuels America graph is shown to be an obvious charade after further review, but what are the chances it will be retracted by Fuels America?

    Near perfect zero, zip and zilch.


  5. It stands to reason: corn is the key ingredient in so many foodstuffs. I can’t even count them all.

    Whiskey, HFCS, corn meal, corn oil, hogs, cattle, chicken,… dairy… (silage)
    catfish, prawns, salmon, (aquaculture means corn feed)…
    antibiotic drugs (the fungi are fed corn byproducts in huge amounts that always boggle the minds of laymen)

    I’m amazed that the correlation isn’t even higher.

    The price of corn should be correlated to the nutrition crisis in the Third World. It would be 100%.

  6. I have a 1996) Lexus 400 which is one of their first hybrid cars (a crossover SUV). The more ethanol that goes in the gasoline, the worse gas mileage I get. Lexus hasn’t a clue or won’t talk about it. In town, I get about 21 mpg but at standard highway rates, I get about 23 MPG. This is much lower than it was when I bought the car. I’m sure the ethanol has something to do with it.

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