**Testimony of Scott Faber**

**Vice President for Federal Affairs**

**On Behalf of the**

**Grocery Manufacturers Association**

**Before the House Committee on Education and Labor**

**July 9, 2008**

Thank you for the opportunity to testify on the rising cost of food and
its impact on federal child nutrition programs. The Grocery
Manufacturers Association strongly supports child nutrition programs,
such as the Women, Infants and Children Program and the National School
Lunch Program, and recognizes the strain that runaway food inflation
places on their successful implementation.

In general, there are seven factors contributing to the sharp increase
in US and global food prices: poor weather, export restrictions, rising
demand for food globally, the weak dollar, higher energy prices, and
changes in commodities markets. In particular, strong foreign economic
growth has increased demand for US exports and contributed to high grain
and oilseed prices. Between 2003 and 2007, annual average real GDP
increased by 4.6 percent, compared with 3.2 percent in the prior five
years. In emerging and developing economies, annual average real GDP
increased by 7.3 percent, compared with 4.1 percent for the prior five
years.[^1] As households improve their incomes and purchasing power,
they shift from traditional staples to high-value foods, such as meat
and dairy products.[^2] In addition, many nations have placed limits on
food exports to manage domestic food inflation, pushing international
market prices higher than supply and demand conditions would otherwise
dictate.[^3]

However, the most significant new factor and the *only* factor affecting
food and feed prices that is *under the control of the Congress,* is the
sudden and significant increase in food-to-fuel production. I have
attached analyses by the World Bank,[^4] IMF,[^5] UN FAO,[^6] CRS,[^7]
USDA-ERS,[^8] IFPRI,[^9] Oxfam[^10] and by former USDA Chief Economist
Keith Collins[^11] which document the combination of factors
contributing to US and global food prices and the significant role of
food-to-fuel production. In general, the rapid expansion of corn ethanol
and bio-diesel production has increased demand for corn and vegetable
oil, increased the price of products which use corn and vegetable oil as
ingredients, and increased the price of other crops that compete with
corn and soybeans for land.

**Commodity prices are rising at dramatic rates.** Since the 2005-2006
crop year, farm-level corn prices have increased more than 200 percent,
and farm-level soybean prices have increased more than 135 percent.[^12]
Although there are many factors contributing to increases in commodity
prices, the recent surge in ethanol production is one of the most
significant factors. Between 2006 and 2008, US corn ethanol production
accounted for 75 percent of the growth in global demand for coarse grain
and 50 percent of the growth in demand for all grains.[^13] Collins
estimates that corn ethanol could be responsible for as much as 60
percent of the expected increase in corn prices between the 2006 and
2008 crop years.[^14] As Collins notes, "the increase in corn demand due
to ethanol is rising faster than growth in corn yields per acre. So long
as that situation continues, corn will have to attract acreage from
other crops to meet its expanding demand. This shift will mean higher
prices for all crops that compete, directly or indirectly, for acreage
with corn."[^15]

**U.S. Ethanol Production 1980-2008**

![](media/image1.wmf)

**Food prices are now rising at twice the overall rate of inflation.**
Because the price of basic commodities has dramatically increased,
domestic food prices rose by 4.9 percent during 2007 -- twice as fast as
inflation and the largest increase in 17 years. Food prices for the
previous three months have increased at a seasonally adjusted annualized
rate of 6.3 percent, and studies predict that annual food price
inflation will average 9 percent between 2008 and 2012 as the impact of
rising commodity prices are slowly reflected in retail prices.[^16]
Although there are many factors contributing to food price inflation,
the rising cost of commodities -- driven in large measure by growing
food-to-fuel production -- is expected to cause food prices to rise 23
to 35 percent faster than historical increases in food prices.[^17] In
particular, the price of animal products will continue to rise
dramatically in response to higher feed prices.[^18] Between May 2005
and May 2008, food-to-fuel production contributed to increases in the
costs of basic staples like eggs (62.8 percent), whole milk (17.2
percent), and whole chicken (13.5 percent).[^19] The price of these
products is particularly sensitive to the rising cost of feed grains.

**Rising food prices fall most heavily on the poor.** These price
increases fall most heavily on the poorest 20 percent of Americans who
spend roughly one-third of their after-tax income on food and on the
global poor who spend as much as 70 percent of their income on food.
Rising commodity prices have pushed global food prices up 83 percent
over the last three years[^20] - and by 57 percent in the last year --
pushing 50 million people into poverty in 2007 alone, according to the
UN FAO. In combination, rising prices and declining commodity stocks
have forced global food aid programs to ration food, and have
contributed to food riots and protests in more than 30 countries. Rising
food inflation in the developing world is not merely a food security
issue, but is a national security issue. The World Bank warns that 33
nations are at risk of social unrest because of the rising price of
food.[^21]

**Rising food prices pose significant budgetary challenges.** Although
potential outlays are difficult to estimate, government spending will
increase significantly as food prices rise. Many federal programs linked
entirely or in part to the Consumer Price Index (CPI), including
anti-hunger assistance programs and child nutrition programs. The CPI is
often used to adjust federal payments, determine program eligibility,
and to provide cost-of-living adjustments to millions of workers.
Overall, the CPI affects the income of about 80 million people,
including 51.6 million Social Security beneficiaries, 21.3 million food
stamp recipients, about 4.6 million military and civil service retirees
or survivors, and more than 2 million workers impacted by collective
bargaining agreements. In particular, changes in the CPI affect the cost
of school lunches for 28.4 million children.[^22] Rising food prices
will impact federal outlays in three ways: by automatically increasing
federal expenditures on programs linked all or in part to the CPI; by
reducing the number of households and students that can be served by
programs, such as the WIC program; and by forcing appropriators to
reduce discretionary spending for other programs to address shortfalls.

**Rising feed prices are causing severe economic harm for livestock
producers**. Although some crop farmers have benefited from high
commodity prices, many more livestock producers are facing unprecedented
losses. The higher costs of corn and soybean meal[^23] have translated
directly into higher feed costs for all livestock producers.[^24] Feed
costs climbed by over \$15 billion between 2005 and 2008 due to higher
prices for corn and other grains.[^25] Moreover, feed costs will
continue to remain well above historic levels through 2017 as
food-to-fuel mandates are fully implemented.[^26] In 2008-09, for
example, food-to-fuel mandates are estimated to increase the cost of
livestock production by as much as \$17.7 billion.[^27] Ultimately, the
increased cost of feed will be passed on to consumers in the form of
higher food prices. As feed costs rise, meat and poultry production will
decline and many livestock farmers will be forced out of business.
Producers at greatest risk of failure are poultry, dairy, hog and beef
producers who do not produce their own feed grains.[^28]

**Historically low commodity stocks pose severe economic consequences.**
Global stocks of several major commodities are at or near historic lows
-- particularly when measured as a share of total usage.[^29] For
example, global end-of-year stocks for coarse grains and wheat are
projected to drop by mid-2008 to the lowest levels since 1977, while
ending stocks of total grains will fall to the lowest levels since 1981.
In particular, a rapid increase in the production of ethanol combined
with a decline in corn plantings will likely result in the second lowest
level of corn stocks relative to consumption in 49 years. Increasing the
use of corn for ethanol by 33 percent in 2008 will contribute to a 40
percent reduction in the corn inventory.[^30] For most commodities,
annual prices tend to have a strong negative correlation with the ending
stocks-to-use ratio.[^31] Reduced yields in 2008 caused by a wet spring
and flooding combined with surging ethanol production and low commodity
stocks are already resulting in dramatic increases in crop prices.

**Food prices will continue to rise as more and more corn and soybean
oil are diverted to our fuel supplies.** Unless the Congress and the
Administration act this year to revise federal food-to-fuel mandates,
commodity prices will continue to rise as more and more food is diverted
to our fuel supplies. In 2008, roughly one-third of U.S. corn supplies
will be diverted to produce fuel. In the coming years, 40 percent or
more of the U.S. corn crop and as much as 30 percent of U.S. vegetable
oils will be diverted from our food supplies to our fuel supplies.
Because commodity prices will remain high in response to these mandates,
food prices are expected to increase by 9 percent annually between 2008
and 2012.[^32]

![](media/image2.wmf){width="2.7493055555555554in"
height="2.216666666666667in"}![](media/image3.wmf){width="2.752083333333333in"
height="2.245138888888889in"}

**Unfortunately, food-to-fuel policies have no impact on gasoline
prices.** Because ethanol displaces a small fraction of the US gasoline
supply and a tiny fraction of global crude supplies, food-to-fuel
mandates will have no impact on gasoline prices. Overall, ethanol
production in 2007 displaced less than 4 percent of the nation's
gasoline supplies in 2007, when relative energy values are considered.
Consequently, freezing the mandate at the levels blended in 2007 -- that
is, reducing the mandate from 9 and 10.5 billion gallons to levels
blended into fuel supplies in 2007 -- would not increase gasoline
prices. In fact, failure to revise food-to-fuel mandates could
marginally increase gasoline prices under some scenarios. Eventually,
rising demand for corn to produce ethanol will increase the cost of
producing ethanol and result in higher prices at the pump.[^33]

**And, food-to-fuel policies harm the environment.** Diverting food
crops to our fuel supplies has artificially increased the price of
commodities, accelerating the conversion of pasture and forest lands to
crop production at home and around the globe. Current and expected
conversion of pasture and forest lands will release carbon into the
atmosphere and reduce the availability of carbon "sinks" that help
sequester carbon. In addition, increased production of row crops of
uncultivated land has increased water pollution, compounded water
shortages, and contributed to the loss of habitat for wildlife. In
particular, increased fertilizer use associated with expanded crop
production has increased the amount of nitrogen and phosphorous being
washed into rivers and bays, including the Chesapeake Bay and the Gulf
of Mexico, and will increase ground-level ozone in some regions.
Increasing the use of distiller's grain -- a byproduct of ethanol
production that is fed to animals but has less nutritional value than
feed - increases the amount of phosphorous reaching waterways.

Although this Committee does not have jurisdiction over food-to-fuel
mandates, subsidies, and tariffs, I urge you to work with the Committee
on Energy and Commerce and the Committee on Ways and Means to revisit
and restructure our food-to-fuel policies to accelerate the development
of fuels that do not pit our energy needs against the needs of the
hungry and the environment.

**Congress should freeze food-to-fuel mandates.** In light of crop
reports and perilously low commodity stocks, Congress and the
Administration should act now to reduce the federal food-to-fuel mandate
for 2008 and 2009 to production levels for 2007 and should revisit and
revise food-to-fuel mandates, subsidies and tariffs to reflect changing
economic conditions and new questions regarding the economic and
environmental costs of fuels made from food crops. Freezing the mandate
would result in immediate reductions in the price of corn. A recent
study by FAPRI estimated that implementation of the RFS increased corn
prices by 19 percent.[^34] A separate study by IFPRI concluded that a
freeze of biofuel production at 2007 levels would reduce global corn
prices.[^35] These studies do not take into account significant declines
in yields in 2008, which are amplifying the impact of increased ethanol
production on corn prices.

**Congress should accelerate the development of sustainable bio-fuels.**
Congress should revisit and reform food-to-fuel mandate schedules,
subsidies and tariffs to gradually reduce our reliance on food as an
energy feedstock, and to accelerate the development of bio-fuels that do
not pit our energy needs against the needs of the hungry or the
environment. In particular, Congress should accelerate the development
of cellulosic and advanced bio-fuels derived from fuel feedstocks that
do not increase food or fiber prices and that and improve the
environment. To accelerate the development of such fuels, which could
displace far more gasoline than corn ethanol, Congress should eliminate
the 54 cent tariff on imported bio-fuels and should consider reforms to
federal tax credits to reward the production of sustainable bio-fuels.

**Congress should accelerate global agricultural development.** Congress
should take steps to expand hunger assistance programs to help address
the impact of food inflation at home and abroad. What's more, Congress
should also provide new funds to increase the productivity and
sustainability of agricultural lands in the developing world. Between
2003 and 2007, global usage of coarse grains like corn grew by 3.4
percent. At the same time, annual growth in agricultural productivity is
slowing. Between 1970 and 1990, production rose by an average of 2.2
percent per year. Since 1990, the growth rate has declined to about 1.3
percent. Projections for US and world agriculture see the rate declining
to 1.2 percent per year between 2009 and 2017.[^36]

In conclusion, we urge Congress to revisit the food-to-fuel mandates in
light of dramatic increases in food prices and new questions about the
environmental costs of fuels derived from food crops. Although there are
many factors contributing to record food inflation -- including
increasing global demand, export restrictions, poor weather, commodity
speculation, and higher energy prices -- a significant new factor and
the *only* factor affecting food and feed prices that is *under the
control of Congress* is food-to-fuel mandates and subsidies diverting
food into our fuel supplies.

[^1]: Collins, Keith. "The Role of Biofuels and Other Factors in
    Increasing Farm and Food Prices," prepared for Kraft Global Food,
    June 2008.

[^2]: CRS, High Agricultural Prices: What are the Issues?, May 6, 2008,
    at 17 (hereinafter "CRS")

[^3]: CRS, at 21

[^4]: "Rising Food Prices:  Policy Options and World Bank Response,"
    World Bank, April 2008.

[^5]: International Monetary Fund, "World Economic Outlook,
    Globalization and Inequality," October 2007.

[^6]: UN FAO, Soaring Food Prices: Facts, Perspectives, Impacts and
    Required Actions, June 2008.

[^7]: CRS, High Agricultural Prices: What are the Issues?, May 6, 2008.

[^8]: USDA, ERS, Global Agricultural Supply and Demand: Factors
    Contributing to The Recent Increase in Food Commodity Prices, May
    2008.

[^9]: Von Braun, Joachim. "Biofuels, International Food Prices, and the
    Poor." International Food Policy Research Institute (IFPRI). June
    12, 2008.

[^10]: "Another Inconvenient Truth: How biofuel policies are deepening
    poverty and accelerating climate change," Oxfam International, June
    26, 2008.

[^11]: Collins, Keith. "The Role of Biofuels and Other Factors in
    Increasing Farm and Food Prices," prepared for Kraft Global Food,
    June 2008. (Hereinafter "Collins")

[^12]: USDA, World Agricultural Supply and Demand Estimates, June 2008.

[^13]: Id.

[^14]: Collins. Collins finds that ethanol could account for 60 percent
    of the expected increase in corn prices between 2006/07 and 2008/09
    when market demand and supply are inelastic with respect to price --
    that is, a period when stocks are very low, feed use is slow to
    respond, export demand is strong due to foreign agricultural
    policies, and acreage is very constrained.

[^15]: Id.

[^16]: Advanced Economic Solutions, Rising Commodity Prices and their
    Impact on US Food Inflation, June 2008.

[^17]: Collins. If food-to-fuel production accounts for 60 percent of
    the expected increased in feed grain and oilseed product costs
    between 2006/07 and 2008/09, and these increases are passed on to
    retail consumers, these increases would increase baseline US
    expenditures on food by 1.8 percent over a 2-3 year period. This
    increase is significant in light of the fact that long-term annual
    average food inflation is about 2.5 percent. Thus, the increase in
    retail food prices due to biofuels is estimated to be 23-35 percent
    above the normal increase in food prices that would occur over 2-3
    years.

[^18]: Elam, Thomas, "Biofuels Support Policy Costs to the U.S.
    Economy," *FarmEcon LLC*, March 24, 2008 (Hereinafter "Elam")

[^19]: Consumer Price Index -- Average Price Data (retrieved for most
    requested statistics), Bureau of Labor Statistics, available at
    <http://www.bls.gov/data/home.htm>.

[^20]: Bob Davis and Douglas Belkin, Food Inflation, Riots Spark Worries
    for World Leaders," Wall Street Journal, April 14, 2008. A1.

[^21]: "The World Food Crisis," *New York Times*, Editorial, April 10,
    2008.

[^22]: BLS, at <http://www.bls.gov/dolfaq/bls_ques1.htm>

[^23]: Elevated corn prices in response to increasing biofuels demand
    also contribute to the historically high prices of soybeans because
    soybean cropland must compete with corn for cropland. Indeed, the
    price of soybeans has risen even though stockpiles of soybean oil
    are also at near record levels. USDA reported that the price of
    soybeans per bushel was \$6.43 in 2006/2007, but shot up to \$9.00
    in 2007/2008. USDA Projections, at 35 (Table 7). Prices of soybeans
    and soybean-derived products (*e.g*., soybean meal and soybean oil)
    are projected to increase and remain well over 2006/2007 levels over
    the long-term due to continued increased demand for biofuels, with
    even greater price increases likely as a result of the strengthened
    biofuels mandates enacted by Congress in 2007. USDA Projection, at
    23 and 41 (Table 13).

[^24]: Food and Agricultural Policy Research Institute, *2008 U.S.
    Baseline Briefing Book* (March 2008) (hereinafter "FAPRI Report"),
    at 3, available at
    <http://www.fapri.missouri.edu/outreach/publications/2008/FAPRI_MU_Report_03_08.pdf>.

[^25]: FAPRI Report, at 60.

[^26]: FAPRI Report, at 60. *See also* USDA Projections, at 4, 49 and
    60. In fact, USDA acknowledges that its own projections likely
    underestimate the anticipated increases in costs of animal feed
    because, although they account for the biofuels mandates created by
    the Energy Policy Act of 2005, they do not account for the
    strengthening of those mandates by Congress in December 2007, which
    has added to the unprecedented demand for corn. USDA Projections, at
    23.

[^27]: Elam at 28,

[^28]: Elam at 28. *See* *also* FAPRI Report, at 42 (suggesting that
    beef producers will experience financially difficult times in the
    next few years as they face high and rising input costs); *see also*
    FAPRI Report, at 50 (stating that higher feed costs have contributed
    to increases in the costs of producing milk).

[^29]: CRS, High Agricultural Prices: What are the Issues?, May 6, 2008.

[^30]: USDA-ERS, *Feed Outlook*, May 13, 2008.

[^31]: CRS, High Agricultural Prices: What are the Issues?, May 6, 2008.

[^32]: Advanced Economic Solutions, The Impact of Rising Commodity
    Prices on Food Inflation, June 2008

[^33]: Elam, Thomas, "Biofuels Support Policy Costs to the U.S.
    Economy," *FarmEcon LLC*, March 24, 2008.

[^34]: FAPRI-MU, The Energy Independence and Security Act of 2007:
    Preliminary Evaluation of Selected Provisions, January 2008.

[^35]: Rosegrant, Biofuels and Grain Prices: Impacts and Policy
    Responses, May 5, 2008.

[^36]: USDA, ERS, Global Agricultural Supply and Demand: Factors
    Contributing to The Recent Increase in Food Commodity Prices, May
    2008.