Methodology for Estimating Impacts on Food Expenditures, CPI for Food and CPI for all Items

November 15, 2012

Impact on Food Expenditures : The impact on food expenditures assumes that the effects of the RFS on corn prices would lead to corresponding adjustments in the pri ces for other feed grains (grain sorgh um, barley, and oats) , distillers dried grains and soybeans. The adjustments in the prices of other feed grains are based on historical price relationships of these commodities with corn. Other feed grains compete wi th corn in the feed market and to a lesser extent for acreage. Distillers dried grains are a byproduct produced when corn is converted into ethanol and competes with corn in the feed market. Soybeans compete with corn for acreag e. Any adjustment in the price of soybeans is assumed to lead to a corresponding change in the prices for soybean oil and soybean meal. These two products are produced from soybeans when soybeans are crushed, with soybean meal used as an animal feed and soybean oil used for human consumption.

The changes in commodity prices are assumed to be fully passed on to consumers at the retail level

. Therefore, the change in food expenditures for each commodity is estimated by multiplying the price change by the quantity of the commodity used d omestically, including food and feed use. Feed use is included to capture the effects of the change in the price of the commodity on livestock producers’ production costs and, ultimately, the effects on retail livestock prices as livestock producers adjust production in response to changes in commodity prices.

Since the model assumes no response by producers or consumers to changes in commodity prices , the model may overstate the change in food expenditures. However, previous research suggests th at the demand for food is very inelastic and, therefore, the model should provide a close approximation of the change in food expenditures.

Change in Food Expenditures= Sum of (Change in Price Commodity i )(Domestic Use Commodity i )

Commodity 1 = corn; Commodity 2 = grain sorghum; Commodity 3 = barley; Commodity 4 = oats; Commodity 5 = soybean oil; Commodity 6 = soybean meal , Commodity 7= distillers dried grains

. Change in Price of Corn= Given Change in Price of Grain Sorghum=0.93 times Change in Price of Corn Change in Price of Barley=0.88 times Change in Price of Corn Change in Price of Oats= 0.72 times Change in Price of Corn Change in Price of Soybean Oil=Given Change in Price of Soybean Meal=Given Change in P rice of Distillers Dried Grains per pound =Change in Price of Corn /56

Domestic Use Commodity i ; See United States Department of Agriculture, World Agricultural Supply and Demand Estimates, October 11, 2012

.Impact on CPI for Food : The CPI for food as measu red by the Bureau of Labor Statistics (BLS) consists of two component s

-- the CPI for food at home and the CPI for food away from home with the CPI for food away from home having a weight of 0.4 0 and the CPI for food at home having a weight of 0. 60 . In turn , the CPI for food at home consists of several components, including the CPI for cereal and bakery products, CPI for meats, poultry, fish and eggs, CPI for dairy and related products, CPI for fruits and vegetables, CPI for nonalcoholic beverages, CPI for s ugar and sweets, CPI for fats and oils, and the CPI for other foods. Any change in the price of corn could be reflected in the CPI’s for cereal and bakery products, nonalcoholic beverages, sugar and sweets, and fats and oils, since corn is used to produce cereal, cooking oil and high fructose corn syrup for use in soft drinks and many other products. To determine the effects of changes in corn prices on the CPI for food would require information on the products that the BLS tracks in determining the vario us CPI’s, the amount of corn used in those products, and the relative weights of the products containing corn in the various CPI’s. Unfortunately, this information is not available.

To estimate the change in the CPI for food caused by a change in the pri ce of corn and associated changes in other commodity prices, we use the estimated change in food expenditures. The following equation represent s baseline food expenditures,

E o = P o Q o

w here E o is baseline food expenditures, P o is the baseline pr ice for food and Q o is the baseline quantity of food purchased. Now, assume the following equation represents food expenditures after the change in corn and related commodity prices,

E 1 = P 1 Q 1

where E 1 is food expenditures, P 1 is the price for food and Q 1 is the quantity of food purchased. We also know from previous research that the quantity of food purchased is very inelastic with respect to price. So, if we assume that Q o =Q 1 , then we can derive and use the following relationship

E 1 /E o = P 1 /Po

to estimate the change in the price or the CPI for food. Therefore, if there is no change in quantity of food consumed, the percentage change in the CPI for food will equal the percentage change in food expenditures. We used the above equa tion to approximate the change in the CPI for food.

Since the model assumes no response by consumers to changes in food prices, the model may overstate the change in the CPI for food. However, previous research suggests that the demand for food is very inelastic and, therefore, the model should provide a close approximation of the change in the food CPI.Impact on A ll I tem CPI : A s measured by the BLS, the CPI for food has a weight for 0.14 in the all item CPI. This implies that for every 1 percent i n crease in the CPI for food the CPI for all items would increase by 0.14 percent. We use this relationship to estimate the change in the CPI for all items.



### Change in CPI, Food CPI, and Food Expenditures

Units (0.07) (0.58) (1.86)
Food CPI without Waiver Index 242.98 242.98 242.98

Food CPI with Waiver Index 242.88 242.13 240.23

Difference Index -0.10 -0.85 -2.75
% Change Percent -0.04 -0.35 -1.13

All Item CPI without Waiver Index 232.73 232.73 232.73

All Item CPI with Waiver Index 232.72 232.62 232.36

Difference Index -0.01 -0.11 -0.369
% Change Percent -0.006 -0.049 -0.158

Food Expenditures without Waiver Bil. $ 1139.4 1139.4 1139.4

Food Expenditures with Waiver Bil. $ 1138.9 1135.4 1126.5

Difference Bil. $ -0.5 -4.0 -12.9
% Change Percent -0.04 -0.35 -1.13 Change in Corn Price (Dollars per Bushel)Changes in Consumer Expenditures with and without RFS mandate

All Consumers Lowest 20 Percent

Average annual expenditures (1) $49,705 $22,001

Food $6,458 $3,547

Percent of Expenditures on Food 13.0 16.1

$0.07 Scenario With Mandate Average annual expenditures (1) 49705.0 22001.0

Food (2) $6,458 $3,547

Percent of Expenditures on Food (2) 13.0 16.1

Without Mandate Food (2) $6,455 $3,546

Percent of Expenditures on Food (2) 13.0 16.1

$0.58 Scenario With Mandate Average annual expenditures (1) $49,705 $22,001

Food (2) $6,458 $3,547

Percent of Expenditures on Food (2) 13.0 16.1

Without Mandate Food (2) $6,435 $3,535

Percent of Expenditures on Food (2) 12.9 16.1

$1.86 Scenario With Mandate Average annual expenditures (1) $49,705 $22,001

Food (2) $6,435 $3,547

Percent of Expenditures on Food (2) 12.9 16.1

Without Mandate Food (2) $6,362 $3,507

Percent of Expenditures on Food (2) 12.8 15.9

(1) Source: ftp://ftp.bls.gov/pub/special.requests/ce/standard/2011/quintile.txt (2) Derived, based on changes estimated for food cpi.Iowa State Mean Estimate Iowa State Mandate Binds Iowa State "Worst Case" Example Units Change in Corn Price with Waiver $/bu -$0.07 -$0.58 -$1.86 Change in Food CPI with Waiver percent -0.04 -0.35 -1.13
Change in Annual Expenditures on Food For Average Household with Waiver $ -$2.59 -$22.68 -$73.11

Change in Annual Expenditures on Food For Lowest Qunitile Households with Waiver $ -$1.42 -$12.46 -$40.15 Change in Food Expenditures as a Percentage of Consumer Expenditures for Average Household with Waiver percent -0.005 -0.047 -0.151 Change in Food Expenditures as a Percentage of Consumer Expenditures for Lowest Quintile with Waiver percent -0.007 -0.061 -0.197 Change in Food Expenditures as a Percentage of Income After Taxes for Average Houshold with Waiver percent -0.005 -0.046 -0.147 Change in Food Expenditures as a Percentage of Income After Taxes for Lowest Quintile with Waiver percent -0.0065 -0.057 -0.183