The RFS: What’s the Real Impact to Food and Fuel Prices?

Ali Lenger
Newsletter Issue: 
March 2016

The EPA released its final rule for 2014-2016, adjusting volumes for the Renewable Fuel Standard (RFS). The agreement sets new minimum amounts of renewable fuels to be blended into our nation’s transportation fuel supply. The RFS focuses on renewable ground transportation fuels, seeking to reduce US reliance on petroleum and to reduce air emissions. The 2016 goals are now lower than the initial goals set by Congress when the Energy Policy Act of 2005 was originally enacted, but 35% higher than the 2014 production. 

Over the years, the RFS has had its share of critics, with spikes in food and fuel prices and food scarcity, even starvation, being attributed to the new law.

But what is the real impact of the RFS on food and fuel prices? Not much, according to Bruce Babcock, who holds the Cargill Endowed Chair of Economics at Iowa State University. At a Brookings Institute forum, “Ten years of the Renewable Fuel Standard: What’s been the impact on energy and the environment?” held in Washington D.C. on Oct. 16, 2015, Babcock joined a panel of experts and said there hasn’t be as much impact as people think.

For example, according to Babcock, between 2006 and 2014, commodity prices, have more than doubled yet the U.S. Consumer Price Index, which tracks changes in the price consumers pay for food, has only risen slightly. How can this be?

“One reason is that food is not commodities,” said Babcock. “The commodity share of the food dollar is small and shrinking,” said Babcock. He explained that as such, it responds differently to policy changes and price signals. “Food is produced by taking some agricultural commodities combining it with capital, labor, energy, marketing, transportation, all of that stuff - in order to get what we eat as food.” 

“So if you double commodity prices and the commodity share of the food dollar is 10%, you’re at most going to get a one time 10 percent increase in food prices,” said Babcock. The actual consumer impact will be less than that 10 percent because companies that produce food will start subbing out expensive commodities.

Babcock further explained that all of the things that have affected food price spikes over the last 10 years would have still occurred whether or not the RFS had been put in place.

“That 2011, record drought that we saw in the southwest that decimated the cattle herd? That still would have happened. The beef prices that we see today that are high they would still be high today with or without the RFS. The 2012 drought in the cornbelt that doubled corn prices in a year would still have occurred. China demand for soybeans that has been growing nonstop over the last ten years? That would still have occurred,” said Babcock.

According to Babcock, these events explain why food prices have changed, but none of them are due to RFS. Even the Great Recession of 2008 where oil prices were quickly changing still would have happened.

“The effect of the RFS on consumer food prices in the U.S. is much less dramatic, more gradual and just about lost in the volatility caused by events in the last ten years,” said Babcock.

What about the impact of food prices globally? According to Babcock, the RFS doesn’t directly affect developing countries commodity prices, but rather raises global commodity prices. 

An International Food and Policy Research Institute (IFPRI) study by Nicholas Minot on food prices in Africa found a weak integration with the world market. Most changes in their food prices were due to domestic supply and demand, not global supply and demand.

Babcock concluded that the RFS will not affect food prices unless they are fully integrated with global markets.

A goal of RFS seeks to integrate more renewable biofuels with our transportation fuels. What has this done to fuel prices?

“It’s facilitated the U.S. to become a net exporter of gasoline rather than a net importer; with 10% more ethanol, it increased the net exports of gasoline,” said Babcock.

This helps lower domestic fuel prices for gasoline according to Babcock. He mentioned that refining costs are down because an 85% octane blend stock, which is cheaper than 87% blend stock, is used to blend ethanol and gas together. The octane is obtained from 10% ethanol.

Another important component of this topic is the Renewable Identification Number (RIN) applied to a group of biofuels. Companies who use more biofuel than the RFS mandates can sell these extra RIN credits to companies who are using less than what is required and need to meet to the RFS standard. According to Babcock the RIN is a tax on gasoline, raising gas prices, but RIN prices are a subsidy to ethanol so they balances themselves out. A soon to be released study by Babcock shows fuel prices are likely to not be affected.

“Those two offset each other so it’s a wash,” said Babcock.

“From what I’ve seen and modeled, I believe that there’s likely a net overall, small negative effect on fuel prices even if you take into account the 3 percent lower BTU content of the fuel.”

You can watch the entire policy discussion here