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John M. Urbanchuk

Director, LECG LLC1255 Drummers Lane, Suite 320

Wayne, PA 19087

Tel: 215-254-4021

E-mail: jurbanchuk@lecg.com

Food and Feed vs Fuel:The Reality of Ethanol and Food Prices

18th Annual EPAC Conference

Kalispell, MTJuly 20-22, 2008

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Ethanol critics and the media have been havinga field day

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But everything is not always what it seems

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Biofuels are only part of the reason for increasing

corn and food prices.

Increases in petroleum prices and related increases inagricultural inputs

Drought in Australia in 2006 and 2007 and poor crops in the EUin 2007 which reduced supplies of grain.

Increased demand for oilseeds in China.

The decline in the value of the dollar.

Speculation by institutional investors.

Export bans and restrictions that restricted access to suppliesof food crops.

Increased demand for biofuels.

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Corn and oil prices have increased hand-in-

hand for most of the last 2 years

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

200501

200505

200509

200601

200605

200609

200701

200705

200709

200801

200805

$/bu

$0

$20$40

$60

$80$100

$120

$140

$160

$/bbl

Corn, No.2 Yel, Cent Ill. (Left) Crude Oil, Spot, WTI (Right)

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Oil and gasoline prices are outpacing

ethanol.

0

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200250

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200501

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cts/gal

$0

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$150

$/bbl

Ethanol, Chi Spot Gasoline, Spot NY Crude Oil, Spot, WTI (Right)

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There is a Direct Link Between EnergyPrices and Food Prices

Historically, food prices have surged during times of highercrude oil prices. Moreover, research shows that energy pricesare quickly passed through to higher retail food prices.

Research by Texas A&M supports the hypothesis that cornprices have had little to do with rising food costs.

The underlying force driving changes in the agriculturalindustry, along with the economy as a whole, is overall higherenergy costs, evidenced by $100 per barrel oil.

Sources: Main Street Economist: What is Driving Food Price Inflation? Federal Reserve

Bank of Kansas City, 2008 The Effect of Ethanol on Texas Food and Feed, AgriculturalFood and Policy Center, Texas A&M University, April 10, 2008.

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Global food prices are increasing largely due to rice,

wheat, and edible oils, not corn via ethanol!

FAO Food Price Index

-40%

-20%

0%

20%

40%60%

80%

100%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008*

PctChg

All Food Cereals Fats & Oils

* YTD. Source: FAO

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Ethanol is Keeping Fuel Prices Lower

Iowa State (CARD) estimates that the growth inethanol production and use has caused gasolineprices to be $0.29 to $0.40 lower than they might

otherwise have been.

Without ethanol to expand the available fuel supply theworlds refiners would need an additional 1.9 millionbarrels of crude oil per day, or 2.2 percent of current

world production and crude oil prices would be 27.5%($35.70 per barrel) higher than they are currently!

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Ethanol and Oil Prices

Ethanol displaces gasoline which is refined fromcrude oil.

One barrel of crude produces 19.2 galgasoline

Because of energy difference this isequivalent to 29.1 gal of ethanol

9 bil gal of ethanol = 309 mil bbl crude

At $127/bbl this amounts to $39.4 bil

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Impact of Ethanol on Oil Prices

World Oil Prod (MBD) 87.22

World EtOH Prod (MBD) 1.33

Gasoline (MBD) 39.77

Etoh Gas Equiv (MBD) 0.87

Crude to make gasoline 1.92

Incr supply from ethanol 2.2%

Demand Elasticity -0.08

Price Flexibility -12.5

Price Impact -27.5%

Base Oil Price ($/bbl) $130.00

Impact of Ethanol ($/bbl) ($35.70)

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E-10 saved Consumers saved 12.6 cents/gal atthe pump in June 2008

U.S. regular gasoline (Rack) $3.55

Ethanol (fob plant, Iowa) $2.60

Less VEETC of $0.51 = net etoh $2.09

E-10 Wholesale

(.1 X Rack + .9 X (net ethanol +$0.125)) X 1.034 +wholesale margin

E-10 RetailE-10 Wholesale + retail margin + taxes

Savings: U.S. retail gas E-10 retail

$4.054 - $3.928 = $0.126

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The Role of Energy and the Marketing Bill

Only 23 cents of every dollar spent on food makes its

way back to the farm.

the remaining portion of total retail food costs

includes the costs of labor, packaging, transportation,energy, profits, advertising, depreciation, rent,interest, repairs, business taxes and other costs notattributable to basic agricultural commodities.

The marketing bill has a higher correlation with the

consumer price index (CPI) for food than does corn..

Source: USDA/ERS Agricultural Outlook. Table 8. (March 2008 estimate)Informa Economics Analysis of Potential Causes of Consumer Food Price Inflation,(www.informaecon.com)

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Increases in marketing costs for foodsubstantially outpace the farm value

0

50

100

150

200

250

300

350

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Index,

1982-84=100

Marketing Bill Farm Value

Source: LECG from USDA/ERS data

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Global corn demand is growing strongly for bothfeed and industrial uses.

World Corn Demand and Supply

0

200

400

600

800

1,000

1,200

1990

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1996

1998

2000

2002

2004

2006

2008

MMT

0

200

400

600

800

1,000

1,200

MMT

Exports Feed FSI* Supply

Source: USDA/FAS.FSI is food, seed, and industrial (including ethanol)

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Per capita income growth is stimulating food andenergy demand.

Per Capita GDP

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

US$

China India

Source: IMF

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Global food prices are increasing faster largely

due to rice, wheat, and edible oils, not ethanol!FAO Food Price Index

-40%

-20%

0%

20%

40%60%

80%

100%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008*

PctChg

All Food Cereals Fats & Oils

Source: FAO

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Cereals provide most of the worlds averagecaloric intake. Corn plays a minor role as a

cereal.

FAO Cereals Price Index

9 wheat quotations

16 rice quotations

1 corn price

Global Per Capita DailyCaloric Intake

0

100

200

300

400

500600

RiceWheat

Sugar

Fats&oils

Meat

Milk&eggs

Corn

Source: FAO

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CBOT Corn Long Positions

0

200

400

600800

1,000

1,200

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

1,0

00Contracts

NonCommercial Commercial

Source: CFTC

Speculation has been a major factor driving

corn prices since mid-2006.

Non-commercial vs commercialJan 98-Apr 06: 46% under

May 06 to today: 6% over

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Rising feed prices are hurting livestock producers butprofitability also suffered when corn prices were low.

Livestock Profitability and Corn Prices

($150)

($100)($50)

$0$50

$100$150$200$250

$300$350$400

1991

1992

1993

1994

1995

1996

1997

1998

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2008

Profit ($/head)

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$1.00

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$3.00

$4.00$5.00

$6.00

$7.00

$/bu

Hogs, Farrow-Finish Beef, Finishing Steer Calves Corn, No 2 Yel, Cent Ill

Source: Iowa State Univ.; USDA/ERS

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Increased supplies of distillers grains offset corn usedfor ethanol. DGs concentrate nutrients, are higher in

protein, fat, and fiber than corn

Source: 2008 Feedstuffs Reference Issue; Ingredient Analysis Table

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Distillers grains production will track corn use for

ethanol and approach 24 million tons by 2017.DDG Production

0

5

10

15

20

25

1990

1992

1994

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2000

2002

2004

2006

2008

2010

2012

2014

2016

MilTons

LECG LLC June 2008

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The foods directly impacted by corn and soybeansaccount for only about 25% of the consumers food

basket.Relative Importance: CPI for Food

0% 10% 20% 30% 40% 50%

Food away from homeFats and oils

Sugar and sweets

Dairy products

Non alcoholic beverages

Cereals and bakery prods

Fruits and Vegetables

Other Foods

Meat, poultry, fish, eggs

Source: Relative importance of components in the Consumer Price Indexes:U.S. city average, December 2007. Bureau of Labor Statistics

Food at home(55%)

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Lets put food price inflation in a historicalcontext.

Consumer Price Index, All Urban

(Average Annual Increase)

0%2%4%6%8%

10%

12%14%16%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008*

PctChg

All Items Food

Source: BLS; *2008 YTD

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Retail food prices are accelerating fasterthan the overall CPI.

CPI-U, Percent Change from Previous Year

0%1%2%3%4%

5%6%

Jan-03

Apr-03

Jul-03Oct-03

Jan-04

Apr-04

Jul-04Oct-04

Jan-05

Apr-05

Jul-05Oct-05

Jan-06

Apr-06

Jul-06Oct-06

Jan-07

Apr-07

Jul-07Oct-07

Jan-08

Apr-08

All Items Food

Source: BLS

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Ethanols Role in Food Price Inflation

Ethanol accounts for somewhere between 2 and3% of the overall increase in global food prices.

The White House Council of Economic Advisorsestimates that just 0.25% of food price inflation isa result of U.S. ethanol production.

Had it not been for ethanol, food prices

would have gone up by 5.0% as opposed to5.3%.

Source: White House Chairman of the Council of Economic Advisers Ed Lazear

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EISA 2007 contains a 36 billion gallon RFS. Corn

ethanol is capped at 15 BG.

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MGY

Corn Cellulose Biodiesel Other Adv Biofuels

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Waiving the RFS is not the answer to high cornprices

A 50% waiver would reduce required ethanol use by4.5 bil gal (equiv of 1.6 bil bu corn)

Actual cut in production would be much less.

Industry capacity is 8.6 bil gal

Industry is still profitable at $6.00 corn

Economics favor blending ethanol at $127/bbl oil

Consumers would be hurt by sharply higher gasolineprices as refiners would be forced to quickly producean additional 3.1 bil gal of gasoline

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IMPACT ON HOUSEHOLD GASOLINE SPENDING

VALUE SOURCE

A. Avg. Miles per Household per Year 21,252 miles FHWA (2001 NHTS)

B. Average Fuel Economy (2007) 20.2 mpg EPA (2007)

C. Gallons Gasoline Purchased per Household 1,052 gallons A BD. Ethanol Savings per Gallon $0.29-0.40 per gal. Iowa State (2008)

TOTAL SAVINGS PER HOUSEHOLD $305.08 $420.83 D x C

IMPACT ON HOUSEHOLD FOOD SPENDING

A. Avg. Household Spending on Food (2006) $6,111 BLS

B.Current Food Inflation (5.3% Jun 08) $323.88 BLS

SHARE OF FOOD SPENDING DUE TO ETHANOL* $15.28 White House CEA

*The White House Council of Economic Advisors estimates that just 0.25% of foodprice inflation is a result of U.S. ethanol production.

The savings from ethanol for Americans overwhelms

the costs.

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Thank you!

Questions?