New Merrill Lynch Report Confirms Overall Benefit of Domestic Ethanol for the Family Budget
Estimated Savings of More than $500 a Year

Washington – According to a new analysis by Merrill Lynch Commodity Strategist Francisco Blanch, “retail gasoline prices would be $21/bbl higher, on average, without the incremental biofuel supply.” This translates to a $526 a year savings on gasoline for the average family (1).

Blanch also calculates that U.S. ethanol production has increased corn prices by just 21% since 2004. Because a very small portion of the price of corn is passed through to retail food items, this means ethanol has increased household spending on retail food items by just $15 per year.

According to a wide range of experts, skyrocketing oil prices, increased global demand for meat and grains from China and elsewhere, commodity speculators, the declining value of the dollar and droughts and bad weather account for approximately 80 percent of corn costs.

“By keeping gasoline prices lower than they otherwise would be, ethanol is helping the average American family save about $500 a year, even after accounting for the slight increase in food prices due to higher prices for corn,” said Bob Dinneen, President of the Renewable Fuels Association.

“Merrill Lynch’s analysis confirms what other studies have found – that the economic benefits of growing ethanol production far outweigh the costs,” added Dinneen

“It also demonstrates the importance of recently passed energy legislation to create new ethanol supplies from wood chips, grasses, waste and other cellulosic sources. If 9 billion gallons can reduce oil prices and cut our reliance on imported oil, imagine the positive economic impact of 36 billion gallons of ethanol, with 21 billion from cellulose” said Dinneen.

Methdology for Analysis of Merrill Lynch Report
Merrill Lynch’s June 6 edition of Global Energy Weekly concludes that “Biofuels are making up a huge portion of oil supply growth,” and ”...biofuels are now the single largest contributor to world oil supply growth.” (2)

The authors estimate that retail gasoline prices would be $21 per barrel higher without the incremental biofuel supply. This equates to a savings at the retail level of $0.50 per gallon.
Based on the fact that the average U.S. household uses 1,052 gallons of gasoline per year (3), biofuels are saving the typical American household $526 per year.

Merrill Lynch also found that “ethanol production from corn in the U.S. has pushed up corn prices by 21% since 2004.” The authors do not estimate the direct impact of ethanol on retail food prices. However, given Merrill Lynch’s 21% estimate, and using data from the U.S. Department of Agriculture’s Economic Research Service, we are able to impute the implied impact on retail food prices.

ERS estimates that ”...overall retail food prices would rise less than 1 percentage point per year above the normal rate of food price inflation when corn prices increase by 50 percent.” (4) According to ERS, cash corn prices increased 201% from January 2004 to April 2008. Thus, it can be assumed corn prices increased an average of 50% per year during this period. Accordingly, corn prices added 4 percent to normal food inflation over this 4-year period, or an average of 1 percent per year.

If biofuels are responsible for 21 percent of the corn price increase (as Merrill Lynch states), then it is implied that biofuels are responsible for 0.21 percent of the 1 percent average annual increase in food inflation above normal rates since 2004 that is attributable to higher corn prices. This is consistent with recent analysis by the White House Council of Economic Advisors, which found ethanol’s impact on food inflation was 0.25 percent.(5)

For the 16 months ended in April 2008, food inflation was estimated by the Bureau of Labor Statistics at 4.17 percent. This means the average household likely spent an additional $257 on food (on an annualized basis) as a result of higher retail prices. If we assume 0.21 percent of food inflation is attributable to biofuels production, food inflation would have been 3.96 percent in the absence of biofuels expansion (4.17% – 0.21%). This means the additional average household spending on food would have been $242 instead of $257, a difference of $15.

Therefore, according to Merrill Lynch’s own analysis, the positive price impacts of ethanol on gasoline prices significantly outweigh the impact on food prices and net household savings resulting from ethanol is $511.

1. The figures in this release are based on Bureau of Labor Statistics which analyzes data for the average U.S. household.
2. Merrill Lynch. "Biofuels driving global oil supply growth." Global Energy Weekly. June 6, 2008.
3. Based on average miles per household of 21,252 (FHWA National Household Travel Survey. http://nhts.ornl.gov/publications) and average fuel economy of 20.2 mpg (Fuel Economy Trends: 1975 Through 2007. http://www.epa.gov/oms/fetrends.htm)
4. Leibtag, Ephraim. USDA, ERS. "Corn Prices Near Record High, But What About Food Costs?" Amber Waves. February 2008. http://www.ers.usda.gov/AmberWaves/February08/Features/CornPrices.htm
5. White House Fact Sheet: Leading the Fight Against Hunger. www.whitehouse.gov/news/releases/2008/05/print/20080501-22.html