AEI-Ideas: FACT: Since the Renewable Fuel Standard went into effect, corn, not oil, has driven food

August 12, 2013

Mark J. Perry, August 10 – The pro-renewable fuels, pro-ethanol, anti-fossil fuel organization Fuels America, which is “committed to protecting America’s Renewable Fuel Standard (RFS),” featured the chart above on Twitter with this text:

FACT: Oil, not corn, drives food prices. Near perfect correlation

The chart presented by Fuels America shows the historical relationship (August 1999 to April 2011) between oil futures prices and the Reuters/Jeffries CRB commodity futures price index, and is supposedly presented as “evidence” to counter the frequent claim that higher corn prices, due to the RFS’ ethanol mandate, are driving up food prices. Where to start with such sloppy “statistics”?

1. The CRB commodity futures index is based on the prices of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat. Fewer than half (9) of those commodities are food (with a combined weight of only 36%) and the other 10 are metals, petroleum products, and fibers. Conclusion: the CRB commodity price futures index is not a measure of food prices, it’s a broad-based commodity index.

Crude oil has a weight of 23% (the highest weight of any of the commodities) in the CRB index, and when you include heating oil and unleaded gas, those three oil-based commodities have a 33% weight in the CRB Index. Wouldn’t we expect a strong or “near perfect” historical relationship between oil prices and a commodity price index that is weighted 33% by oil and oil products?