Piles of corn rest on a farm in North Dakota, ready to be shipped to a nearby ethanol refinery, for a hefty profit.  (Source: Michael Williamson - The Washington Post)
Ethanol is accounting for 25 percent of corn consumption, driving up food prices sharply

With gas at unprecedented highs in the U.S. of $4 a gallon or more, and with many vehicles equipped with ethanol ready engines, the demand for the biofuel is soaring.  A U.N. expert warned that switching to an ethanol infrastructure, in its current form, would be disastrous for the world food market, yielding famine.  Here in the U.S. the cost is not being felt in hunger as much as it is being felt in the check book.

The news is good news for some -- corn farmers.  The farmers, long propped up by government subsidies and constantly on the verge of collapse, are in the unfamiliar territory of making record profits.  While oil has long been labeled black gold, farmers are discovering that corn is the new gold -- yellow gold. 

Erwin Johnson, an Iowa farmer for 35 years following in the tradition of his father and grandfather, comments on the strange times.  Only a year ago he had to send his corn to a barge company to ship down the Mississippi River to be exported.  Now a monolithic new ethanol refinery has been constructed just miles from his farm and is paying him a bounty of $5.50 or more a bushel, more than twice is previous price.

"This is a fantastic time to be farming," Johnson enthuses, "I'm 65, but I can't quit now."

A fantastic time indeed, for the corn farmer, but the outlook is not so positive for the average American consumer.  Corn, traditionally used largely for feedstock and in products such as corn starch and corn syrup this year will see over 25 percent of its production siphoned into making ethanol.  With a constant influx of refineries, and with some customers brewing their own ethanol, this should only increase.

Oil's rising prices are having a harsh double effect, costing the consumer at the pump, while simultaneously raising food prices through a rise in corn costs.  Lester Brown, president of Earth Policy Institute, a Washington research group, states, "The price of grain is now directly tied to the price of oil.  We used to have a grain economy and a fuel economy. But now they're beginning to fuse."

While corn farmers are doing great, other farmers are on the verge of going out of business due to rising costs.  Farmers of cattle, hogs and chickens, who use corn for feed are feeling the pinch.  Tyson Foods, typically a strong earner, posted its first loss in six quarters.  And it expects the trend to continue.  It expects its cost for corn and soybeans to rise $600 million this year alone. 

Some producers in turn pass the cost to the consumer.  The egg market has managed to do this, and stave of financial ruin, but has in turn passed its burden on to the buyer.  The Agriculture Department noted that the cost of eggs raised 40 percent in the first quarter of the year over first quarter prices of last year.  And other food producers are following the trend.  Cereal to sodas to salad dressing are just some of the foods that use corn that have slowly risen in price.

The nation's leadership is at a loss about what to do about the crisis.  In 2005 a bipartisan effort by the then Republican-controlled Congress, passed into law a energy bill, the Energy Policy Act of 2005, mandating that corn-based ethanol to account for 15 billion gallons, about 10 percent of motor fuel, by 2015.  Another more recent bill, calls for 36 billion gallons a year by 2022, over 25 percent of motor fuel.  The bills were seen as pro-farmer and pro-environment.  It offered subsidies to fuel blenders using ethanol, which has driven production growth, which this year is expected to reach 8 billion gallons, over halfway to the target.

Now some politicians are going as far as asking the EPA to overturn part of the bill's provisions.  Texas's new Republican governor, Rick Perry is leading the effort, after his constituents, many of them beef farmers, complained of financial hardship.  The bill is costing his state's cattle industry $6M USD a year, he says.

The argument for ethanol being green is falling apart as well.  DailyTech previously reported that members of the academic community had noted that the total carbon cost from ethanol production was really no less or even greater than that of oil.  These findings were corroborated by an analysis in the Feb. 29th edition of Science magazine, which concluded that ethanol's total carbon costs "exceed or match those from fossil fuels and therefore produce no greenhouse benefits".  Further it said the clearing of land for ethanol fuel crops could make net emissions even worse, and that fertilizer runoff threatens the oceans.

World Bank President Robert B. Zoellick is among the critics of ethanol.  He states, "While many are worrying about filling their gas tanks, many others around the world are struggling to fill their stomachs, and it is getting more and more difficult every day."

However the market shows little signs of slowing.  In Iowa, 28 plants have been built, and more than 12 are on their way.  A $3 billion ethanol pipeline is being planned by two major oil pipeline producers, which will funnel 3.65 billion gallons a year to the East and Midwest and will increase the fuel industry's vested interest in ethanol. 

Bruce Babcock, professor of economics and the director of the Center for Agricultural and Rural Development at Iowa University, sees no end in sight for the problems while ethanol lasts.  He states, "As long as you keep that ethanol industry running, grain prices will be high.  If you didn't have this large growth in ethanol corn, prices would be nowhere near where they are today.

Some are defensive about increases.  Says Johnson, the corn farmer, food prices indexed by household income have been in decline for 50 years.  They point out that consumers today pay half the income percentage they used to for food in the 1950s.  Further, they state that the biggest cause for the food price increases is not from corn demand, but from increased cost from transportation and packaging, both affected by the rising oil rates. 

Some also point out that yields are increasing; Don Endres, chief executive of the country's largest ethanol producer, VeraSun says that in the days of these farmers’ grandfathers, the yields were around 40 bushels per acre.  Today his brothers get 160 bushels per acre, and soon they will be getting 300 bushels per acre, he believes.

In the end the ethanol crisis may now be unstoppable, much like a runaway train.  With oil prices rising, ethanol should become more and more competitive in price as the years pass.  As long as this is the case, consumers will likely choose the cheaper fuel, despite the economic cost that it entails.  The only real long-term competitor is the fledgling hydrogen market, which despite advances remains years away from production on the scale of ethanol.

"You can bet that Sony built a long-term business plan about being successful in Japan and that business plan is crumbling." -- Peter Moore, 24 hours before his Microsoft resignation

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