backtop

Print E-mail del.icio.us 146 comment(s) - last by phusg.. on May 8 at 12:18 PM

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.

Comments     Threshold


This article is over a month old, voting and posting comments is disabled
By noone55555 on 5/2/2008 12:19:54 PM , Rating: 3
Most criticism equating Ethanol use to increased food prices seems to completely ignore the contribution of aspects like shipping cost to increased food prices. I.e., if it costs more to truck a good across the country due to higher fuel prices, it's going to cost more on the shelf. Certainly, cost of the raw product material matters as well, but I'd like to see someone break it down a bit more before claiming that the raw material's cost is completely to blame when it comes to food price increases in the current economy.

Put another way - if your $3 box of corn flakes uses 3 cents worth of corn, doesn't it seem a bit extreme to blame corn price increases for any large % change in the final price on the shelf?




By BikeDude on 5/2/2008 12:51:01 PM , Rating: 2
I agree.

In addition, the price of grain was record low recently. There is a small rise in the price of grain now, but the price is nowhere as expensive as it was in the mid-70s.

AFAIK, Russia, EU and USA paid farmers to stop growing grain in order to keep the surplus of grain to a manageable level. A lot of farmable land is currently not used...

In short, when the oil prices soar, how can we afford to ship cheap food to poor countries?


By geddarkstorm on 5/2/2008 1:03:41 PM , Rating: 2
But! Saying that prices are only fluctuating around all time lows is not nearly as dramatic and hair raising as saying prices are suddenly soaring since yesterday and we're going to start seeing starving children on the street corners by next week.


By masher2 (blog) on 5/2/2008 3:12:02 PM , Rating: 3
> "Put another way - if your $3 box of corn flakes uses 3 cents worth of corn..."

We're not talking about corn flakes; the issue is the raw foodstocks eaten directly by people and food animals, the prices of which have skyrocketed. Rice prices, for instance, have tripled this year...and over two billion people in the world use rice directly as a major part of their diet.

Shipping isn't a huge cost percentage of most bulk foods.


By noone55555 on 5/2/2008 4:49:50 PM , Rating: 3
I've heard that rice has become expensive, but am ignorant on the details behind it. How exactly does that relate or correlate to Ethanol use and/or corn's influence on high food prices? It seems a bit of a red herring in your argumentation to me at this point...

And don't get me wrong, I understand that people suffer when staple foods become more expensive, particularly the poor. I'm just leery of completely labeling US Ethanol production as a villainous contributor to starvation in the world at this point. Also, I think Ethanol use presents economic and political advantages at this point in time.

Truth be told, from an environmental point of view, I don't buy into *any* combustion-oriented solution to energy for the long term. The sun is the closest thing out there to an unlimited clean energy resource, at least on Earth, so I think the various forms of solar energy will prove the eventual winner(s). Lots of technical hurdles, but progress is being made... :)


By Ringold on 5/2/2008 5:07:46 PM , Rating: 5
quote:
I've heard that rice has become expensive, but am ignorant on the details behind it. How exactly does that relate or correlate to Ethanol use and/or corn's influence on high food prices?


Some times I wonder if people even try to think or understand something opposed to their world view. I'll break it down in Econ 101 terms.

There are two large drivers to food demand in the world at present.

1) Growing capitalist middle class in China and India. They are tired of eating small amounts of rice. Now that they've got some money, they want large amounts of rice, or even better, a wider variety of food -- including meat, which requires large amounts of other feedstocks to produce.

2) Ethanol, the drivers of which were detailed in DT's article. Globally, structural trade problems compound the problem; for example, US equilibrium prices are being propped up by a 33 cent per gallon import tariff, and farmers don't face hardly any risk due to various subsidy programs.

So, in ethanol, farmers have huge incentive to plant corn, and to squeeze as much corn out of a given field as possible. What happens then?

1) Other fields, growing many of our other staple crops, get converted to corn production, thus lowering the quantity supplied of other foods at the same time demand is rising; thats where you get part of the price increase in crops other than corn.

2) Farms don't just put water on the ground. They use a variety of fertilizers, and they can use custom-made seeds. In their attempt to squeeze yields as high as possible, they consume vast quantities more than they would in the past. Look at the chart of the stock ticker POT, MOS, MON, AGU -- you can deny this if you want, but you'd look rather foolish. The prices of these inputs have thus been sent in to the stratosphere, and expected to possibly go even higher.

There you go, the perfect storm for higher prices. Reduced capital (land) in service for non-corn crops, vastly higher input costs, and higher demand due to the growing capitalist middle class in more developed 'transitional economies'.

Further, these countries that are having rice shortages are not disconnected from global commodity markets, so they can't live in their own little fantasy price land.

So there, it's not a red herring, it's just you having fallen asleep in Principles of Macroeconomics in college. :P


By Ringold on 5/2/2008 8:00:19 PM , Rating: 5
quote:
Actually, I got A grades in all my college econ classes.


Your professors failed you.

quote:
Is the US the primary supplier of rice to these countries? I'd think not, though I admit not having data.


Does the US get almost any oil from the Middle East? No. Are we connected by global markets? Yes. Therefore, do supply and demand fluctuations across the globe impact the benchmark oil market in the US, West Texas Intermediate Crude futures contracts? Yes.

The above is sufficient to answer your point about US and foreign prices being connected (they always are unless barriers exist), but 12% of the global rice exports come from America, with California being the largest producer in the country. If there were any difference in prices across nations, then someone would buy high, sell low, and capture the difference.

quote:
Ok, so land diverted from rice production in these countries is going to feedstocks - is that what you're implying? Either way, what cause/effect here implies that US shifts in corn and Ethanol supply/demand is increasing the price of rice?


That's not what I imply, thats what data shows. Again, as production moves away from other less profitable crops, such as rice, their prices go up. You said you got an A in college econ classes, so draw a supply/demand chart. Shift the supply curve to the left. Note the new equilibrium. It's higher.

quote:
From what I see locally, it's those fields that are now going into production to meet Ethanol-driven demand.


From what national data indicates, a lot of previous land under cultivation has as well, though land previously held in reserve has come on line to feed the craze, yes.

quote:
All farmers try to maximize yields if their reason for growing a crop has anything to do with profit or survival.


If fertilizing a field cost $1, and boosts yield by an amount worth $.50, then it doesn't get done -- and yield isn't maximized in an absolute sense. But if the crop value goes through the roof, then suddenly it makes sense to buy the most expensive genetically modified seed and dump all the fertilizer products you can on it. Demand for fertilizer has sky rocketed, supply has not -- higher prices. Therefore, other crops that also use fertilizer still have to pay the inflated price -- or not use as much, or none, and thus lower their yield further in order to make money. Same as above, shift the supply curve for non-corn crops further to the left.

quote:
Hmm, wouldn't it be interesting to know how much of a US farmer's corn profit is offset by increased upfront costs to produce the crop this year...


Not much; I recall reading their take-home pay/profit is expected to be vastly higher than in recent history. The guy in the article isn't saying he doesn't want to retire for no reason at all -- he's making more money than he probably has in his life!

quote:
I'd venture a guess that rice increases have more to do with *localized* impact of the your "transitional economics" in regions where rice is a staple versus US corn supply and demand.


There is some of that, sure. But markets are global. Little has changed in Mexico in recent years, for example, and yet they've felt the impact pretty hard. Considering that raw ore is mined, transported to one place, refined, transported to China, assembled, and then transported to America for sale at amazingly low prices, I would say that Mexico's proximity isn't at fault, either. And its 'transitional econom ies '; I'm trying to use the politically correct term instead of "third world", heh. Not sure why I bother. :P

I hope you didn't take those econ classes at Pheonix University. :D


By andrinoaa on 5/5/2008 4:41:02 AM , Rating: 1
markets are global and Australia, having hugh water problems , has effectively stopped growing rice. Supply and demand at work in global markets has seen a big jump in price, sadly we are in no position to meet the demand! If as reported, the US has shifted 25% of corn to ethanol production, I predict a global famine due to other crops also going into bio deisel. We are witnessing a fundamental realignment of "food" crop use. Which wars will be bigger, iraq oil war or Hunger wars?


By iowafarmer on 5/3/2008 1:43:44 AM , Rating: 2
I think the import tariff on ethanol is $.51 not $.33. The blenders tax credit is $.51 a gallon, blended ethanol whether imported or domestically produced receives the credit. The credit is designed to help build infrastructure in the USA not in brazil or another foreign country. I would look for the import tariff and the blenders tax credit to disappear at the same rate. I also look for blenders to look like they are investing the $.51 credit. I've noticed a pipeline proposal or 2.

Elwyn Taylor, ISU climatologist, recently claimed that up until the 50's up to 2/3 of all ag land in the US was used in the production of "fuel." I think he meant 1/3 and I have a 35hp M farmall bought by granddad in the 50's, thats still a pretty good farm tractor, so I'd guess it was a bit earlier than the 50's when farmers where phasing out the horse, but who am I to argue with Elwyn. What do you think farmers did before tractors? How did they heat their houses and feed their horses?

I pity the farmer that raised corn in his rice paddy. He sure screwed up a large investment in preparing his ground to raise rice.

I guess you like wading through reports like this:

http://usda.mannlib.cornell.edu/usda/current/CropP...

You might note where rice and corn are raised.

You will find farmers raised about 1/3 more acres of corn in 07 and also more acres of wheat. Fewer acres of beans 07 in response to low prices and a large caryover for soybeans. Do you know how the farm subsides work? Do you know what CRP stands for?

You are really going to like the results of this "economic" study, hot off the press:

http://www.card.iastate.edu/publications/synopsis....

"This analysis suggests that the growth in ethanol production has caused retail gasoline prices to be $0.29 to $0.40 per gallon lower than would otherwise have been the case."

Farmers are reinvesting those huge profits in infrastructure. New paint everywhere you look in the midwest. Give a farmer a dollar and he'll keep it circulating.


By masher2 (blog) on 5/3/2008 2:34:08 AM , Rating: 3
> "I pity the farmer that raised corn in his rice paddy. He sure screwed up a large investment in preparing his ground to raise rice."

I recognize your sarcasm, but the truth is a large amount of rice in the US is grown in areas like California...on land which used to be desert. "Rice paddies" are artificially created through irrigation, on ground that, if one only cut back the water a bit, would be suitable for wheat, corn, or other crops.

However, there is a kernel (ahem) of truth in your statement. Little rice farmland is being lost in the US. However, in places like Indonesia, the story is radically different, where over 12 million acres have been converted for burgeoning biofuel crops like palm oil.

Furthermore, rice isn't grown in a vacuum. It requires fertilizer, farm machinery, shipping, and many other commodities and services. Just this year has seem price rises and shortages of fertilizer...courtesy of the global biofuels boom. All this competition among crops raises prices for all of them.

Even still, blaming a tripling of rice in one year on biofuels isn't correct. At least half of that increase is due to a poor harvest in Australia, and burgeoning demand from China and India.

The fact remains that *all* food prices have risen. And this most definitely is in large part to the biofuels boom. There really isn't any serious debate on the issue...its one of the few things that GW proponents and skeptics both agree upon.


By iowafarmer on 5/3/2008 9:26:34 AM , Rating: 2
I've never seen a rice field in IA and do not have a good handle on yields. Corn at the farm gate is currently worth a little less than $.10 a pound. I've recently seen rice quoted as worth $1200 a ton or $.60 a pound. To level and irrigate land to grow rice is not cheap. On a pound for pound basis rice would seem to be the more valuable crop. Pardon me while I look up rice yields in the US. I'm going to use 3 ton of rice an acre, but maybe I should be using 4 ton. $3600 gross an acre for rice vs a record $800 gross an acre for corn. I should think rice would be the more profitable crop. I do have to wonder if it' a good use of water in california to raise rice in the desert.

I also do not have a good handle on using palm oil as a biofuel. I do know the demand for soyoil and palm oil has ballooned in china and india. I guess I was under the impression it was used as a cooking oil.

I do understand farmers responding to market forces. If raising palm oil is more profitable than raising rice do you blame the farmer for converting land to palm oil production?

quote:
The fact remains that *all* food prices have risen. And this most definitely is in large part to the biofuels boom. There really isn't any serious debate on the issue...its one of the few things that GW proponents and skeptics both agree upon.


Increasing oil price and the falling dollar has raised the price of all commodities. To declare the debate over is to miss the forest for a tree.


By Ringold on 5/3/2008 4:20:58 PM , Rating: 4
quote:
Increasing oil price and the falling dollar has raised the price of all commodities. To declare the debate over is to miss the forest for a tree.


While you raised many good points, you'll find you're out voted on the above by a huge margin. Cato Institute, Heritage Foundation, liberal think-tanks, conservative think-tanks, the UN, the World Bank, charitable groups and economists of all political stripes the world over are in general agreement that food price inelasticity is such that the increase in demand from biofuels production is largely to blame. Even climate scientists aren't as united behind man-made global warming as economists are behind the idea biofuels are driving prices up.

The World Bank has a good summary here:
http://siteresources.worldbank.org/NEWS/Resources/...

Tyson's CEO was also on CNBC last week; he was partly defending his bad quarter, but also dumping on ethanol as being the only factor he could see driving these wild changes.

Your study showing ethanol has pushed down gas prices slightly is interesting, as you admit it was a highly subsidized push down, but part of the outrage is the morality of the issue. America and Europe can pay a little more for 89 octane with roughly zero impact on our daily lives -- look at the resilience of our economy as of late. It's absorbed massive energy and food inflation, and still has been growing at a 2.4% annualized rate this year, despite small blue-collar job losses. When people in a city like Nairobi dedicate a huge portion of their income already on food, and then the price of food doubles, that's a whole other level of pain.

Something similar, by the way, happened in Bengal. They were not exactly short on rice, the price of rice simply skyrocketed such that the poor could no longer afford it, while those with money hoarded as much as they could. Up to 3 million died. Food prices then went up 61%. Food prices now have gone up 83%.

Nice to see you farmers are just like the rest of us when it comes to money; absolutely heartless so long as the mighty dollar flows in to your coffers. Fear not, the World Bank sees no end to the suffering in the near future for the world, nor an end to your pay day.