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.
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?
quote: 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...
quote: ...or even better, a wider variety of food -- including meat, which requires large amounts of other feedstocks to produce.
quote: 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.
quote: 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.
quote: 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'.
quote: Actually, I got A grades in all my college econ classes.
quote: Is the US the primary supplier of rice to these countries? I'd think not, though I admit not having data.
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?
quote: From what I see locally, it's those fields that are now going into production to meet Ethanol-driven demand.
quote: All farmers try to maximize yields if their reason for growing a crop has anything to do with profit or survival.
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...
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.
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.
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.
quote: 2 From 2004 to 2007, global maize production increased 51 million tons, biofuel use in the U.S. increased 50 million tons and global consumption for all other uses increased 33 million tons, which caused global stocks to decline by 30 million tons (Mitchell 2008).
quote: Furthermore, world markets could be relied on to provide a steady supply ofrelatively cheap grain imports when needed. More recently, however, the stock-holding policies of several large producers—such as the U.S., E.U. and China—have changed, contributing to the present situation of very low global grain stocks and increased global price volatility. As a consequence, a number of developing countries, such as Indonesia, are considering reverting to this form of price management, particularly after experiencing the impact of export bans in key export countries.
quote: For many low-income countries, transport and logistics costs are a key component of food prices and are generally far higher than OECD benchmarks of around 9 percent. While countries can do little to reduce ocean shipping costs (which for high volume, relatively low value goods such as grains and edible oils represent a significant part of the final price), they can act to lower the overall cost of domestic distribution.
quote: Making agriculture a priority. In 1980, 30 percent of annual World Bank lending went to agricultural projects, but this declined to 12 percent in 2007. The overall proportion of all Official Development Assistance going to agriculture is currently only 4 percent. Falling and stable world real cereal prices in the 1980s and 1990s contributed to a sense of complacency with respect to agricultural issues in developing countries from the late 1970s until recently.
quote: ""Everyone agrees corn is not the right crop [for producing biofuels]..."
quote: But corn-grown ethanol hurts out food independence, and it will *never* grant us even a portion of energy independence.
quote: Compare to the rest of the 3rd world (not yet, we are almost there, seriously),
quote: I find it hilarious that many people are finally catching on to what I saw when I was twelve years old: The Earth is on giant intertwined system of energy and it is not fooled by our ignorance of how it operates, it just keeps on going...
quote: we are getting jabbed.
quote: The cost of oil per barrel has gone up 75% in the past 10 years yet the cost of gas at the pump has gone up 200%, meanwhile these oil companies are making record profits that are 200% of what they were just a decade ago. Rising food costs is due to 2 primary things: increase in gas prices and increased usage of corn for fuel.
quote: Oh, and I know plenty of Persians (yes, they refuse to recognize themselves as Iranian), good friends of mine actually, whom have both renounced Islam and refuse to associate themselves with the rest of Middle-eastern culture. They proudly call themselves Americans.
quote: People need to stop judging other people and start trying to make the world a better place.
quote: And who's been worse over the course of history, Christian fundamentalists or Muslim fundamentalists? Its an inherently dumb question, like asking who was worse, Timothy McVeigh or Osama Bin Laden?
quote: I'm sure in your liberal mind thats not true, but it is a fact.
quote: Buddy, I could be a liberal or a conservative, I know people on both ends who believe equally in freedom of religion and oppose fundamentalism.
quote: Don't confuse Liberals with Democrats. There are still some sane well minded Democrats out there. But once someone declares themselves as " Liberal " just steer clear.
quote: For not being liberals they sure did a good job of picking two left-wing liberal socialists to run for office this year.
quote: Ugh sadly yes. And the other guy isn't much better of a choice either.
quote: I vote for 2.2.
quote: The nation's leadership is at a loss about what to do about the crisis.
quote: LOL I forgot about those bills, thanks for the reminder. Like I say, they are going to shoot down anything Bush puts out because he is a republican and it was not one of their own ideas. (See post below)
quote: If I remember right, the reason they can make ethonal is because the legality comes in when transporting it (You aren't allowed to transport moonshine). The way the get around this is they add a small amount of gas to the ethanol before shipping it, rendering it consumable and hence legal to transport.
quote: Once the technology matures, you will see the production of ethanol switch to non-food sources. (ie waste products, like corn stalks) Once that happens, ethanol will all of a sudden become very 'green'.