FOOD PRICES AND ETHANOL

You may have heard the headlines about the resulting increase in food prices from demand for ethanol. There is actually much more to the story.

It is true that in this country, we eat corn, wheat, and soybeans. We may not directly consume them, but they are our staples. We used to devote about 60% of our corn crop to animal feed ( meat & milk consumption), 20% to exports, 15% to food byproducts and direct consumption, and the remainder for industrial uses and ethanol. Now almost 18% of our corn crop is being devoted to ethanol production. Of course this will put upward pressure on the price of corn. And as people divert acres away from wheat and soybeans it will put upward pressure on the prices of those commodities too. So it would seem palpable that food prices would follow the trend. They have to some degree.

According to a recent study :
Link
http://www.ethanolrfa.org/objects/documents/1157/food_price_analysis_-_urbanchuk.pdf

“Increasing petroleum prices have about twice the impact on consumer food prices as equivalent increases in corn prices”

Compared to energy, even corn prices impact a much smaller segment of the food market. Advancements in genetics and technology are allowing producers to continue to meet our demands for both food and fuel with minimal impacts on price. This year the markets have responded via producers planting the largest corn crop since WWII. There are projections of a record crop of 11 billion bushels this fall.

I admit that much of this demand and the response to it stems partly from a 51-cents per gallon tax credit, and a 54-cents-a-gallon tariff on imported ethanol, and ethanol based oxygenate reqquirements for all gasoline. As I mentioned in a previous post, gasoline demand and production is based largeley on governent subsidies and regulations as well. The point is that the market is responding given the circumstances and the crisis is not what many are making it out to be.

Corn, Ethanol, Markets, and Diversity

http://www.csmonitor.com/2007/0521/p09s02-coop.html?page=1

I’ve recently commented on the above article from the CS monitor. It also contained an additional statement that I take issue with, at least theoretically.

"Any sort of shock to corn yields, such as drought, unseasonably hot weather, pests, or disease could send food prices into the stratosphere. Such concerns are more than theoretical. In 1970, an outbreak of a fungus destroyed 15 percent of the US corn crop.”

I think they want to make the point of how tight supply and demand conditions are and how easily we could see price spikes to ration shortages in case of a drought or some other disaster. (as a result of corn diverted to ethanol production)

But the point is that the corn blight of the 70's was the result of common male sterile inbreds being used to produce most of the hybrids grown then. This common genetic background made almost the entire corn crop susceptible. Most companies have learned their lesson and genetic diversity among corn hybrids has proliferated to meet diverse grower needs since then anyway. Between diversification in crops planted and the risk management tools available in the market, disasters like the corn blight in the 70’s are really much more theoretical than the CS Monitor implies.

THE REAL PRICE AT THE PUMP

If you look at tax and program subsidies, defense of oil interests, environmental, and health costs, the real cost of gasoline may be much higher than just the price we pay at the pump. Some estimates of these external costs are between 20 and 70 cents more.

According to the center for technology assessment, about $9-18 billion dollars worth of tax breaks are provided for gasoline production and use. The defense department allots $55-$96 billion per year to protect petroleum resources across the globe.

I’m not necessarily advocating increasing the price at the pump by increasing gas taxes to reflect these costs. However, if these costs were factored into the price of gasoline, it appears that the gap between the real cost of ethanol and the real cost of gasoline would narrow significantly even after the subsidies to ethanol were removed.

Sources: Ethanol Today, August 2005
‘The Real Cost of Gas’ International Center for Technology Assessment 1998

MEXICAN CORN PRICES AND ETHANOL

http://www.csmonitor.com/2007/0521/p09s02-coop.html?page=1


In a recent Christian Science Monitor article, many good points were made about the effects of ethanol on corn prices. I’m not sure every point was on the mark however.

"..in Mexico, where corn is a staple food, the price of tortillas has skyrocketed because US corn has been diverted to ethanol production. "

It is my understanding that another major issue with tortilla prices (food grade white corn) is the lack of biotech varieties. There have not been enough biotech white corn varieties approved for human consumption, making these crops much more difficult and expensive to grow for our producers, so few are willing to grow it anyway. As a result, white corn accounts for less than 1% of US corn production, and already trades at a premium.

Further, even with NAFTA, there are trade barriers that prevent US corn producers from exporting white corn to Mexico. Even in the case of drought and severe shortage over- quota tariffs are quite steep.

Now I also understand that increased corn prices may be leading producers to destroy agave crops- used for tequila. Would the price of corn in Mexico be so high if they could relieve market pressure by importing ?

If ethanol has anything to do with the current plight of Mexican food prices, it is only adding to the misery created by previously existing anti-free trade policies.

ETHANOL AND ENERGY BALANCE

According to David Pimental of Cornell University, the production of ethanol requires almost 30% more energy to produce than it provides as a fuel. Another study from UC Berkeley concluded that ethanol is less fossil fuel intensive that gasoling production, but has greenhouse emisisions similar to gasoline. Finally a researcher at MIT reports a slight advantage for gasoline, but one that can easily be overcome via technological breakthroughs in the near future. According to research from a Proceedings of the National Academy of Sciences study ethanol yields 25% more energy than the energy invested in its production, whereas biodiesel yields 93% more.


So it seems the jury is still out on the energy balance of ethanol, with a slight advantage on the positive side.

SOURCES:
http://environment.newscientist.com/
Natural Resources Research, vol 14 p65
Science, vol 311 p 506
Tiffany Goode, MIT (Graduate Student)
PNAS July 25, 2006 vol. 103 no. 30

ETHANOL AND CORN FOR FOOD

Should we be concerned that demand for corn for ethanol will lead to increased prices of corn based food products for consumers?

I'm more concerned with the corn used for animal feed vs. human consumption (as in Corn Chips). Corn raised for direct human consumption is a very small part of the total market for corn. It's production and cost functions are quite different from other types of corn. The different types of corn are not likely close substitutes in production. (even soybeans and corn for feed are likely better substitutes) I'm not sure if most corn producers grow more or less corn for human consumption based on demands for ethanol or livestock feed since it's not the same corn (this is also a strong rebuttal to those who laud the comment 'eat a steak starve an African').

Although I agree if corn for ethanol and animal feed becomes profitable enough, some producers may retool and switch to producing commodity grade corn, causing increased price pressures in the food markets as indicated in the previous post.
But for now I think we'll see greater ramifications from the livestock markets and meat prices. We'll see more corn acres grown at the expense of soybeans, driving up their prices as well.

From the livestock producer's perspective, a good policy question would be, why should government be legislatively creating demand for ethanol and creating a boom market for one industry segment, while increasing the costs (in corn and feed prices) in another. Of course there is debate and on going research being done related to how this is actually going to affect livestock producers.

Bush Bio-fuel

President Bush in his state of the union address made it a national goal to reduce our dependence on foreign oil by 75% by the year 2050.

Is this realistic? Lets look at the facts.

1) We currently produce 40 billion gallons ethanol (corn) out of a 146 billion gallon gasoline market, which is approximately 3%.

2) After this year estimates indicate that biodiesel production will be >100 million gallons out of a 55 billion gallon market for diesel fuel.

3) Current estimates based on current technology indicate that it would require 40% of cropland to replace just 10% of gasoline consumption.

We may not be able to replace 75% of our gasoline and diesel consumption with biofuels, at best we may only be able to pick up the slack in conjunction with improved fuel efficiency, hybrid fuel technology, and increased domestic production. It is estimated by the department of energy that we could replace 30% of gasoline consumption by the year 2030 with biofuels.

With technological change over the last 50 years, we produce twice the output per unit of energy than we did 50 years go. Even modest increases in biofuel production will help alleviate the volatility of our balkanized gasoline markets dictated by EPA rules. Biofuels are more than just a PR opportunity for modern agriculture; they are another example of how technological change will once again help markets triumph over 'limits to growth' pessimists.