Demand for Ethanol May Drive Up Food Prices

July 19, 2006 at 3:09 pm

Harvests of corn and other crops are likely to be drawn into a tug of war between people’s need for food and their need for fuel, agricultural economists say.

FUEL VS. FOOD. Cars such as this one, which burns fuel that’s 85 percent corn-derived ethanol and just 15 percent gasoline, could compete with people for the 280 million tons of corn harvested annually in the United States. Department of Energy

Corn is the most cost-efficient and popular raw material used in the United States to make ethanol. That’s important because the fuel has gotten increasingly competitive with gasoline as oil prices have risen.

“The lines between the food economy and the energy economy [are] becoming blurred,” says agricultural economist Lester R. Brown, president of the Earth Policy Institute in Washington, D.C. Last week, his organization issued an economic analysis on the subject.

The analysis found an emerging “competition between the 800 million people who own automobiles and the 2 billion low-income people, many of whom already spend over half their income on food,” Brown says. Furthermore, he says, “taxpayers may be subsidizing a rise in their own food prices.”

To encourage the use of alternative fuels, U.S. law subsidizes ethanol production at 51 cents per gallon and production of other so-called biofuels at up to $1 per gallon. Those incentives tempt farmers to sell crops to biofuel distilleries or, if they instead sell to food manufacturers, to demand higher prices than they otherwise would.

One-fifth of corn and almost one sixth of the U.S. grain harvest overall goes toward ethanol production, according to the institute’s report. And while the world’s production of grain will grow by about 20 million tons this year, 70 percent of the increase could be used to generate ethanol for U.S. automobiles, Brown says.

Combustion vs. consumption

“Ethanol plants [are] being built, and they’re starting to pull more corn their way,” comments agricultural economist Chad E. Hart of Iowa State University in Ames. “We’re seeing already higher projected prices than normal for the 2007 crop.”

Predicting that the growth of the ethanol industry could drive up food prices as early as next year, Hart notes that corn futures are trading at about $3 per bushel, or about 50 cents higher than usual.

With demand for corn rising, production is also likely to increase, Hart says. Higher corn prices will lure farmers to devote more acres to cultivating corn and fewer to other crops. That, he says, will encourage “an across-the-board increase in crop prices”—as well as in the price of animal feed derived from such crops.

“If corn price goes up, you’ll probably feel it more in the cost of your steak than the cost of your cornflakes,” Hart says.

Processing, packaging, and distribution costs account for more than 90 percent of the commercial price of cornflakes, bread, and other grain-based products. “Most of the cost of [products such as] bread is not in the cost of the raw materials,” Hart says.

By contrast, the cost of feed for animals and other expenses incurred on livestock farms account for about half of the commercial price of meat and eggs, and nearly a third of the cost of cheese. Therefore, Hart says, higher corn prices aren’t likely to translate into penny-for-penny increases in food costs.

In addition, Hart says, byproducts of ethanol production from corn, such as corn-gluten meal, can be used to feed livestock. That way, not all the corn used to make fuel is diverted from the food supply.

“So the price impact on livestock products will likely be relatively small in comparison to the change in corn prices,” he says.

A technological shift away from corn-based ethanol toward ethanol made from non-crop plants could eventually reverse the anticipated rise in crop costs, Hart says.

A scientific study published last week finds that making ethanol from corn generates less new energy than does manufacturing certain other kinds of biofuel, such as biodiesel made from soybeans (see Farm-Fuel Feedback: Soybeans have advantages over corn).

But if ethanol remains the primary alternative fuel in the United States, a possible replacement for corn could be cellulose from other plants. A weedy plant called switchgrass, for instance, is a productive source of that material, and the plant can be grown in abundance on land unsuitable for crops.

Of a mostly switchgrass-based ethanol industry, Hart says: “While it’s technically feasible, it’s not commercially viable at this time. For the U.S., corn is the best model going right now.”