Is ethanol pushing food prices higher?

The near daily media reports on the use of corn for ethanol has created what appears to be a long-term market for corn and good prices for corn farmers. All the hoopla has also left many Americans wondering whether turning corn into ethanol is a good thing, citing the sharp increases in food costs as evidence to the negative.

Consumers are a few steps behind corn farmers who have seen the potential of $4 per bushel corn melt away in drought, diesel fuel cost spikes, doubled fertilizer costs — not to mention $3 a gallon gasoline.

While the national media has been quick to accept that high corn prices are the cause for a moderate increase in food prices, there are a number of economists who contend the upsurge in food prices is much more directly related to higher fuel prices than to higher corn prices.

Though the ethanol, corn, fuel and food industries are eager to shift blame for high prices to someone, or something else, all these commodities are intricately intertwined. What affects one is sure to impact the others.

Corn prices and corn growers have become a favorite whipping boy for the rise in food prices. Only when facts interdict frenzy is little said about the relatively small impact higher corn prices have made on this increase.

A dollar per gallon increase in fuel prices, for example, has roughly three times the impact on food costs (0.9 percent vs 0.3 percent) as does a dollar per bushel increase in corn prices to farmers.

Corn and ethanol have been blamed for price increases for everything from tortillas in Guatemala to bacon in Brazil, but in truth relatively little is known about the relationships of corn, ethanol and U.S. food prices.

It is factual that ethanol production doubled from 2002 to 2006 and is likely to double again between 2006 and 2008. From January 2002 through September 2006, corn prices averaged $2.18 per bushel. Clearly, doubling of ethanol production had little affect on corn prices.

It is equally factual that since September 2006 the Consumer Price Index for food has accelerated by 1.2 percent. During this same time period, cash market corn prices increased $1.15 per bushel. However, most of the increase in food prices was the result of foods not impacted by corn such as fish, fruits and vegetables, sugar and sweeteners.

Beef, pork, dairy, and poultry products, which are directly affected by high corn prices, accounted for only 0.2 percent of the 1.2 percent acceleration in food price inflation between September 2006 and April 2007.

Oil, by comparison, currently trades at roughly five times higher than it did when the corn-based ethanol industry began its steep growth climb in the early 2000s. This meteoric rise in fuel prices has driven consumers toward substitute goods, such as ethanol.

The impact of increased prices paid for corn has had less impact on corn based products 2.1 percent than the average inflation rate for all food products (2.9 percent).

According to a recent study by John Urbanchuk, an economist at Penn State University, rising energy prices had a more significant impact on food prices than did corn. The study notes the national average price of conventional regular gasoline increased 89 cents per gallon (39 percent) between October 2006 and May 2007.

The study contends a number of factors other than high corn prices have caused the moderate price jump in meat prices:

  • Heavy cow and calf slaughter and early placement of feeder cattle in feedlots have combined with poor fall and winter pasture conditions and higher grain prices to set the stage for slower growth in cattle numbers through early 2008. This will in turn slow growth in beef production in 2008 and support higher beef prices.

  • Growth in hog inventories is expected to be constrained by higher feed costs. However, this will be offset by growth in domestic demand supported by a stronger consumer economy and increases in exports as China turns to the U.S. to offset sharply reduced domestic pork production.

  • Higher feed costs will dampen broiler producer's zest to sharply expand production. However, producers will respond to higher prices for red meat and growth in real disposable income that will support demand growth. This will moderate any potential sharp increases in broiler prices in 2008.

The reason for the larger impact on food prices from petroleum and energy prices stems from the relative importance of energy in food production, packaging, and distribution compared to that of a single ingredient.

The high price of corn is not just a U.S. boon to farmers or bust to consumers — not by a long shot, according a recent United Nations report.

The increased price of corn has left people in under-developed countries more vulnerable than they were before — and weather affecting crops is increasingly unpredictable due to climate change,” said Ian Cherret, head of the UN Food and Agriculture Organization, or FAO, in Guatemala.

“You put the two elements together and you begin to have a killer,” he said in a recent interview, adding that “hundreds of thousands” could starve this year if rising prices combine with drought to create a worst-case scenario.

The Renewable Fuels Association contends there is a popular misconception that corn is exported from the U.S. to feed those in malnourished countries, and thus ethanol use will diminish exports to these countries. The truth is the majority of corn exports are used to feed livestock in developed countries. Importantly, the U.S. ethanol industry is helping to satisfy foreign demand for high-protein, high-energy feedstuffs by exporting more than 1 million metric tons of distillers grains to countries around the world in 2005.

Speaking at a recent meeting of the Virginia Corn and Soybean Association, National Corn Producers President Ken McCauley said there is no competition among food, feed and ethanol for U.S.-grown corn.

“Demand for corn is at unprecedented levels, and we fully expect unprecedented levels of supply as well. This spring U.S. corn growers planted the largest crop this country has seen since the 1940s. Given normal weather conditions this summer, we'll produce the largest corn crop in history, and that will allow us to readily satisfy demand for livestock feed, human food processing, exports and fuel ethanol,” McCauley said.

Skyrocketing fertilizer costs have likewise been cited as a cause for higher food prices. Nitrogen costs, nearly double last year's cost, did influence some growers in the Southeast to not plant corn, because of the high demand for fertilizer by the crop. Likewise, the ethanol industry creates a high demand for natural gas that is directly linked to fertilizer production.

It takes about 33,000 cubic feet of natural gas to produce a ton of nitrogen fertilizer. About 96 percent of the corn planted in the United States depends on fertilizers, such as anhydrous ammonia (NH3), liquid nitrogen, urea and ammonium sulfate. Fertilizers consume more than three percent of total U.S. natural gas use, and the high demand for corn created by the ethanol boom could dramatically impact natural gas prices.

Corn is one of the largest consumers of nitrogen-based fertilizer.

Despite the high cost of fertilizer, drought-related losses in dryland corn and myriad storage and handling problems, most experts are predicting more corn will be planted in 2008. If ethanol production continues to increase there will be a built in demand for corn and favorable price structure for farmers, since even the most fuel efficient cars will require nearly 200 pounds of corn to produce a tank of ethanol.

From the farmer's perspective, a ton of fertilizer in 2007 cost approximately $100 per ton more than in 2006. That translates to roughly $33 per acre. At $2 per bushel of corn, under-applying nitrogen is not an option. At $4 per bushel, using less nitrogen and accepting lower yields is an option.

In the third week of June, the price of a gallon of regular gasoline dropped to a national average of just over $3. The price of a ton of nitrogen fertilizer did not drop.

Likewise, the May to June price index for food remained nearly the same. By the end of June corn prices were down slightly and wheat prices up slightly. All are tied together with the same rope — the cost of a barrel of oil, not the cost of a bushel of corn.

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