Analysis: Ethanol and food costs

WASHINGTON, May 15 (UPI) -- The rise in ethanol demand has led to a spike in food prices, a trend that is likely to continue for some time to come, experts and officials say.

"The ethanol program is a high-cost, low-growth solution to dependence on foreign oil," wrote Peter Morici, professor at the Robert H. Smith School of Business at the University of Maryland in College Park. "It appeals to farm state senators, but it is a very costly and inefficient approach that raises food prices to create expensive gasoline."

Despite the debate over the efficiency of ethanol, there's little doubt that its presence as a fuel additive is assured for the foreseeable future. There are 118 ethanol plants in operation around the country and more are being built. The source of this ethanol: corn.

Ethanol production is growing, and it's growing fast. In 2006, 5.9 billion gallons of ethanol were produced in the United States. In 2007, that figure is expected to jump to 9.3 billion gallons. Corn farmers have been the biggest recipients of this spike in demand.

The 2006 corn crop was worth $6.33 billion; the 2007 crop is expected to be worth $42 billion. The growth is largely driven by biofuel demand.

The U.S. Department of Agriculture estimates that 27 percent of the 2007 corn crop will go toward the manufacture of ethanol. Ten years ago that figure was less than 5 percent. In 2005 it was 14 percent, and in 2006 it was 20 percent.

The demand for ethanol has prompted not only a spike in corn prices, but also an increase in the amount of corn being planted at the expense of other crops. Previously unused swathes of land nationwide have been placed under corn cultivation for the first time.

"As a result of this, we have seen higher agricultural commodity prices across the board," the USDA's chief economist, Keith Collins, said at a breakfast meeting with reporters Friday.

Most of the corn in the United States is used as a feedstock, and as demand rises, the price of poultry and beef products, eggs and dairy have shown consequent increases. This trend is likely to continue in the foreseeable future.

"There are going to be costs and benefits ... One of the things we expect to see is slightly higher food prices," Collins said.

Collins said that at present the rise in the consumer price index could be attributed mainly to the spike in price of fruits and vegetables. That trend is likely to change, however.

"Over the next couple of years, food will be a factor," he said.

The rise in corn prices may be good for farmers, but it has also presented them with a dilemma, especially in poorer agricultural nations.

"The real debate is whether it is possible for nations to develop a strong energy policy without affecting food prices," Ray Cesca, president of the World Agricultural Forum, told United Press International in a telephone interview Tuesday.

This issue was debated last week by the WAF's members at a congress in St. Louis. Their consensus: Agriculture needs to be retooled to balance the needs of energy and food.

In a bid to ease some of the pressure on corn, the Bush administration in pushing ethanol from cellulosic sources such as switchgrass. The USDA in its proposal for the Farm Bill has requested $1.6 billion over 10 years for research on cellulosic ethanol.

Although cellulosic ethanol has more net energy and yields lower greenhouse emissions than corn ethanol, it requires a more complex refining process. To this end, the Bush administration hopes to make cellulosic ethanol cost-competitive with corn ethanol by 2012.

That is still five years away and so, for the foreseeable future, corn is likely to be king and food prices will probably continue to rise.

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