Ethanol Juggernaut Diverts Corn from Food to Fuel

February 1, 2007 at 9:06 am

Shoppers, brace yourselves. Higher across-the-board supermarket prices may be around the corner, says agricultural economist Lester Brown. A rapidly escalating demand for the corn that underlies a broad range of products—from breakfast cereals to milk and meats—has been driving up the price of this grain, he notes. Those commodity-price hikes could soon inflate the cost of plenty of other products.

ENERGY FARM. A rapid growth in the ethanol industry means that half of U.S. corn yields could soon be diverted from the production of food to fuel. Photodisc

PRICIER FEED. Because most U.S. livestock producers and dairy farmers rely on corn as feed, increasing demands on that grain to make ethanol fuel have already hiked the cost of producing meat and dairy goods. Photodisc

Founder of the Earth Policy Institute think tank in Washington, D.C., Brown has been watching corn prices rise throughout the past year, driven, he says, by rising demand for corn-based ethanol as a fuel alternative to gasoline.

About 3 weeks after Brown released his report to that effect, President Bush in his State of the Union address called for a new decade-long program aimed at reducing U.S. gasoline use by 20 percent. “To reach this goal,” the President said, “we must increase the supply of alternative fuels [to] nearly five times the current target.” In an online brief about energy provisions mentioned in the address, the White House explained that this new program would rely on ethanol made from corn and grasses.

However, only corn distilleries are ready to ramp up their production of ethanol within the President’s timeframe. The Energy Department acknowledges that new, more complicated technologies will be needed before other ethanol sources, such as switchgrass, become economically feasible.

In fact, the federally subsidized ethanol industry was already mushrooming before the President’s latest plug for the alternative fuel. Brown found that many fuel distilleries have recently broken ground or are scheduled to do so in the coming 18 months.

According to Brown’s report, because U.S. livestock producers feed grain to most of their animals, higher corn prices can quickly translate into higher meat and dairy prices. Moreover, as demand for corn grows, farmers may begin shifting some of their acreage away from wheat or soy into corn. Thus, any increase in corn production could reduce the supply of those crops and increase their prices.

Ironically, the biggest price hikes stemming from the new demand for corn aren’t on products such as corn flakes, Brown points out. The reason is that corn accounts for only about 5 percent of the cost of that breakfast cereal. However, several pounds of the grain typically go into each pound of meat from livestock. Corn feed typically accounts for 40 percent of the cost of producing chicken meat and 40 to 50 percent of the cost of pork. Most dairy and beef cattle also dine on corn-based fare, but those industries haven’t broken down their costs the way chicken and pork producers have.

The competition for corn between motors and mouths has already grown at a pace unforeseen by either the U.S. government or the alternative-fuels industry, Brown says. Indeed, he found, neither had done a realistic projection of corn demand from ethanol distilleries even in the near future.

Brown created such a projection mainly by tallying existing fuel distilleries and those under construction and in planning. His work shows that by the 2008 harvest, ethanol-fuel distilleries will need 139 million metric tons of corn—more than twice the amount that the U.S. Department of Agriculture had predicted. In fact, the total that Brown has calculated would amount to half the total U.S. corn harvest—up from just 20 percent now.

It’s already gotten to the point, Chad Hart of Iowa State University reported at an Iowa Poultry Association meeting in September 2006, that “corn is worth more as ethanol than as feed.”

With the United States producing 70 percent of the corn that other countries import from all sources, shifting very much of the grain from food into energy could have global economic repercussions, Brown says. “If we want to continue down this path, I think it should be the result of conscious policymaking,” he says. That’s not the case today, he adds.

Livestock liabilities

Within a day of the President’s call for a new alternative-fuels initiative, various livestock-producer organizations weighed in—and they weren’t happy.

For instance, William P. Roenigk, chief economist for the National Chicken Council, argued that the ethanol industry is already affecting chicken growers and buyers. In terms of production costs, “We estimate that ethanol demand has already increased the price of chicken by 6 cents per pound” within the past year, he says. Across the U.S. industry, Roenigk says, that change has translated into an estimated $1.5 billion in extra costs that poultry producers have had to bear.

“Given that corn prices are the major feed-input cost for dairy cows, and that corn is expected to reach record price levels in 2007, the USDA needs to do more homework on the implications of the ethanol gold rush on milk and meat costs,” argued Jerry Kozak, president of the National Milk Producers Federation. In a Jan. 18 letter to Secretary of Agriculture Mike Johanns, Kozak’s group joined the National Chicken Council, the National Pork Producers Council, the National Cattlemen’s Beef Association, the American Meat Institute, and the National Turkey Federation to express concerns over the ethanol industry’s sudden growth.

The letter said that many meat and milk producers “fear they cannot sustain their operations alongside a robust and growing ethanol economy.” The organizations requested that Johanns assemble a USDA working group to study the full implications of the emerging ethanol economy on the food producers, which make up a $128 billion U.S. industry.

Toasted tortillas?

Brown observes that owing to the role of livestock feed in producing a host of foods, from ice cream to cold cuts, much of what a U.S. consumer finds in a home refrigerator is effectively a corn product.

As a Jan. 27 Washington Post story points out, dramatic impacts are already being felt south of the U.S. border. “Mexico is in the grip of the worst tortilla crisis in its modern history,” the story reports, as spiraling corn prices “spurred by demand for the grain-based fuel ethanol” have triggered a tripling to quadrupling of prices for the flatbread corn product during the past 6 months.

On Jan. 18, Mexican President Felipe Calderón reported that he had negotiated an agreement with commercial tortilla makers to cap the price of their product at the equivalent of 78 cents per kilogram. However, the Post story reported that some businesses were ignoring the agreement and selling tortillas—a national food staple—at prices well above the cap.

Brown says that in this country, U.S. policymakers need to start asking themselves whether fuel is the best use of grain. The amount required “to fill a 25-gallon SUV tank with ethanol will feed a person for a year,” he notes. If we’re not careful, the United States could be seen as reducing corn exports for the sake of fueling bad-mileage vehicles, says Brown. “That would not be a positive image.”

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