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Ethanol Issues
On Tuesday, USDA’s Economic Research Service issued their monthly Feed Outlook report, which was written by Allen Baker and Edward Allen.
In part, the report noted that, “Forecasted feed grain area planted in 2007 based on Planting Intentions, is up 14 percent from 2006 as farmers responded to strong preseason prices. Acres to be planted in corn are expected to be up 15 percent. Total feed grain supplies for 2007/08 are forecast up 7 percent to a new record. However, record use of feed grains, boosted by a 58-percent rise in corn used to make ethanol, is expected to keep ending stocks relatively low, up just 1 percent from 2006/07. With plentiful supplies of spent grains from ethanol production in 2007/08, feed and residual use is expected to total 152 million tons for the four feed grains, down from 155 million in 2006/07. Strong prices are expected for all four feed grains” (page one).
The report indicated that, “Feed grain use is expected to rise in 2007/08. Food, seed, and industrial (FSI) use is projected at 128 million tons, up from 95 million in 2006/07. Exports are expected to slip from 60 million tons in 2006/07 to 55 million tons in 2007/08. Feed and residual use is expected to decline nearly 3 million tons in 2007/08 to 152 million. Despite the increase in supply, ending feed grain stocks are projected to increase only 1 percent. Higher prices are expected for corn, barley, and oats, but sorghum prices are forecast lower” (page two).
This graphic (at left), which appeared recently in the Los Angeles Times, demonstrates that food prices are on the rise.
On page six and seven of the ERS report, the authors stated that, “Corn use for ethanol in 2007/08 is projected to increase 58 percent following an expected 34-percent gain in 2006/07. Monthly ethanol production reported by the Department of Energy (DOE) was record high at 386,000 barrels per day in February 2007 (the latest available data), helping boost first-half 2006/07 production to a record 2,689 million gallons. This ethanol production reflects expansions to existing plants and the new plants that have been added in response to very profitable operations last year. Ethanol production also continues to run ahead of reported plant capacities.”
Meanwhile, researchers at the Center for Agricultural and Rural Development issued a report earlier this month entitled, “Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets” (Simla Tokgoz, Amani Elobeid, Jacinto F. Fabiosa, Dermot J. Hayes, Bruce A. Babcock, Tun-Hsiang (Edward) Yu, Fengxia Dong, Chad E. Hart, John C. Beghin).
According to a summary of the report, “Projections of U.S. ethanol production and its impacts on planted acreage, crop prices, livestock production and prices, trade, and retail food costs are presented under the assumption that current tax credits and trade policies are maintained. The projections were made using a multi-product, multi-country deterministic partial equilibrium model. The impacts of higher oil prices, a drought combined with an ethanol mandate, and removal of land from the Conservation Reserve Program (CRP) relative to baseline projections are also presented. The results indicate that expanded U.S. ethanol production will cause long-run crop prices to increase. In response to higher feed costs, livestock farmgate prices will increase enough to cover the feed cost increases. Retail meat, egg, and dairy prices will also increase.”
With respect to higher food costs, Jerry Hirsch reported in Wednesday’s Los Angeles Times that, “Southland residents already pay among the highest grocery prices in the nation, and the forecast is for even higher costs. Federal statistics released Tuesday for April show that food prices in Southern California rose 5.7% from a year earlier.
“Prices are going up for much of what gets dumped into the grocery cart including cereals, bread, bacon, pork roasts, chicken, eggs, cookies, hot dogs, oranges, soda pop and dried beans.
“Nationally, food prices rose 3.9% in April compared with the same month in 2006, and the outlook is equally chilling wherever you shop. It is happening for many reasons: inflation, drought, freezing weather, even the rising cost of corn — highly sought after not only as ingredients for thousands of food products but also to make ethanol.
“Food prices in 2007 are increasing at their highest rate in years.”
The article added that, “The real problem, according to food manufacturers and supermarket executives, is the run up in fuel prices and the cost of grain, which has soared as an ever-growing amount of corn is diverted to make ethanol to mix with gasoline.
“‘Corn prices have moved up significantly as demand for ethanol taps supplies … which will impact overall inflation levels throughout the year,’ Jeff Noddle, chief executive of Supervalu Inc., reported to shareholders last month. Supervalu owns Albertsons.
“The price of a bushel of corn has jumped 46% to $3.66 over the last 12 months and earlier this year topped $4, according to DTN, an Omaha-based agriculture information firm.”
In addition, Philip Brasher, writing recently at The Des Moines Register’s Cash Crops blog, stated that, “Agribusiness giant Cargill Inc. has long kept a low profile.
“But the privately held Minneapolis-based company’s retiring chief executive, Warren Staley, warned last year that the ethanol rush could have unintended consequences.
“His successor, Gregory Page, is picking up the theme. In a recent interview with Tom Webb of the St. Paul Pioneer Press, Page says the world could be months away from a grain shortage ‘if we don’t have the weather we all expect
“‘What we would like to see is some thoughtfulness about what we will do if we have a weather calamity.’”
In more specific news regarding biodiesel, Philip Brasher reported in today’s Des Moines Register that, “Willie Nelson may want to stick to his music. Biodiesel, the fuel additive that the singer has tried to make famous, is eating the dust of corn ethanol.
“Biodiesel is made primarily from soybean oil, and the price of soybeans is up as farmers put more and more land into production of corn, the more lucrative crop of the two.
“That is cutting the profit out of biodiesel production and could stunt the industry’s growth for a long time to come.
“A new study by economists at Iowa State University suggests the biodiesel market won’t grow substantially unless the government requires its usage or adds more subsidies.
“‘In our projections, we can’t see why anyone would build a biodiesel plant right now unless you are speculating on a biodiesel mandate,’ says Bruce Babcock, director of Iowa State’s Center for Agricultural and Rural Development.”
In recent editorial opinion regarding federal policy that supports corn-based ethanol production, Colin A. Carter and Henry I. Miller noted in Thursday’s Los Angeles Times that, “Policymakers and legislators often fail to consider the law of unintended consequences. The latest example is their attempt to reduce the United States’ dependence on imported oil by shifting a big share of the nation’s largest crop, corn, to the production of ethanol for fueling automobiles.
“Good goal, bad policy. In fact, ethanol will do little to reduce the large percentage of our fuel that is imported (more than 60%), and the ethanol policy will have widespread and profound ripple effects on other markets. Corn farmers and ethanol refiners are ecstatic about the ethanol boom and are enjoying the windfall of artificially enhanced demand. But it will be an expensive and dangerous experiment for the rest of us.”
The authors added that, “American legislators and policymakers seem oblivious to the scientific and economic realities of ethanol production. Brazil and other major sugar cane-producing nations enjoy significant advantages over the U.S. in producing ethanol, including ample agricultural land, warm climates amenable to vast plantations and on-site distilleries that can process cane immediately after harvest.
“Thus, in the absence of cost-effective, domestically available sources for producing ethanol, rather than using corn, it would make far more sense to import ethanol from Brazil and other countries that can produce it efficiently — and also to remove the 54-cents-per-gallon tariff on Brazilian ethanol imports.
“Our politicians may be drunk with the prospect of corn-derived ethanol, but if we don’t adopt policies based on science and sound economics, it is consumers around the world who will suffer the hangover.”
Max Schulz, writing on Tuesday at National Review Online indicated that, “One proposal kicking around Congress now would limit the amount of corn-based ethanol to 15 billion of the 35-billion-gallon mandate. The rest would have to be ethanol derived from cellulosic sources, such as switchgrass. But even if we had the capacity to gin up 20 billion gallons of ethanol from these sources (we’re not even close), the 15 billion gallons from corn still would amount to twice what we are already committed under the current renewable-fuels standard. Can anyone doubt that food prices will really start to soar if the proposed new mandate becomes law? The Bush administration claims to. Agriculture secretary Mike Johanns has said he expects food prices the rise two or three percent every year, or roughly in step with inflation.
“Not everyone is so circumspect when it comes to describing what such a proposal will do to food prices. Across the political divide, Rep. Collin Peterson (D., Minn.) seemed excited at the prospect when he told a reporter in March that, ‘frankly, we have been underpricing our food in this country.’ Peterson continued: ‘What this fuel thing is going to do is cause us to re-price our food to some extent. So consumers are going to pay more, and in my opinion, they should be.’
“That’s honesty for you. The question is whether those higher prices are worth it. After all of the mandates and artificially increased demand and the government subsidies, will this plan substantially provide for American energy security? Doubtful. A 20-percent reduction in gasoline consumption, even if it could be achieved (a very big ‘if’), would still leave us looking to oil for the bulk of our transportation fuels. That hardly sounds like directions to fundamentally curb appetites for a product President Bush condemns for its alleged addictiveness. Whether we hit the president’s 20-in-10 goal or not, we’ll be relying on oil — from the Middle East and elsewhere — for as long as anyone can legitimately guess.”
And Kimberley Strassel noted in the editorial pages of Friday’s Wall Street Journal that, “Things are even hotter in Washington, where lobbying groups are firming up their positions against corn ethanol. The hugely influential National Cattlemen’s Beef Association has gone so far as to outline a series of public demands, including an end to any government tax credits (subsidies) for ethanol and an axe to the import tariff on foreign ethanol. Put another way, the cattlemen are so angry that they are demanding free markets and free trade — a first. Maybe ethanol really is a miracle fuel. In any event, expect the ethanol call to get harder for Plains state senators such as Max Baucus, Ben Nelson and Byron Dorgan.
“The National Turkey Federation estimates its feed costs have gone up nearly $600 million annually and is surely letting loose on members from turkey states such as Minnesota and Missouri. The National Chicken Council, which represents companies that produce, process and market chickens, has been hitting the southern political caucus, putting pressure on senators from big poultry states such as Georgia, Arkansas and Alabama. Chicken giant Tyson’s, the second largest employer in Arkansas (after Wal-Mart), even felt the need to warn about the effect of rising corn prices on its business in its first quarter earnings statement. Food and drink manufacturers, which rely heavily on corn and corn syrup for their products, are also making the Washington rounds. The Grocery Manufacturers Association this week called for Congress to undertake a study before it imposed a bigger ethanol mandate. Soft-drink companies such as Coca-Cola (of Mr. Chambliss’s Georgia) are also up in arms.
“From the other side, green groups are grousing about the environmental consequences of intensive corn farming. International aid organizations are complaining that ethanol is raising the overall cost of food and diverting grain from poor countries. Ducks Unlimited, part of Washington’s ‘hooks and bullets’ conservation lobby, sported a recent article in its magazine complaining that farmers are taking idle land out of conservation programs — land currently home to ducks — and using it for corn farming again.
“All this pressure is beginning to hit home. Ethanol isn’t going away anytime soon; you can’t unring a bill. But senators are said to be readying amendments to offer to the new ethanol bill that would use triggers or waivers to further water down the corn element. Turns out there are huge economic consequences to Congress micromanaging energy policy, and all to aid its campaign donors in agribusiness. A lesson the U.S. is now learning the hard way.”
-Keith Good
