Expanding US ethanol market provokes food price surge - report

Citizens in the United States are paying a very heavy price for their locally produced, inefficient biofuels: first they spend billions on subsidies that are handed out to a select group of corn farmers and corn ethanol producers who produce a fuel that is energy inefficient and that does not help mitigate climate change. Then, to make things worse, they have to incur rising food prices because of the expansion of this industry.

All the while, they are being denied access to biofuels that are competitive and that effectively help reduce climate change. The US denies its citizens this access by imposing tariffs on efficiently produced imported ethanol. The question is: how much longer will Americans accept this state of affairs?

Maybe they will start to question things when they read that soaring corn prices due to the expanding US ethanol market have already driven US retail food prices up by US$14 billion over the last year. The Iowa State University Center for Agriculture and Rural Development calculated this in its study "Emerging Biofuels: Outlook of Effects on US Grain, Oilseed, and Livestock Markets" [*.pdf]. The report's outlook for US food prices is bleak. It confirms that greater US ethanol production will mean more competition for land and grain, and will subsequently cause long-run crop price increases.

The report suggests that this rise in US retail food prices is likely to get worse and that they could be pushed even higher - to an annual increase of US$20 billion. Crude oil prices could increase from US$65 to US$70 per barrel and US corn prices to US$4.42 per bushel, compared to US$2 per bushel in mid-August 2006. In response to higher feed costs, livestock farmgate prices and therefore retail prices for meat, eggs and dairy will also increase (graph, click to enlarge).

The magnitude of US ethanol market will depend on the price of oil - which is unlikely to decrease much from current levels - and the future makeup of the US automobile fleet. If Americans show sufficient demand for E-85 (a fuel that typically contains a mixture of up to 85 percent ethanol and 15 percent gasoline), corn-based ethanol production will increase to over 30 billion gallons per year, claims the study.

This would cause the US corn acreage to increase to more than 110 million acres, largely at the expense of soybean and wheat acres. Equilibrium corn prices would then rise to more than US$4.40 per bushel:
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The direct effect of higher feed costs would be to push up beef, pork and poultry prices by more than 4 percent, and to send egg prices rocketing by about 8 percent.

Corn will remain the primary raw material for biofuels in the Corn Belt, ahead of cellulosic ethanol from switchgrass and biodiesel from soybeans, because these crops are less economically viable, says the study.

The Grocery Manufacturers Association (GMA) recently urged a full report into the effect the growing use of corn for biofuels could have on the US food industry.

"We support policies that will permit an increase in biofuels production without hampering the ability of the food industry to provide consumers - both in the US and around the world - with a reliable and affordable supply of food," said Cal Dooley, GMA president and chief executive officer.

US President George Bush earlier this month signed an executive order directing federal agencies to draw up regulations that will "cut gasoline consumption and greenhouse gas emissions from motor vehicles".

These regulations, which he wants in place by the end of 2008, are expected to boost domestic ethanol production and could cause food prices to rise even higher than current forecasts.

Americans need a 'biopact'
There is only one alternative to the dreadful evolution of the U.S. biofuel market: to demand lower subsidies for corn growers, and to reduce or lift the trade barriers imposed on imported ethanol.

Biofuels produced in the subtropics and the tropics - like sugarcane ethanol - have a much better energy balance as well as a stronger greenhouse gas (GHG) reduction balance. This means that their use is energy efficient and helps fight climate change. This cannot be said of corn based ethanol, which, some scientists found, takes almost as much energy to make, as you get out of it. Its GHG balance is very weak as well.

By allowing biofuels from the South to be imported, American citizens can both enjoy lower fuel prices (sugar cane ethanol is competitive with oil at around US$35-40 per barrel), as well as lower food prices. Moreover, they would be helping farmers in the South, and would indirectly help alleviate poverty in the developing world.

At the Biopact, we understand that such a scenario is wishful thinking, because the corn lobby in the U.S. is extremely powerful. But still, the message must be repeated, so that eventually change becomes possible. It's in the hands of the American electorate. But voters should not feel alone: they are being supported by a small but growing group of law makers and politicians with green credentials, who are in favor of the abandonment of the tariff. Amongst them are Governor Arnold Schwarzenegger, Senator Richard Lugar, and former Governor Jeb Bush.

More information:
Simla Tokgoz, et al., Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets, Staff Report 07-SR 101, Center for Agricultural and Rural Development Iowa State University, May 2007.