« 110 Mgy Red Rock Renewable plant approved in Iowa India’s Finance Minister condemns ethanol policies of West as “outrageous”; Petroleum Minister announces doubling of Indian ethanol content requirment » US corn exports rose 6 percent in 2007; $3 billion ethanol subsidy reduced crop support payments $6 billion, reduced US trade deficit more than $20 billion
The Ethanol Promotion and Information Council responded to a recent report that US ethanol production had led to Haitian villagers being forced to eat mud pie.
In its response, EPIC noted that US corn exports in 2007-08 market year were 2.25 billion bushels, 6 percent more than in 2006-07 and the highest since 1990, and that the largest increase in sales went to Mexico, “one of the very nations that we are supposedly starving to death.”
EPIC also noted that US ethanol subsidies, totaling $3 billion, have resulted in a $6 billion reduction in crop price supports and a $15 billion drop in US oil imports. EPIC said that the true reason for rising food prices was rising labor, packaging and fuel costs, and rising wealth and demand from China and India.
The Agriculture Department will release its projection of acres planted later this month, while Chicago grain trader Dan Brophy told the Chicago Tribune, “personally, I don’t think there are enough acres to satisfy the demand in all these commodities”. The US Agriculture Department projected farm-grown exports at $101 billion in the 2008 fiscal year, a 23 percent increase over 2007 that would result in a $24.5 billion agricultural trade surplus. The trade balance has improved $10 billion since November, despite a falling dollar. However, the American Bakers Association warned that wheat reserves fell to a 27 day supply, compared to the historic average of 90 days.
In Washington, John Podesta, CEO of the Center of American Progress, said that fossil fuels account for two-thirds of the cost of producing and transporting grains, and blamed the 129 percent increase in fuel costs for the increase in food prices.
Lester Brown, director of the two-thirds of the Earth Policy Institute, recently wrote that ethanol grain usage has increased 27 million tons between 2006 and 2007. However, the chief scientist at BP said that crop prices have been rising because the emerging world is consuming more food, noting food grains demand increased by 28 million tons, and that ethanol uses only 4 percent of world grain production.
Crop failures in the Ukraine and Australia, as well as yield problems in China, have exacerbated the situation. Professor Garth Taylor, of the University of Idaho, identified Brazilian, Argentine and Australian droughts as well as increased Third World demand for the run-up in prices. He also said that the weak dollar, US drought risk, low interest rates and the unsigned Farm Bill have impacted prices.
In Mexico, as many as 100,000 farmers took to the streets in Mexico City to protest the end of corn tariffs, saying that the United States would put Mexican corn out of business. On January 1, tariffs on sugar, milk, beans and corn were eliminated under the NAFTA agreement. The US sugar industry and Mexican corn industry are considered to face the greatest risk from this round of tariff eliminations. Last year, food riots erupted in Mexico over the rising price of white corn, which is produced primarily by Mexican producers for the domestic market. Last year’s protests in Mexico sparked the “food vs. fuel” debate over ethanol.
Corn futures at the Chicago Board of Trade have increased to $5 per bushel, prompting expectations of another big spring planting of corn. Last year, farmers planted record acreages of corn and produced a record 13.074 billion bushel corn crop. Despite the record production, reserve corn stocks only increased from 1.3 billion to 1.4 billion bushels, owning to strong ethanol producer demand as well as 2.45 billion bushels in export sales.
Providing more background to the reserve stock shortages, the International Food Policy Research Institute recently released a report saying that the world is eating more food than it produces, and that biofuel production runs the risk of creating social unrest. The report projected a 66 percent increase in the price of corn and a 50 percent increase in oilseed prices by 2020, attributed to biofuel production. The report also said that global cereal stocks have fallen to their lowest levels in more than 15 years.
Summary: Thanks to high oil prices and hefty subsidies, corn-based ethanol is now all the rage in the United States. But it takes so much supply to keep ethanol production going that the price of corn -- and those of other food staples -- is shooting up around the world. To stop this trend, and prevent even more people from going hungry, Washington must conserve more and diversify ethanol's production inputs.
C. Ford Runge is Distinguished McKnight University Professor of Applied Economics and Law and Director of the Center for International Food and Agricultural Policy at the University of Minnesota. Benjamin Senauer is Professor of Applied Economics and Co-director of the Food Industry Center at the University of Minnesota. Of Related Interest
* Topics: Energy, resources, and environment U.S. policy and politics * Food for Fuel?
By Tom Daschle, C. Ford Runge, and Benjamin Senauer
Foreign Affairs, September/October 2007
THE ETHANOL BUBBLE
In 1974, as the United States was reeling from the oil embargo imposed by the Organization of Petroleum Exporting Countries, Congress took the first of many legislative steps to promote ethanol made from corn as an alternative fuel. On April 18, 1977, amid mounting calls for energy independence, President Jimmy Carter donned his cardigan sweater and appeared on television to tell Americans that balancing energy demands with available domestic resources would be an effort the "moral equivalent of war." The gradual phaseout of lead in the 1970s and 1980s provided an additional boost to the fledgling ethanol industry. (Lead, a toxic substance, is a performance enhancer when added to gasoline, and it was partly replaced by ethanol.) A series of tax breaks and subsidies also helped. In spite of these measures, with each passing year the United States became more dependent on imported petroleum, and ethanol remained marginal at best.
Now, thanks to a combination of high oil prices and even more generous government subsidies, corn-based ethanol has become the rage. There were 110 ethanol refineries in operation in the United States at the end of 2006, according to the Renewable Fuels Association. Many were being expanded, and another 73 were under construction. When these projects are completed, by the end of 2008, the United States' ethanol production capacity will reach an estimated 11.4 billion gallons per year. In his latest State of the Union address, President George W. Bush called on the country to produce 35 billion gallons of renewable fuel a year by 2017, nearly five times the level currently mandated.
The push for ethanol and other biofuels has spawned an industry that depends on billions of dollars of taxpayer subsidies, and not only in the United States. In 2005, global ethanol production was 9.66 billion gallons, of which Brazil produced 45.2 percent (from sugar cane) and the United States 44.5 percent (from corn). Global production of biodiesel (most of it in Europe), made from oilseeds, was almost one billion gallons.
The industry's growth has meant that a larger and larger share of corn production is being used to feed the huge mills that produce ethanol. According to some estimates, ethanol plants will burn up to half of U.S. domestic corn supplies within a few years. Ethanol demand will bring 2007 inventories of corn to their lowest levels since 1995 (a drought year), even though 2006 yielded the third-largest corn crop on record. Iowa may soon become a net corn importer.
The enormous volume of corn required by the ethanol industry is sending shock waves through the food system. (The United States accounts for some 40 percent of the world's total corn production and over half of all corn exports.) In March 2007, corn futures rose to over $4.38 a bushel, the highest level in ten years. Wheat and rice prices have also surged to decade highs, because even as those grains are increasingly being used as substitutes for corn, farmers are planting more acres with corn and fewer acres with other crops.
This might sound like nirvana to corn producers, but it is hardly that for consumers, especially in poor developing countries, who will be hit with a double shock if both food prices and oil prices stay high. The World Bank has estimated that in 2001, 2.7 billion people in the world were living on the equivalent of less than $2 a day; to them, even marginal increases in the cost of staple grains could be devastating. Filling the 25-gallon tank of an SUV with pure ethanol requires over 450 pounds of corn -- which contains enough calories to feed one person for a year. By putting pressure on global supplies of edible crops, the surge in ethanol production will translate into higher prices for both processed and staple foods around the world. Biofuels have tied oil and food prices together in ways that could profoundly upset the relationships between food producers, consumers, and nations in the years ahead, with potentially devastating implications for both global poverty and food security.
THE OIL AND BIOFUEL ECONOMY
In the United States and other large economies, the ethanol industry is artificially buoyed by government subsidies, minimum production levels, and tax credits. High oil prices over the past few years have made ethanol naturally competitive, but the U.S. government continues to heavily subsidize corn farmers and ethanol producers. Direct corn subsidies equaled $8.9 billion in 2005. Although these payments will fall in 2006 and 2007 because of high corn prices, they may soon be dwarfed by the panoply of tax credits, grants, and government loans included in energy legislation passed in 2005 and in a pending farm bill designed to support ethanol producers. The federal government already grants ethanol blenders a tax allowance of 51 cents per gallon of ethanol they make, and many states pay out additional subsidies.
Consumption of ethanol in the United States was expected to reach over 6 billion gallons in 2006. (Consumption of biodiesel was expected to be about 250 million gallons.) In 2005, the U.S. government mandated the use of 7.5 billion gallons of biofuels per year by 2012; in early 2007, 37 governors proposed raising that figure to 12 billion gallons by 2010; and last January, President Bush raised it further, to 35 billion gallons by 2017. Six billion gallons of ethanol are needed every year to replace the fuel additive known as MTBE, which is being phased out due to its polluting effects on ground water.
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