Food versus fuel debate wages on

by World Grain Staff
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With ethanol demand for maize continuing to climb, agricultural leaders must prepare for a new frontier in grain prices

by Susan Reidy

With some analysts forecasting U.S. grain-based ethanol production to reach 9 billion gallons in 2007, other agriculture-related industries are concerned what that increase has done and will continue to do to the cost and supply of raw materials such as corn (maize) and wheat.

The so-called food versus fuel debate flared several months ago and shows no sign of subsiding. In fact, panelists at the American Society of Baking’s Baking-Tech 2007 conference last month in Chicago, Illinois, U.S. agreed that the debate is sure to continue for many more years. To that end, governments and agriculture leaders are preparing for what is turning into a new frontier for grain prices.

Ethanol production’s sudden upward trajectory has fueled the food versus fuel debate, said Scott Richman, senior vice-president, Informa Economics. In the years following the 1996 Farm Bill, corn prices were bumping along at low levels and the U.S. was accused of encouraging overproduction. At the same time, energy prices started rising. Several pro-ethanol events, including the banning of MTBE, an extension of the ethanol excise tax incentive, and passage of the comprehensive energy bill, pushed ethanol production.

As a result, ethanol is enjoying its most stable policy environment since the modern era began in the 1970s, Richman said. Moderate corn prices and high energy prices provided the perfect environment for ethanol production to grow. But now corn prices have doubled and ethanol production is expected to continue its rapid growth.

"People extrapolate that and say that must mean there will be continued pressure on corn prices," Richman said.

Several factors have contributed to rising costs of corn, he said. For one, despite knowing last year that the ethanol industry was growing, farmers were given signals to plant more soybeans. As a result, farmers planted 4 million fewer corn acres in 2006-07 for a total of 78 million. Maize production fell from 11.1 billion bushels in 2005 to 10.5 billion bushels in 2006.

"It’s not yet a situation where we’re struggling to produce more corn to meet ethanol production. Rather the signals have not been adequate to meet this train coming down the track," Richman said.

Export demand has increased, similar to 1995-96, which also was a modest crop year. Additionally, hedge funds and other speculative interests have jumped into the market and will push it as far in one direction as it will move. Lastly, world wheat supplies are tight.

U.S. corn is used for domestic food purposes, but its top uses are for feed and exports. Increased corn costs will have

the biggest impact on the price of meat, where material costs are more significant than value-added expenses. In contrast, material costs for bakeries and tortilla manufacturers are much less than valueadded expenses such as marketing. This provides a shock absorber in terms of the retail price consumers are charged, Richman said.

"It’s a little bit of a balancing act," he said. "Is corn-for-ethanol driving up food prices, and is it driving down fuel prices to the same extent? Or are both bit players in both markets."

In Mexico, corn tortilla prices doubled in less than three months, said Daniel Servitje, chief executive officer of Grupo Bimbo. Tortillas are a main staple in the Mexican diet, and for low-income consumers the cost of tortillas represent onethird of the minimum daily wage.

"We have to find a way to cushion the impact of these food staples, especially in countries like ours that are less developed," Servitje said.

The government and industry also need to understand the short- and longterm implications of this trend, he said, and spend time and resources to educate the different groups, especially consumers.

U.S. wheat production is also being impacted by increasing ethanol output and corn prices. Even though the hard wheat crop is projected to hit 1 billion bushels, prices are not falling due to the significant rise in corn prices, said Hayden Wands, director of procurement for Sara Lee.

A majority of the U.S.’s ethanol plants are located in the largest corn-producing states, which also have significant wheat production. Wands said because of corn prices, some wheat acres are going to be lost to maize. Spring wheat acres are expected to decrease between 8% and 10% this year and reductions in hard wheat plantings are expected next year.

The seven largest ethanol producing states (Iowa, Illinois, Nebraska, Minnesota, South Dakota, Wisconsin and Kansas) produce 8.3 billion bushels of corn and use 1.7 billion for ethanol. They produce 85% of the country’s ethanol and are expected to see an 82% increase in corn demand for ethanol in 2008-09. Wands noted that this is going to change the flow of grain in these states, which traditionally have been grain exporters but now could become importers.

"There’s going to be huge demand on truck freight going to these new facilities," Wands said. "We could have a freight shortage when it comes to landbased haulers."

This year, corn plantings in the U.S. are expected to increase to 87 million acres, with an anticipated crop of 12.3 billion bushels, Richman said. Fuel ethanol is expected to use 1 billion more bushels this year.

However, the U.S. will barely be able to grow its inventory. The stocks-to-use ratio at the end of 2005-06 was equal to 17% of corn usage in the previous year. This year, it’s expected to be down to 9%. Yield improvements and the ability to increase corn acres to 90 million will help build inventories slowly.

By 2015, it’s expected that 15 billion gallons of ethanol will be produced from corn. By that time, the gasoline market is going to be 150 billion gallons.

"Even those promoting the use of corn to produce ethanol don’t think we can get to where we’re substituting U.S. gasoline supplies through the use of corn," Richman said.

The big question is how soon will cellulosic ethanol become commercially viable? Richman said the best-case scenario is five years. It’s likely the first facilities will be added on to existing grain-based ethanol and will use things such as stover (the leaves and stalks left in the field after maize is harvested).

"We’re going to be having the food versus fuel debate over the next decade, because it’s going to continue to be a cornbased industry," Richman said. "The risk premium out there right now is going to continue to be significant."