Study: More ethanol means higher food, crop prices
July 01, 2007
by Meyer Sosland
A new study from researchers at Iowa State University (ISU), Ames, Iowa, U.S., say increasing ethanol production could lead to higher maize (corn) prices and consequently higher retail food prices in the United States.
The study, "Emerging Biofuels: Outlook of Effects on U.S. Grain, Oilseed, and Livestock Markets," was released in May by researchers from ISU’s Center for Agricultural and Rural Development. It examined how large the biofuels sector in the U.S. could become and the likely impact it would have on crop markets, trade and on wholesale and retail livestock markets.
The study was funded by the National Grain and Feed Association, American Meat Institute, Grocery Manufacturers Association/Food Products Association,
National Cattlemen’s Beef Association, National Chicken Council, National Pork Producers Council, National Oilseed Processors Association, National Turkey Federation and the North American Millers’ Association.
Researchers said with current federal ethanol policy and projections of crude oil prices, U.S. ethanol production from maize could reach 14.8 billion gallons (56 billion liters) by 2011. This could increase to 30 billion gallons under a scenario examined in the study in which crude oil prices increase U.S.$10 to a range of $65 to $70 per barrel.
Such an expansion would increase maize prices to $4.40 per bushel and push food prices to more than 1.1% higher than baseline levels, the study said.
Two additional scenarios were examined: A drought combined with an ethanol mandate; and removal of land from the Conservation Reserve Program (CRP). Researchers also said that cellulosic ethanol was not economically viable under any of the scenarios examined in the study.
RISING FOOD COSTS Ethanol production of 14.8 billion gallons would require maize acreage of 94 million acres. Average maize prices are projected to reach $3.40 per bushel. Most of the increased maize acreage will come from soybean acres, which are projected to decline 69 million acres.
In response to higher feed prices, livestock producers are assumed to reduce production to allow their higher production costs to be passed onto consumers. Researchers said retail food prices have increased $47 per person as a result of maize prices increasing by $1.50 per bushel since mid-2006.
The baseline projections have several key assumptions including:
• no impact on trend yields from changes in planted acreage; no impact on meat quality from the feeding of distillers grains at less than maximum inclusion rates;
• all potential bottlenecks involved in transporting ethanol, distillers grains, maize and fertilizer are solved;
• cellulosic ethanol is not competitive under current policy incentives;
• livestock feeders respond to permanent feed cost increases to a greater degree than temporary feed cost increases;
• only direct food price increases caused by increased feed costs are accounted for.
With higher crude oil prices and consequently increased ethanol production, U.S. maize acreage would increase to more than 110 million acres at the expense of soybean and wheat acreage. Maize prices would increase to more than $4.40 per bushel. Higher feed costs would cause food prices to increase 1.1%. Beef, pork and poultry prices would increase more than 4%, and egg prices would increase by about 8%.
There is uncertainty over how high maize prices would have to go to sustain the 110 million acres needed. The uncertainty is due to the fact prices of competing crops would be expected to increase dramatically to vie for acreage. Additionally, the U.S. has never experienced the market impacts of such a large, permanent maize price increase. If maize prices increase greater than anticipated, the retail cost impact on meat, milk and eggs also would be greater.
Increased use of maize would have ripple effects throughout world commodity markets, the study found. About 15% of total world wheat and coarse grain production would be used for ethanol production. Canadian feed barley prices would increase by 26% and world soybean prices would increase by 22%. U.S. domestic wheat prices are projected to increase by 23%, Australian wheat prices by 16% and E.U. wheat prices by 7%.
Taking 7 million acres out of the CRP would lower crop prices in the short run, the study said. The lower prices could alleviate some of the financial stress on livestock producers. But it does not have a significant impact on the long-run, break-even price of maize for use in ethanol facilities. The impact on livestock and retail meat prices will be small relative to the baseline in the long run.
A drought combined with a large mandate for ethanol production would sharply increase crop prices. Maize would increase to $4.75 per bushel, a 42% increase from the baseline. Soybean prices would increase 22% to $8.50 per bushel. U.S. maize exports and U.S. maize stocks would decrease by more than 60%.
Livestock producers would respond with moderate cuts in production because they would anticipate that the increased feed costs would be temporary, the study said. Without a high biofuels mandate, the market more easily adjusts to shortsupply situations because ethanol producers will also reduce maize usage.
OTHER FINDINGS Researchers said cellulosic ethanol made from switchgrass and biodiesel
made from soybeans are not economically viable in the major maize-producing areas of the U.S. in any of the scenarios. High energy costs that increase the prices of biodiesel and switchgrass ethanol also increase the cost of maizebased ethanol. As long as there is a choice between switchgrass, soybeans and maize, producers will choose maize, the study said.
Maize stover and switchgrass are not likely to come into widespread use, the study found, because of conversion, handling, logistics and capital costs and constraints. Switchgrass would only make economical sense if it receives an additional subsidy that is not given to maize-based ethanol. The federal government would have to provide $270 per acre in subsidies for biomass production to entice producers to switch from maize to switchgrass production.
The study also examined the ethanol import tariff and said eliminating it would not result in large quantities of U.S. imports of foreign-produced ethanol. Ethanol imports would increase 136%, but the volume increase would be modest from the current 314 million gallons (1.2 billion liters) to 743 million gallons (2.8 billion liters).
Ethanol imports could play a bigger role in attenuating the negative impact of short crops under an ethanol mandate because blenders could source ethanol more cheaply abroad.
A copy of the study is available at www.card.iastate.edu/publications/ DBS/PDFFiles/07sr101.pdf WG
Susan Reidy is editor of World Grain’s Biofuels Business. She can be reached at firstname.lastname@example.org.