Monday, March 26, 2007

Corn To Ethanol Equals Rising Food Prices

Mar 21: The latest EcoEconomy Update from Lester Brown and the Earth Policy Institute warns that the massive diversion of U.S. grain to fuel cars is raising world food prices. The Update indicates that The escalating share of the U.S. grain harvest going to ethanol distilleries is driving up food prices worldwide. Corn prices have doubled over the last year, wheat futures are trading at their highest level in 10 years, and rice prices are rising too. In addition, soybean futures have risen by half. A Bloomberg analysis notes that the soaring use of corn as the feedstock for fuel ethanol “is creating unintended consequences throughout the global food chain.”

The countries initially hit by rising food prices are those where corn is the staple food. In Mexico, one of more than 20 countries with a corn-based diet, the price of tortillas is up by 60 percent. Angry Mexicans in crowds of up to 75,000 have taken to the streets in protest, forcing the government to institute price controls on tortillas. Food prices are also rising in China, India, and the United States, countries that contain 40 percent of the world’s people. In the United States, the U.S. Department of Agriculture projects that the wholesale price of chicken in 2007 will be 10 percent higher on average than in 2006, the price of a dozen eggs will be up a whopping 21 percent, and milk will be 14 percent higher. And this is only the beginning.

The food and energy economies, historically separate, are now merging. In this new economy, if the fuel value of grain exceeds its food value, the market will move it into the energy economy. As the price of oil climbs so will the price of food. Some 16 percent of the 2006 U.S. grain harvest was used to produce ethanol. With 80 or so ethanol distilleries now under construction, enough to more than double existing ethanol production capacity, nearly a third of the 2008 grain harvest will be going to ethanol. Since the United States is the leading exporter of grain, shipping more than Canada, Australia, and Argentina combined, what happens to the U.S. grain crop affects the entire world.

The Update indicates that against this backdrop, Washington is consumed with “ethanol euphoria.” President Bush in his State of the Union address set a production goal for 2017 of 35 billion gallons of alternative fuels, including grain-based and cellulosic ethanol, and liquefied coal. Given the current difficulties in producing cellulosic ethanol at a competitive cost and given the mounting public opposition to liquefied coal, which is far more carbon-intensive than gasoline, most of the fuel to meet this goal might well have to come from grain. This could take most of the U.S. grain harvest, leaving little grain to meet U.S. needs, much less those of the hundred or so countries that import grain.

Brown says there are alternatives to this grim scenario. A rise in auto fuel efficiency standards of 20 percent, phased in over the next decade would save as much oil as converting the entire U.S. grain harvest into ethanol. One option that is gaining momentum is a shift to plug-in hybrids. Adding a second storage battery to a gas-electric hybrid car along with a plug-in capacity so that the batteries can be recharged at night allows most short-distance driving. He notes that encouragingly, three auto manufacturers—Toyota, Nissan, and GM -- have announced plans to bring plug-in hybrid cars to market.

He concludes, "Ethanol euphoria is not an acceptable substitute for a carefully thought through policy. For Washington, it is time to decide whether to continue with the current policy of subsidizing more and more grain-based fuel distilleries or to encourage a shift to more fuel-efficient cars and a new automotive fuel economy centered on plug-in hybrid cars and wind energy."

In January Brown reported that the distillery demand for grain to fuel cars is "vastly underestimated" and the world may be facing the highest grain prices in history [
See WIMS 1/17/07].

Access the complete EcoEconomy Update (
click here). [*Energy]