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BEST-L  January 2007

BEST-L January 2007

Subject:

World May Be Facing Highest Grain Prices in History

From:

Steve Humphrey <[log in to unmask]>

Reply-To:

Steve Humphrey <[log in to unmask]>

Date:

Fri, 5 Jan 2007 12:55:06 -0500

Content-Type:

text/plain

Parts/Attachments:

Parts/Attachments

text/plain (154 lines)

See appended news story from ENN.com
 

Dr. Stephen R. Humphrey, Director of Academic Programs, 
School of Natural Resources and Environment, 
Box 116455, 103 Black Hall, University of Florida 
Gainesville, FL  32611-6455  USA 
Tel. 352-392-9230, Fax 352-392-9748 
 <http://snre.ufl.edu/> http://snre.ufl.edu 

World May Be Facing Highest Grain Prices in History

January 05, 2007 - By Lester R. Brown, Earth Policy Institute 

Investment in fuel ethanol distilleries has soared since the late-2005 oil
price hikes, but data collection in this fast-changing sector has fallen
behind. Because of inadequate data collection on the number of new plants
under construction, the quantity of grain that will be needed for fuel
ethanol distilleries has been vastly understated. Farmers, feeders, food
processors, ethanol investors, and grain-importing countries are basing
decisions on incomplete data. 

The U.S. Department of Agriculture (USDA) projects that distilleries will
require only 60 million tons of corn from the 2008 harvest. But here at the
Earth Policy Institute (EPI), we estimate that distilleries will need 139
million tons-more than twice as much. If the EPI estimate is at all close to
the mark, the emerging competition between cars and people for grain will
likely drive world grain prices to levels never seen before. The key
questions are: How high will grain prices rise? When will the crunch come?
And what will be the worldwide effect of rising food prices? 

One reason for the low USDA projection is that it was released in February
2006, well before the effect of surging oil prices on investment in fuel
ethanol distilleries was fully apparent. Beyond this, USDA relies heavily on
the Renewable Fuels Association (RFA), a trade group, for data on ethanol
distilleries under construction, but the RFA data have lagged behind
movement in the industry. 

We drew on four firms that collect and publish data on U.S. ethanol
distilleries under construction. RFA is the one most frequently cited. The
other three firms are Europe-based F.O. Licht, the publisher of World
Ethanol and Biofuels Report; BBI International, which publishes Ethanol
Producer Magazine; and the American Coalition for Ethanol (ACE), publisher
of Ethanol Today. 

Unfortunately, the lists of plants under construction maintained by RFA,
BBI, and ACE are not complete. Each contains some plants that are not on the
other lists. Drawing on these three lists and on biweekly reports from F.O.
Licht, EPI has compiled a more complete master list. For example, while we
show 79 plants under construction, RFA lists 62 plants. (We welcome any
information that will improve this list, which can be viewed at
www.earthpolicy.org/Updates/2007/Update63.htm.) 

According to the EPI compilation, the 116 plants in production on December
31, 2006, were using 53 million tons of grain per year, while the 79 plants
under construction-mostly larger facilities-will use 51 million tons of
grain when they come online. Expansions of 11 existing plants will use
another 8 million tons of grain (1 ton of corn = 39.4 bushels = 110 gallons
of ethanol). 

In addition, easily 200 ethanol plants were in the planning stage at the end
of 2006. If these translate into construction starts between January 1 and
June 30, 2007, at the same rate that plants did during the final six months
of 2006, then an additional 3 billion gallons of capacity requiring 27
million more tons of grain will likely come online by September 1, 2008, the
start of the 2008 harvest year. This raises the corn needed for distilleries
to 139 million tons, half the 2008 harvest projected by USDA. This would
yield nearly 15 billion gallons of ethanol, satisfying 6 percent of U.S.
auto fuel needs. (And this estimate does not include any plants started
after June 30, 2007, that would be finished in time to draw on the 2008
harvest.) 

This unprecedented diversion of the world's leading grain crop to the
production of fuel will affect food prices everywhere. As the world corn
price rises, so too do those of wheat and rice, both because of consumer
substitution among grains and because the crops compete for land. Both corn
and wheat futures were already trading at 10-year highs in late 2006. 

The U.S. corn crop, accounting for 40 percent of the global harvest and
supplying 70 percent of the world's corn exports, looms large in the world
food economy. Annual U.S. corn exports of some 55 million tons account for
nearly one fourth of world grain exports. The corn harvest of Iowa alone,
which edges out Illinois as the leading producer, exceeds the entire grain
harvest of Canada. Substantially reducing this export flow would send shock
waves throughout the world economy. 

Robert Wisner, Iowa State University economist, reports that Iowa's demand
for corn from processing plants that were on line, expanding, under
construction, or being planned as of late 2006 totaled 2.7 billion bushels.
Yet even in a good year the state harvests only 2.2 billion bushels. As
distilleries compete with feeders for grain, Iowa could become a corn
importer. 

With corn supplies tightening fast, rising prices will affect not only
products made directly from corn, such as breakfast cereals, but also those
produced using corn, including milk, eggs, cheese, butter, poultry, pork,
beef, yogurt, and ice cream. The risk is that soaring food prices could
generate a consumer backlash against the fuel ethanol industry. 

Fuel ethanol proponents point out, and rightly so, that the use of corn to
produce ethanol is not a total loss to the food economy because 30 percent
of the corn is recovered in distillers dried grains that can be fed to beef
and dairy cattle, pigs, and chickens, though only in limited amounts. They
also argue that the U.S. distillery demand for corn can be met by expanding
land in corn, mostly at the expense of soybeans, and by raising yields.
While it is true that the corn crop can be expanded, there is no precedent
for growth on the scale needed. And this soaring demand for corn comes when
world grain production has fallen below consumption in six of the last seven
years, dropping grain stocks to their lowest level in 34 years. 

From an agricultural vantage point, the automotive demand for fuel is
insatiable. The grain it takes to fill a 25-gallon tank with ethanol just
once will feed one person for a whole year. Converting the entire U.S. grain
harvest to ethanol would satisfy only 16 percent of U.S. auto fuel needs. 

The competition for grain between the world's 800 million motorists who want
to maintain their mobility and its 2 billion poorest people who are simply
trying to survive is emerging as an epic issue. Soaring food prices could
lead to urban food riots in scores of lower-income countries that rely on
grain imports, such as Indonesia, Egypt, Algeria, Nigeria, and Mexico. The
resulting political instability could in turn disrupt global economic
progress, directly affecting all countries. It is not only food prices that
are at stake, but trends in the Nikkei Index and the Dow Jones Industrials
as well. 

There are alternatives to creating a crop-based automotive fuel economy. The
equivalent of the 2 percent of U.S. automotive fuel supplies now coming from
ethanol could be achieved several times over, and at a fraction of the cost,
by raising auto fuel efficiency standards by 20 percent. 

If we shift to gas-electric hybrid plug-in cars over the next decade, we
could be doing short-distance driving, such as the daily commute or grocery
shopping, with electricity. If we then invested in thousands of wind farms
to feed cheap electricity into the grid, U.S. cars could run primarily on
wind energy-and at the gasoline equivalent of less than $1 a gallon. The
stage is set for a crash program to help Detroit switch to gas-electric
hybrid plug-in cars. 

It is time for a moratorium on the licensing of new distilleries, a
time-out, while we catch our breath and decide how much corn can be used for
ethanol without dramatically raising food prices. The policy goal should be
to use just enough fuel ethanol to support corn prices and farm incomes but
not so much that it disrupts the world food economy. Meanwhile, a much
greater effort is needed to produce ethanol from cellulosic sources such as
switchgrass, a feedstock that is not used for food. 

The world desperately needs a strategy to deal with the emerging food-fuel
battle. As the leading grain producer, grain exporter, and ethanol producer,
the United States is in the driver's seat. We need to make sure that in
trying to solve one problem-our dependence on imported oil-we do not create
a far more serious one: chaos in the world food economy. 

Lester R. Brown is President of the Earth Policy Institute and author of
Plan B 2.0: Rescuing a Planet Under Stress and A Civilization in Trouble. 

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