Looks like a good follow-up to trying to figure out the ethanol thing…
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Ethanol Demand in U.S. Adds to Food, Fertilizer Costs (Update3)
By Alan Bjerga
Feb. 21 (Bloomberg) — U.S. plans to replace 15 percent of gasoline consumption with crop-based fuels including ethanol are already leading to some unintended consequences as food prices and fertilizer costs increase.
About 33 percent of U.S. corn will be used for fuel during the next decade, up from 11 percent in 2002, the Agriculture Department estimates. Corn rose 20 percent to a record on the Chicago Board of Trade since Dec. 19, the day President George W. Bush signed a law requiring a fivefold jump in renewable fuels by 2022.
Increased demand for the grain helped boost food prices by 4.9 percent last year, the most since 1990, and will reduce global inventories of corn to the lowest in 24 years, government data show. While advocates say ethanol is cleaner than gasoline, a Princeton University study this month said it causes more environmental harm than fossil fuels.
“We are mandating and subsidizing something that is distorting the marketplace,” said Cal Dooley, a former U.S. congressman from California, who represents companies including Kraft Foods Inc. and General Mills Inc. as president of the Grocery Manufacturers Association in Washington. “There are no excess commodities, and prices are rising.”
The energy bill requires the U.S. to use 36 billion gallons of renewable fuels by 2022, of which about 15 billion gallons may come from corn-based ethanol. The nation’s current production capacity is about 8.06 billion gallons.
Oil prices tripled since the end of 2003, causing the government to consider alternative fuels. Now, the competition for corn is leading to higher costs for food companies, raising prices for everything from cattle to dairy products.
Corn doubled in the past two years, touching a record $5.29 a bushel today in Chicago. The price of young cattle sold to feedlots gained 8.7 percent in the past year, reaching a record $1.1965 a pound on Sept. 6 on the Chicago Mercantile Exchange. Average whole milk rose 26 percent to $3.871 a gallon in January from a year earlier, the Department of Labor said yesterday.
“For thousands of years, humans grew food and ate it,” said Andrew Redleaf, 50, chief executive officer of Whitebox Advisors LLC, a Minneapolis hedge fund that manages $3 billion. “Now we are burning crops to make fuel.”
Whitebox bought three U.S. grain depots in the past year to profit from the growth in demand.
Farmers will have to increase planting of corn for ethanol by 43 percent to 30 million acres by 2015 to meet the government’s requirements, said Bill Nelson, a vice president at A.G. Edwards Inc. in St. Louis. This year, growers outside the Midwest are focused on more profitable crops such as soybeans and wheat, the USDA said today in a crop forecast.
Corn planting will fall 3.8 percent this year to 90 million acres as farmers sow 12 percent more land with soybeans and 6 percent more with wheat, Joe Glauber, USDA acting chief economist, said today at the department’s annual conference in Arlington, Virginia. The USDA said Feb. 8 that world corn reserves would drop for the seventh year in the past eight.
Increased planting has caused some fertilizer costs to double. Diammonium phosphate, a nutrient used on corn fields, reached $792.50 a ton on Feb. 15 from $297 a year earlier, USDA data show.
Researchers led by Timothy Searchinger at Princeton University said their study showed greenhouse-gas emissions will rise with ethanol demand. U.S. farmers will use more land for fuel, forcing poorer countries to cut down rainforests and use other undeveloped land for farms, the study said.
Searchinger’s team determined that corn-based ethanol almost doubles greenhouse-gas output over 30 years when considering land-use changes. Bob Dinneen, president of the Renewable Fuels Association in Washington, said the study used a flawed model and overestimated how much land will be needed.
Ethanol is important in reducing emissions, ending energy dependence on the Middle East and creating jobs in rural areas, Dinneen said today at the USDA conference.
“There are still some who want us to choose between food and fuel,” said Dinneen, whose organization represents ethanol producers including Archer Daniels Midland Co. “I don’t think we have to choose.” Research shows cellulosic ethanol made from grasses and crop waste may contribute 21 billion gallons by 2022, and farmers will be able to boost yields, he said.
Food Costs Rise
U.S. food costs, which account for about a fifth of the consumer-price index, rose 0.7 percent in January, the Labor Department said Feb. 20. They will increase as much as 4 percent this year, Glauber said in remarks at the forum.
“Food prices through 2010 will rise greater than the overall inflation rate,” because of rising energy and commodity costs, he said.
Ethanol’s contribution to inflation is limited, USDA economist Ephraim Leibtag said in an interview. A 50 percent jump in corn prices in 2007 from the 20-year average only added 1.6 cents to the cost of an 18-ounce box of Kellogg Co. Corn Flakes cereal, Leibtag said. The cost is less than 2 percent per box, JPMorgan Chase & Co. estimates.
Ethanol’s boom helps restrain government spending on farm subsidies, said House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat. The USDA expects taxpayers to spend $941 million on the two main subsidy programs tied to price this year, down from $9.1 billion in 2006.
For food companies, demand for ethanol translates into lower profits and job cuts.
Smithfield Foods Inc., the largest U.S. hog producer, said Feb. 19 it will cut output by as much as 1 million animals a year, or 5 percent, because feed costs are too high. The company is based in Smithfield, Virginia.
Tyson Foods Inc., the largest U.S. meat company, forecast an increase in grain costs this year of more than $500 million. Springdale, Arkansas-based Tyson also reported a 40 percent drop in first-quarter profit and said it will close a beef plant in Kansas, firing 1,800 workers.
Ethanol “has caused a domino effect,” CEO Richard L. Bond said in a statement Jan. 28. “For the foreseeable future, consumers will pay more and more for food.”
To contact the reporter on this story: Alan Bjerga in Washington at email@example.com.
Last Updated: February 21, 2008 19:32 EST