January 20, 2007

Food vs. Fuel: Over-reliance on Corn Raises Ag Prices

Lester Brown of the Earth Policy Institute is a commited advocate for "an environmentally sustainable economy. He has written a book called Plan B 2.0: Rescuing a Planet Under Stress and a Civilization in Trouble:

Sustaining our early twenty-first century global civilization now depends on shifting to a renewable energy-based, reuse/recycle economy with a diversified transport system. Business as usual—Plan A—cannot take us where we want to go. It is time for Plan B, time to build a new economy and a new world.

Plan B has three components—(1) a restructuring of the global economy so that it can sustain civilization; (2) an all-out effort to eradicate poverty, stabilize population, and restore hope in order to elicit participation of the developing countries; and (3) a systematic effort to restore natural systems.

Brown has been getting press lately for uncovering what he sees as a gross underestimation of corn demand numbers for the ethanol industry by governmental agencies.

There is clearly a major liability whenever producers or consumers shift precipitously from one energy resource to another. Just this last spring, the decision of oil producers to switch en masse from MTBE to ethanol in large measure precipitated the gasoline price spike.

Unlike Mr. Brown, I don't agree that there needs to be a government crack-down on the licensing of ethanol plants. Let the market "separate the wheat from the chaff."

I believe that a lasting solution is best achieved by diversifying the source of feedstock from a harmful overreliance on a single biostock (corn or sugarcane) to the introduction of new biostocks such as other crops, ag waste, forestry, and urban wastes. For this to occur, we need incentives and regulatory reform for R&D and deployment of more decentralized plants - especially cellulosic ethanol pilot plant scale-ups of promising emerging technologies.

Below is Mr. Brown's alarming account of the unrealistic forecasting being promulgated by the USDA:

World May Be Facing Highest Grain Prices in History
by Lester R. Brown of the Earth Policy Institute

The U.S. Department of Agriculture (USDA) projects that distilleries will require only 60 million tons of corn from the 2008 harvest. But ...the Earth Policy Institute (EPI)...estimates 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....

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.

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.

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.

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