Rising Oil Prices, energy security considerations and concerns over global warming are all contributing to a growing demand for biofuels. These alternative energy sources — derived primarily from corn — have the potential to curb greenhouse gas emissions as they simultaneously ease the country's dependency on foreign oil.
While that might all sound great, it's also putting the crunch on the food industry, which is also largely based on corn. Corn-produced ethanol has been blamed for contributing to a rise in wholesale and retail food prices. Farmers using grain to feed their livestock say increased costs are putting them in a real pinch. Organic livestock farmers in particular are finding themselves in an ironic situation. The strong profits they've enjoyed for the past few years are suddenly being erased. Industry observers note with a degree of alarm that farmers are less interested now in undertaking the three-year transition to organic production.
But how dire is the situation? Is this a long-term problem the industry will have to grapple with? Economic experts specializing in agriculture say ethanol's impact on rising food costs has been somewhat exaggerated. Matt Hartwig, a spokesman for the Washington-based Renewable Fuels Association, said fossil fuels are still the deciding factor in prices. It doesn't help that oil is hovering around $100 a barrel.
“Together with increasing global demand from countries like China, and adverse weather events around the world, these three factors are far more responsible for rising food prices than our domestic ethanol industry,” he said.
The U.S. Department of Agriculture estimates that slightly more than 20% of the forecast 10.55 billion bushels of corn that will be produced in the United States this year — or about 2.15 billion bushels — will go toward the production of fuel ethanol. That represents a 34% increase over the year before.
Ethanol production reached nearly 5 billion gallons in 2006, an increase of 25% from the previous year, according to RFA records.
While these numbers might be cause for concern — observers say dozens of new ethanol refineries are currently under construction nationwide, and production capacity is expected to more than double beyond current levels next year — prices for corn-produced ethanol this year did not increase as much as anticipated. John Davies, vice president of the Green Technology Research & Sustainability Peer Forum at Boston-based AMR Research, pointed out that ethanol is almost entirely used as a blend in gasoline, and there are still very few vehicles on the road that can run on a blend of 85% ethanol.
“That's causing the price of ethanol to stabilize, and that's causing many farmers to reconsider whether they want to grow corn that can be used for ethanol production,” he noted.
Gary Wilhelmi, another financial agricultural analyst, agreed, saying that the corn-produced ethanol industry has expanded as far as it is going to go.
Wilhelmi, who reports on the activities of the Chicago Board of Trade over various radio, television and satellite networks — including the Data Transmission Network, a provider of information to farmers — noted that since corn-produced ethanol is a regional product, it will never get out of the Midwest because of distribution challenges.
“There are only about 100 stations that can pump ethanol in the state of Illinois out of thousands,” he pointed out. “So ethanol has a distribution problem, and it has a profitability problem.”
While President Bush has called for a production target of 35 billion gallons of renewable and alternative fuels by 2017, a fivefold increase over the currently established goals, Wilhelmi and others point out that only a portion of that energy will come from corn-produced ethanol. Davies believes that the use of corn for ethanol has a natural peak at about 15 billion gallons. Beyond that, he said, “the market wouldn't reward the farmers for growing corn for ethanol, and we are relatively close to building enough biorefineries to meet that peak now.”
What's more, the price of corn has reached a level that will allow ethanol production to expand without production going higher, noted Iowa State economics professor Bruce Babcock.
“The prices that we've seen for corn in the past year are pretty much indicative of where they are going to be in the next few years. They won't keep going higher. If you look at the price levels predicted by the Chicago Board of Trade, prices are all pretty level through 2010,” he said, adding that the increase in oil prices means gasoline and transportation costs are going to go way up.
“If petroleum stays at or above $80 a barrel, I think we will see $3.50- and $4-a-gallon prices for gasoline by next spring, and that will have a much bigger impact on food prices than ethanol.”
In the short term, Davies called corn-produced ethanol “a big win for farmers, because it provides them with an additional market that will pay a competitive price.”
At the Pumps
By increasing its number of fuel centers that carry E85, Kroger is probably the largest supermarket chain selling the fuel, though it's certainly not the only one. H.E. Butt and Meijer, to name just a few, are also adding the mixture of 85% ethanol and 15% gasoline to their fuel centers. Cincinnati-based Kroger has partnered with VeraSun Energy Corp. to add VeraSun's brand of E85 — which it calls VE85 — to nearly two dozen of its fuel centers in Ohio and Kentucky. This comes in addition to the 40 E85 fueling stations Kroger already operates throughout the two states and Texas.
The incentive for retailers to get into the business vary. In addition to being easier on the environment and increasingly popular with consumers, an expansion to ethanol is not economically complicated. According to the National Ethanol Vehicle Coalition, numerous tax incentives can defray the cost of installation.
“We see this as a way to give our customers a choice,” said Meghan Glynn, spokeswoman for Kroger. “For those who wish to use E85, our goal is to make it easily available to them.”
According to the Environmental Protection Agency, E85 reduces greenhouse gas emissions by up to 20% compared with conventional gasoline. The fuel also gives off fewer harmful toxins, such as the carcinogen benzene.
Kroger, which started providing E85 one year ago, operates 652 fuel centers across the country and is currently opening one new center per week.
— JEFF WELLS
