Ethanol production and food prices are related (Editorial)

Ethanol production and food prices are related (Editorial)

IT is time to acknowledge that the draw on corn for ethanol production is driving corn costs for animal feeding and, in turn, food prices significantly higher.

The evidence is clear.

Cash corn has increased from about $3.50/bu. last October to about $4.75 now, with new-crop futures above $5.00. Cash soybeans have increased similarly from about $9.50/bu. then to about $11.50 now, with September futures well above $12.00.

The impact on livestock and poultry production is clear.

In October, chicken production profitability for this year was projected at 11 cents/lb., but updated data plugging in new corn cost forecasts have revised that down to 2 cents.

In October, cow/calf production profitability for this year was projected at $45 per head, but updated data plugging in new corn cost forecasts have revised that to a loss of $7.20. In October, cattle feeding was projected to lose about $10 per head but is now projected to lose $20.

Breakevens for hog producers have increased more than $2 in the last two months.

One chicken company said last week its cost projections for grain price increases this year have risen from $300 million more than the year before in November to more than $500 million now.

Analysts who maintain profitability series for Feedstuffs have said without hesitation that these substantial changes are due to increasing costs of feeding, and those costs are the consequence of biofuel's demand for grains and oilseeds.

Furthermore, other analysts have pointed out that this cost event is permanent -- not a one-year spike as in 1996. "There is no relief in sight," one agricultural economist said last week.

The impact on food prices is clear.

Food companies are currently negotiating new contracts with customers in the foodservice and supermarket trades, and not only are they forwarding on higher feed costs in the form of higher food prices, but they are negotiating unusually short contracts so they can negotiate new ones later this year to pass on more of these costs.

An analyst following several food companies believes one will need to increase its food prices 12% to cover increased feed costs.

A recent scenario showed that the U.S. could need 4.1 billion bushels of corn -- or 26 million to 28 million acres of corn -- for ethanol plants in the 2008-09 marketing season starting this September. Factoring in corn for domestic feeding, exports and industrial purposes, this scenario projected corn stocks at the end of August 2009 at levels under 400 million bushels, which is not sustainable and would require corn prices higher than $7 to ration demand.

This is not to be anti-ethanol or other biofuels, as America needs to develop alternate fuels. However, Congress and the renewable fuel industry need to "space program" the development of alternative fuel stocks to take the pressure off corn, feed and food prices.

Congress should also repeal the tariff on imported ethanol and possibly repeal the blending credit for domestic production to let the marketplace set the lead.

Moreover, Congress should encourage innovative means to decrease fuel use, such as tax incentives for businesses that create work-at-home opportunities for employees and incentives for individuals who reduce their fuel use.

The feed/food versus fuel issue is real and has a bottom line. It's time to quit denying it and open a dialogue on what's happening and what needs to happen.

Volume:80 Issue:05

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