January 9, 2007

 

Ethanol boom causes concern among farmers, ranchers in the US
 

 

Demand for ethanol might be at an all time high but not everyone seems convinced for fear of increasing feed cost.

 

With increasing amount of corn being diverted into ethanol production, the demand for corn has gone up. This in turn, has driven up the cost of feed corn, making it more expensive to feed cows, chickens and pigs.

 

Producers fear this in the long-term could even drive up the cost of food.

 

With US government even offering subsidies like the 51-cent-a-gallon tax credit to encourage ethanol growth, cattle ranchers like Kerby Barker are worried of its impact on livestock production.

 

At a recent meeting of the American Farm Bureau Federation, the latter being the country's largest general-interest agriculture group,

members expressed concern over the same. The situation was like having a bull on the loose and it was going to have far reaching implications for American agriculture and the population, Keith Collins, the USDA's chief economist, told Farm Bureau members.

 

What was alarming was that more ethanol plants were under construction or were being expanded to more than double the nation's ethanol production, from around 5 billion gallons now to 11 billion gallons, according to industry estimates.

 

Corn prices have already climbed above US$ 3 a bushel, the highest level in more than a decade. Strong returns mean plants could cover cost even above US$ 4 or US$ 5 a bushel, depending on prices for ethanol byproducts, said Collins.

 

Incidentally, the rush for ethanol has come as good news for grain farmers and rural communities, where new plants are opening at a breakneck pace. While big agribusiness firms such as Archer Daniels Midland and

Cargill Inc produce the most ethanol, many new plants are farmer-owned cooperatives.

 

However, the boom has become a threat to beef, chicken and pork producers owing to high feed cost. Eventually, this would lead to higher food prices. If corn prices rise by US$ 1 a bushel, within a couple of years, pork price could rise 3 to 3.5 percent according to Collins.

 

High corn prices have also affected the margins for meat producers like Smithfield Foods Inc and Tyson Foods, which have reported a fall in earnings.

 

Also, higher prices prompt farmers to plant more corn than other crops, such as wheat, driving up the price of things like wheat flour, said Cal Dooley, who heads the Food Products Association, an industry group.

 

This is of particular concern since what is driving a lot of this use of corn for ethanol is a generous subsidy for production of ethanol, said Dooley. Instead of asking to eliminate the subsidy, there was a need to tie the subsidy to market forces, raising it when prices are low and lowering it when high, he said.

 

While the subsidy expires in 2010, lawmakers introduced a bill last week to make it permanent.