May 21, 2007

US surge on ethanol sparks debate on food versus fuel

The rise in ethanol production during the past year has already increased food prices by US$47 per person, or 1.3 percent of the cost of a basket of goods typically consumed annually, due to higher corn prices, according to a study conducted by the Iowa State University.

In February this year, corn futures at the Chicago Board of Trade has hit a 10-year high of US$4.37-1/4 a bushel, which prompted US farmers to plant a record corn crop this spring, according to the US Agriculture Department. With traders anticipating a large harvest this fall, corn prices have dropped to US$3.73.

The US$47 increase in food comes as ethanol plants produced 4.9 billion gallons in 2006. According to estimates from the US Agriculture Department, ethanol plants are expected to use 27 percent of the US corn crop to make 9.3 billion gallons in the marketing year that starts September 1.

The study revealed that if ethanol production escalates to 30 billion gallons a year in the long run, food prices will increase to a total of US$67 or 1.8 percent.

Meat would cost 7.0 percent to 8.5 percent more, while egg prices would climb 13.5 percent. Corn prices would climb to $4.43 a bushel.

Biotech companies have been exerting effort to improve the amount of corn that farmers can produce per acre. The study said that higher corn yields could limit the rise in food prices if ethanol production peaks at 15 billion gallons annually by 2010.

The study forecasts that under this scenario, corn prices would peak at about US$3.43 per bushel in 2009 before leveling off at US$3.16 per bushel by 2016. Ethanol production at that level would equate to approximately 10 percent of US gasoline consumption.