May 21, 2007

 

US nears critical point on corn-based ethanol     

 

 

The United States is already approaching the tipping point on the use of corn-sourced ethanol production as it pushes US food retail prices to the pinnacle, according to a study conducted by the Centre for Agricultural and Rural Development at Iowa State University (ISU).

 

The ISU says US retail food prices already have increased US$14 billion annually and could further climb to US$20 billion yearly if crude oil prices reach US$65 to US$70 per barrel. The increase could be more fuelled by US corn prices reaching US$4.42 per bushel, compared to US$2 per bushel in mid-August 2006. At that crude oil price range, US ethanol production could reach 30 billion gallons by 2012, consuming more than half of US corn, wheat and coarse grains, and triggering higher meat and poultry prices for consumers, reduced meat and poultry production, and significant reductions in grain and meat exports. 

 

J. Patrick Boyle, president and chief executive officer of the American Meat Institute (AMI), one of the study sponsors, said the study clearly shows that the US is reaching a "tipping point" and that over-reliance on corn-based ethanol to meet mandates would further drive up retail food prices, reduce domestic meat and poultry production, and erode the country's meat and grain export markets.

 

The ISU study also indicated corn yield gains would be sufficient to moderate grain price increases if corn-based ethanol production peaks at 14 billion to 15 billion gallons annually by 2010 (10 percent of US gasoline consumption), when existing ethanol plants and those already under construction come online. Under that scenario, corn prices peak at US$3.43 per bushel in 2009 before leveling off at US$3.16 per bushel by 2016.

 

The study also revealed that a subsidy of US$270 per acre would be needed to encourage producers to convert to switchgrass on land capable of growing corn for cellulosic ethanol production.

 

The study also finds that if the US was producing 14.7 billion gallons of ethanol and experienced yield losses similar to what occurred during the 1988 drought, corn and soybean prices would increase to US$4.75 and US$8.50 per bushel, respectively. This could trigger a 60 percent decline in US corn exports and corn stocks, and a 50 percent increase in feeding of US wheat to livestock.

 

According to Kendell Keith, president, National Grain and Feed Association (NGFA), biofuels have offered US agriculture a way of diversifying its markets but he stressed any supply disruptions in the US or other major foreign grain-producing countries "could trigger major ripple effects on multiple users of grain in the short run, including herd liquidations, higher grain processing costs and steep reductions in US grain and meat exports."

 

The study projects the following if season-average corn prices over a 10- year period ending in 2016 increased to US$4.42 per bushel (based upon US$65-US$70 per-barrel crude oil), compared to US$2-per-bushel corn:

• Pork:  Production declines 9.2 percent.  Production costs increase 6.8 percent. Retail prices increase 8.4 percent.  Exports decline 21 percent, reversing 15 consecutive years of pork export growth.  

• Poultry:  Broiler exports down 15 percent.  Turkey exports fall 6 percent. Wholesale broiler prices increase 15 percent.  Retail prices increase 5 percent.  Domestic consumption down 4 percent. 

• Beef:  Retail prices increase 4 percent.  Production down 1.6 percent. Significantly, the study projects prices for distillers dried grains with solubles will closely track corn, meaning price increases are nearly as significant for beef and dairy as for hogs and poultry.

• Corn:  US planted acreage increases 44 percent to 112.5 million acres.  Corn exports decline 63 percent. 

• Soybeans:  Planted acres decrease from 75 million in 2006 to 57.3 million acres.  Exports drop 33 percent. 

• Wheat:  Plantings decline significantly to 42 million acres.  Exports decline to 483 million bushels.

 

The study also notes currently idle acres in the Conservation Reserve Program (CRP) could play a useful role in "alleviating some of the financial stress on livestock producers" (during the early years of rapid ethanol growth), as well as mitigate short-term disruptions in grain supplies.

 

Aside from AMI, the study was also funded by the Grocery Manufacturers/Food Products Association, National Cattlemen's Beef Association, National Chicken Council, NGFA, National Pork Producers Council and National Turkey Federation.