A backlash against the ethanol backlash

May 13, 2008

home_graph_2.jpgIs it fair to scapegoat ethanol and biodiesel for record grain prices and the knock-on surge in food prices? It’s a key question for policy makers as the pressure builds to wriggle out of U.S. rules to blend 36 billion gallons of renewable fuels into the nation’s gasoline supply by 2022.

There are a slew of reasons for high food prices. China requires more calories and Chinese are eating more meat. The weak dollar, weather disruptions, government intervention and speculation in commodities have been a perfect storm for food inflation. (Food price spikes are tracked in Food and Argiculture Organization graphic on the left).

Last week a top official at the International Monetary Fund, John Lipsky, said that increased demand for biofuels accounts for 70 percent of the increase in corn prices and 40 percent of the increase in soybean prices. Still he noted that oil prices would have been higher in the absence of biofuels. Francisco Blanch a commodities researcher at Merrill Lynch told Business Week that oil prices could be at least 15 percent higher without ethanol.

U.S. farmers planted the largest corn crop since WWII last year. The 25 percent of the U.S. corn crop that goes into ethanol production is not available for food products like cooking oil, corn sweetener and tortillas. Almost half of the corn crop goes to feed livestock. But making ethanol from corn also yields a byproduct called distillers dried grain, which is used as concentrated animal feed.

sugarcane.jpgA blacklash against the ethanol blacklash is building. The Renewable Fuels Association is battling negative perceptions with data it says shows rising energy costs have twice the impact of increased corn costs on food inflation. Brazil is also alarmed at the criticism since it produces almost as much ethanol as the United States from its abundant sugar cane and is eager to increase its exports. Ethanol is a crucial part of the energy mix in Brazil and is distilled and distributed to pumping stations far more efficiently and with a much greener footprint than in the United States. Brazil can vastly expand cane production without competing with food acres.

One has to wonder whether it makes sense for the United States to reduce or eliminate the U.S. 54 cent per gallon ethanol import tariff to help it meet renewable fuel targets with less impact on food and animal feed prices. Of course that would be a tough sell to American corn farmers.

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