Ethanol could fuel rise in
Wednesday, January 17, 2007
Wednesday, January 17, 2007
By Prasenjit Bhattacharya
Corn prices are likely to reach unprecedented highs in the next two to three years, as
an ethanol boom in the U.S. is likely to limit corn`s availability for food and feed use.
This has fueled concerns that corn, a staple food ingredient in many countries and
widely used as feed in the poultry and livestock sectors, might become out of reach
for poorer consumers, boosting food prices in general.
Source: The Wall Street Journal
Soaring food prices could cause urban riots in scores of low-income countries that
rely on grain imports, such as Indonesia, Egypt, Algeria, Nigeria and Mexico, said
Lester Brown, founder of the Earth Policy Institute and author of a recent report about
potential corn demand from the ethanol industry.
The report said the ethanol distilleries being built in the U.S. will need 139 million
metric tons of corn by the 2008 harvest, far more than a U.S. Department of
Agriculture estimate of the requirement, pegged at around 60 million tons.
"If the Earth Policy Institute estimate is at all close to the mark, the emerging
competition between cars and people for grain will likely drive grain prices to levels
never seen before," Mr. Brown said.
Apart from being the biggest corn grower, the U.S. is also the leading corn exporter.
Since 2006, corn-importing countries have became more dependent on U.S. corn asChina cut back on exports amid increased domestic demand from its own ethanol industry and fears of a supply shortage.
Mr. Brown isn`t alone in warning that an ethanol boom might lead to sharp rise in corn
prices by creating a supply squeeze.
"If biofuels continue to expand globally, you can expect grain prices to move to their
energy equivalent, until cellulose and other alternative-energy sources become
commercially available," said Simon Bentley, analyst with LMC International, a
commodities research firm based in the United Kingdom.
Mr. Bentley said that while sufficient land is available to expand corn output in the
U.S. and Brazil, how such expansion will affect output of other crops, especially
soybean, and corn prices, remains the key question.
According to a recent report by J.P. Morgan, average corn prices are expected to be
about $4.03 a bushel in 2007, up 61% from $2.51 a bushel in 2006.
The most-active March contract on the Chicago Board of Trade closed at $3.9650 a
bushel Friday, up 55% from the $2.5525 a bushel the contract traded at on the same
day last year.
The J.P. Morgan report said the ethanol industry`s growth calls for an additional 500
million to one billion bushels of corn every year.
While such a rapid rise in demand in itself will ensure high corn prices, the study
added that any weather threat to the corn crop this year will be "met with record high
China, a large producer and consumer of corn, is already taking measures to ensure
In December, the Chinese government stopped approving new corn-based ethanol
plants. "As of now, it seems the government is reluctant to permit additional capacity
for corn-based ethanol production, though existing corn-based ethanol plants are
functioning normally," said Gu Lifeng, manager of the maize division at the state-run
Cofco Maize Co., based in Beijing.
Meanwhile, Chinese corn processors are ramping up their alcohol-production
capacity, which can be converted into ethanol plants if the government relaxes its
Arthur Ragauskas, associate professor at the Georgia Institute of Technology, whorecently co-wrote a paper on biofuels in the industry journal Science, said the key to
a sustainable biofuels industry is cheaper feedstock, not expensive corn.
"As demand for corn increases, so too will its prices. This will drive the ethanol
industry to look for lower-cost feedstock and as these alternatives develop, price and
demand will stabilize," Mr. Ragauskas said.
He said the food-versus-fuel debate can generate new ideas if there is increased
collaboration among academia, governments and the private sector to develop
nonfood biomass -- such as switchgrass, recycled waste materials and corn stovers,
which is the part of the corn plant that is left over after harvest -- into viable resources
The corn growers` lobby in the U.S., however, continues to argue that there will be
enough corn in the long term to meet food, fuel and feed needs.
"All demand for corn - food, feed, fuel and exports - are being met. Farmers have
always responded to price signals from the marketplace and historically we have had
much more challenge with overproduction than shortage," said Rick Tolman, chief
executive of the National Corn Growers Association.
"Market forces, not broad assumptions, are driving ethanol and corn markets. . .
There is no conflict between [corn use for food and fuel], nor any pending crisis," Mr.
Copyright The Wall Street Journal