By DOUG SCHMITZ
Iowa Correspondent

WASHINGTON, D.C. — A major Iowa State University biofuel study released last week indicated the United States ethanol production glut fueling today’s soaring corn prices would spike nationwide retail food costs to an estimated $50 per household, or $14 billion annually, by 2012.

“The sponsoring organizations [of the study] represent the grain and feed industry, grain processors and handlers; the livestock, poultry and meat processors; and grocery and food product industry,” said Kendell W. Keith, president of the National Grain and Feed Assoc. (NGFA), in a media teleconference about the new study conducted by the Center for Agricultural and Rural Development (CARD) at ISU in Ames.

“In mid-2006, these groups became keenly aware that the surge in crude oil prices was driving investments in ethanol and biodiesel plants at a much faster pace than had been anticipated only six months earlier,” he said. “We knew at that time that the biofuels industry would have a sizeable impact on agriculture and food industries.

“But the real question on our minds was, ‘How big and how quickly would it happen?’”

‘Realistic assessment’

Bruce Babcock, CARD director, ISU economics professor and lead researcher of the study, said the report’s goal was to provide “a realistic assessment of how large the U.S. biofuels sector could become, and to estimate the likely impacts it could have on crop markets, the livestock and poultry sectors, exports,” as well as grain-based wholesale and retail food prices.

“We wanted to focus on the next five to 10 years and then, looking out at even a longer period, and see the impact under traditional ag markets and food markets,” he said.

What would stop the flow of money from investments in the biofuel industry are either low ethanol prices or high corn prices – or a combination of the two – Babcock added.

“This research is critical for national leaders who are making decisions about investments in renewable fuels,” he said. “Right now, people are asking how high the price of corn is going to go, and what higher corn prices mean for the competitiveness of U.S. livestock producers and our ability to meet export demand. This research (helps) to provide answers to these questions.”

The study was funded in part by the American Meat Institute (AMI), the Grocery Manufacturers/Food Products Assoc., the National Cattlemen’s Beef Assoc., the National Chicken Council, the NGFA, the National Pork Producers Council and the National Turkey Federation.

It used various scenarios in which it estimated U.S. retail food price increases could top $20 billion per year if crude oil prices range from $65-$70/barrel, and if U.S. corn prices hit $4.42 per bushel, more than doubling the $2 per bushel mark reached last August.

Under a “base scenario,” with crude oil prices ranging from $55-$60 per barrel, the study projected ethanol capacity could plateau at around 15 billion gallons annually.

U.S. ethanol production under the high crude oil scenario could reach 30 billion gallons by 2016, consuming more than half of U.S. corn, wheat and other coarse grain production and “triggering higher meat prices for consumers, reduced production across-the-board for all segments of the meat sector and even greater reductions in grain and meat exports.”

“We recognize the importance of the United States diversifying its energy sources to enhance energy security,” said J. Patrick Boyle, AMI president and CEO. “But this study clearly shows that we are reaching a tipping point, and that over-reliance on corn-based ethanol to meet stringent government mandates would further drive up retail food prices, reduce domestic meat and poultry production and erode our vital meat and grain export markets.”
Scenarios

The study found corn yield gains would provide “sufficient additional corn stocks to moderate grain price increases, if corn-based ethanol production peaks at 14 billion to 15 billion gallons annually by 2010,” when existing ethanol plants and those already under construction are in operation.

It added corn prices would reach $3.43 per bushel in 2009 before leveling off at $3.16 by 2016, amounting to approximately 10 percent of U.S. gasoline consumption.

Cellulosic ethanol likely “will not be a panacea to achieving U.S. ethanol-production mandates,” meaning the vast majority of ethanol growth for the foreseeable future likely will come from corn.
The study found neither corn stover nor switchgrass planting as replacement feedstocks for ethanol makes economic sense on acres capable of growing corn.

As for high conversion, handling, logistics and capital costs and constraints, the study stated cellulosic ethanol would be viable only if the federal government added about $270 per acre in subsidies to entice producers to convert from corn to switchgrass.

The study also said corn stocks would be susceptible to any supply disruption resulting from drought, reduced yields or shifts in cropping patterns: “Specifically … that if the United States was producing 14.7 billion gallons of ethanol annually and sustained yield losses comparable to what occurred during the 1988 drought, U.S. corn and soybean prices would increase to $4.75 and $8.50 per bushel, respectively.”

Keith said that would trigger a 60-percent decline in U.S. corn exports and stocks, and a 50-percent increase in feeding of U.S. wheat to livestock.

Market impact

“From a grain and feed sector standpoint, we support the goal of greater U.S. energy security, and of using biofuels as a partial means to attain that goal by diversifying our energy sources,” Keith said. “Biofuels also offer U.S. agriculture a way to diversify its markets.”

But this study indicated any supply disruptions in major grain-producing countries could result in “major ripple effects on multiple users in the short run, triggering some herd liquidation, higher costs for grain processing sectors (such as corn refining, oilseed processing and flour milling) and steep reductions in U.S. grain and meat exports.”

In assessing the impacts of the ethanol sector on retail food prices, the study measured only the direct effect of higher feed costs, and didn’t take into account such “second-round” impacts as demands from employees for higher wages to compensate for higher food costs. Nor did it consider ancillary food cost impacts on other land-intensive crops, such as vegetables.

In the end, the study predicted that bringing out 11 million acres of the 36 million enrolled in the Conservation Reserve Program would add slightly more than one percent to corn supplies and would reduce long-term corn prices by 2.2 percent, or 7 cents per bushel, under the base oil price scenario.