January 27, 2007
Ethanol Demand Driving Up Corn Prices

The demand for corn to produce ethanol is driving up the price of tortillas in Mexico and creating a political problem.

Mexico is in the grip of the worst tortilla crisis in its modern history. Dramatically rising international corn prices, spurred by demand for the grain-based fuel ethanol, have led to expensive tortillas. That, in turn, has led to lower sales for vendors such as Rosales and angry protests by consumers.

The uproar is exposing this country's outsize dependence on tortillas in its diet -- especially among the poor -- and testing the acumen of the new president, Felipe Calderón. It is also raising questions about the powerful businesses that dominate the Mexican corn market and are suspected by some lawmakers and regulators of unfair speculation and monopoly practices.

Tortilla prices have tripled or quadrupled in some parts of Mexico since last summer.

Biomass energy puts more affluent car drivers in competition with poor food buyers for the same fields of land. Biomass energy also increases the amount of competition between farmers and wildlife for the same fields of land. The poor people and the wildlife lose in such competitions.

Higher corn prices will eventually translate into higher prices for other basic foods. Why? Farmers will plant less of other crops and more of corn. Plus, people will shift away from eating corn and toward eating other foods.

Ethanol producers are getting squeezed by higher corn prices and lower gasoline prices.

Corn prices, 75 percent of the cost of ethanol production, have doubled in the past six months, to more than $4 a bushel. At the same time, the price of ethanol has followed the price of gasoline downward.

Absent a rescue from Capitol Hill, the glut is going to get worse. AgResource's Basse estimates the blending demand for ethanol at 10 billion gallons, 7 percent of the 150 billion gallons of blended fuel burned each year. Current nationwide ethanol capacity is 5.4 billion gallons. But 6.1 billion gallons' worth of capacity is now under construction, according to the Renewable Fuels Association. That would push supply right past demand and destroy ethanol prices. Unless mandates are tightened. At the moment the motor fuel industry is meeting environmental minimums and exceeding the energy independence ones.

Under present law the independence minimum comes to 4.7 billion gallons of ethanol this year and 7.5 billion in 2012. But now the Bush Administration is considering boosting this mandate to 60 billion gallons by 2030.

Such a huge increase in ethanol production will raise food costs even if we shift to using switchgrass with cellulosic technology to make ethanol. Lots of land will get shifted into switchgrass production and away from food crop production in that case.

Corn has more than doubled in price.

NEW YORK - The economic viability of ethanol as an alternative to petrol has been thrown into question as the oil price fell below US$50 a barrel yesterday for the first time in nearly two years, while the price of corn - the main ingredient in the new fuel - surged to a new 10-year high.

...

After a decade of trading between US$2 and US$3 per bushel, corn was trading yesterday at US$4.09 a bushel.

Some ethanol plants extract as much as 2.8 gallons of ethanol per bushel. So a doubling of corn prices adds at least 71 cents to the cost of a gallon of ethanol. The only way ethanol can get produced is with a large taypayer-funded subsidy. You subsidize the production of ethanol and as a result you pay more for ham, chicken, steak, corn muffins, and tortillas. Plus, the demand for corn causes farmers to shift away from wheat, soy, and other crops to grow more corn. So you pay more for the other grains as well.

Calves headed to feedlots cost $200 more each due to the doubling of corn prices.

Corn prices have gone from $2 to $4 per bushel. Ranchers say that's costing them about $200 dollars a head for calves headed to the feedlots. Even worse, cattleraisers are bracing for even higher prices.

That $200 is just at the stage of calves. As the calves continue to get fed the costs from higher corn prices continue to add up even higher.

The biggest chicken producer says we may pay more for meats this year due to the use of corn for ethanol production.

Tyson has warned rising corn prices could mean consumers will have to pay more for chicken, beef and pork this year. The price of corn, which is used as animal feed, has been skyrocketing as demand has increased for ethanol, an alternative source of fuel to gasoline.

Chickens cost 6 cents more per lb wholesale due to ethanol.

"We estimate that ethanol demand has already increased the price of chicken by six cents per pound wholesale," said William P. Roenigk, senior vice president and chief economist for NCC. "If government continues to push corn out of livestock and poultry feed and into the energy supply, the cost of producing food will only increase."

The retail price increase is higher, but how much higher? 10 cents per lb total perhaps?

Ethanol gets a 51 cents per gallon subsidy in the United States. If that subsidy remains in place then the yearly cost of that subsidy could rise to over $17 billion per year by 2017.

Production of ethanol is currently subsidized by the federal government through a tax credit of 51 cents per gallon of ethanol added by fuel blenders. In his State of the Union message, President Bush called for an increase in the production of renewable and alternative fuels from 7.5 billion gallons to 35 billion gallons by 2017. He also proposed $2 billion in loans for the development of fuel from sources other than corn, such as switchgrass or other "cellulosic" sources.

Some of the post commenters argue against government spending on energy research in photovoltaics, batteries, and other areas. Well, we are spending billions per year on ethanol production subsidies. I'd rather spend on research that will lower costs than on use of technologies that are expensive. Politicians are going to spend big money on energy policy. I'd rather they spend in ways that will lower costs and reduce environmental impacts.

Corn ethanol is driving up the costs of raising pigs.

Greg Boerboom raises 37,000 pigs a year on his farm in Marshall, Minn. Those hogs eat a lot of corn—10 bushels each from weaning to sale. In past years he has bought feed for about $2 a bushel. But since late summer, average corn prices have leapt to nearly $4 a bushel. To reduce feed costs, he sells his pigs before they reach the normal 275 pounds, and keeps them warmer so they don't devour more food fighting off the cold. Still, Boerboom hopes just to break even. "It's been a pretty tight squeeze on pork producers," he says. "The next eight months will be really tough."

That is only $20 extra per pig or less than 10 cents per lb.

Recently Lester Brown and colleagues at the Earth Policy Institute counted up all the ethanol plants in operation, under construction, getting expanded, and in planning. They discovered a much larger scaling up of ethanol production than has previously been measured by other organizations.

According to the EPI compilation, the 116 plants in production on December 31, 2006, were using 53 million tons of grain per year, while the 79 plants under construction—mostly larger facilities—will use 51 million tons of grain when they come online. Expansions of 11 existing plants will use another 8 million tons of grain (1 ton of corn = 39.4 bushels = 110 gallons of ethanol).

In addition, easily 200 ethanol plants were in the planning stage at the end of 2006. If these translate into construction starts between January 1 and June 30, 2007, at the same rate that plants did during the final six months of 2006, then an additional 3 billion gallons of capacity requiring 27 million more tons of grain will likely come online by September 1, 2008, the start of the 2008 harvest year. This raises the corn needed for distilleries to 139 million tons, half the 2008 harvest projected by USDA. This would yield nearly 15 billion gallons of ethanol, satisfying 6 percent of U.S. auto fuel needs. (And this estimate does not include any plants started after June 30, 2007, that would be finished in time to draw on the 2008 harvest.)

I think the rising cost of corn combined with the declining cost of oil may prevent many of those planning stage ethanol plants from ever getting built. A removal of the subsidy for ethanol production would reduce food prices and save money. We'd be better off spending the tax dollars on developing new energy technologies that have less environmental impact than biomass.

Share |      Randall Parker, 2007 January 27 11:48 PM  Energy Biomass


Comments
Randall Parker said at January 28, 2007 9:20 AM:

E-P,

As that article reports, the Mexican government has prevented a merger precisely to prevent too much concentration.

The article says Mexico City supermarkets are selling tortillas for 55 cents per kilogram. Or 55 cents per 2.2 lb or 25 cents per lb. But some shops are selling them for 90 cents per kilogram or 41 cents per lb. I haven't bought tortillas lately. But those prices do not strike me as high.

Oilcan said at January 28, 2007 11:02 AM:

Why don't they just ban "working on sundays"? think about this for a minute, if all of N A shut down except for fire, police, ambulance etc, this would be a mild boost to the decline of CO2 emissions, oil, and consumerism in general. I'm no bible thumper but wasn't sundays supposed to be thou shalt not work? Its not a solution but a mild help.
Regards
M

Peter said at January 28, 2007 11:07 AM:

What strikes me as interesting about th ethanol boom is the way in which a subsidized and encouraged way of moving off oil has taken off like a rocket after moving slowly for 20 years. Can this approch be taken with other ideas, such as battery powered cars? When people talk about extra funding of research, I usually think of dollars flowing into acadamia and only very slowly making their way to useful products. Why not offer incentives for plugable hybrids scaled for the percentage miles (on average) the battery could give? This would drive research much more efficiently than congress handing out funds to favored groups for "long term study". Many of the technologies discussed here don't need huge breakthroughs, but rather incremental imrovement best delivered by getting them into the marketplace soon and scaling them up over 10 to 15 years. Fund research well but lets get on with acutally doing something.

Randall Parker said at January 28, 2007 12:26 PM:

Peter,

The subsidies for ethanol production haven't made ethanol a wise choice. It takes energy to produce ethanol. So there's coal and natural gas and some oil as well getting used to produce the ethanol. All these existing ethanol plants and the ones under construction are not incorporating cellulosic technology. They are just using existing technology.

Batteries and cars: Actually, tax breaks have already lowered the prices for hybrids. I think the demand for hybrids has caused more companies to enter into development work for next generation batteries. So tax breaks have helped there. But I suspect that money given to fund electrochemistry research and perhaps some prize money for achieving breakthroughs in battery development would accomplish more for less money spent.

Oilcan,

If a truck doesn't delivery food to a grocery store on Sunday it'll deliver it on Saturday or Monday. So the same miles get driven. I doubt that a Sunday holiday would decrease energy usage by much.

Doug said at January 28, 2007 5:48 PM:
Tortilla prices have tripled or quadrupled in some parts of Mexico since last summer.
I'm interested in any available information on changes in prices and availability of foodstuffs in muslim countries and OPEC countries, resulting from the conversion of corn to the production of ethanol.
Do-Crew said at January 28, 2007 8:43 PM:

Randall,

Right On, been following this Ethanol equation for more than a year. Your posts support the facts, not the hype. While I "was" bullish on Ethanol last year I also admit I profited from and took part in the irrational enthusiasm till it peaked last summer. Your insights and others from those like you help many of us keep this changing landscape in perspective.

Alternatives energy sources must be developed. It's obvious the grain demand will outstrip our current production volumes. This path will eventually demand additional land resources and put pressure on what's left of our untouched wild regions. So we need a better alternative, one that will support our shortsighted politicians and still help us reach our goal.

Lignin to synfuel_ethanol process search:
You've done a great job with quoting expert links and I'd like to share just one more with you. There is a huge resource of untapped waste which you have touched on before. The process of converting methane, natural gas, coal, peat, dried sewage and waste wood into Syngas has been around for almost 75 years. Your posts inspired me to do some searching for those leading the pack in Lignin to synfuel_ethanol process's.

There is a research program currently getting ready for commercialization at Drexel Plasma Institute in the area of Synfuel. The Syngas process they have engineered will give rise to several output fuel options including Ethanol and FT-diesel. They claim they can do it without creating C02 emissions. They also claim the process produces a marketable fertilizer. See |Fuel Conversion| http://plasma.mem.drexel.edu/publications/

What isn't listed here is the work that's been underway for the last year to broaden the feedstock's for the process listed in the publications section. (Dried sewage sludge, peat, lignite (brown coal)). You can only find a short blurb about it at http://www.mem.drexel.edu/research/New_Research_Awards.php entitled, “Hydrogen Production by Plasma Conversion of Biomass.”

I called Drexel last summer and inquired about the project and thought I'd asked about some state secret the way they responded. I was firmly told they couldn't speak about it, and they thought I was looking for insider stock information about their funding partner W2 Energy. Well when you won't answer my questions I do start to dig. I've learned that their final design specifications will be turned over to W2 energy in about 10 weeks. Further W2 Energy plans on having a demo plant up and running by 4th quarter 2007.

At any rate keep posting and know you have a growing audience trying to balance all the hype.

Larry said at January 29, 2007 8:47 AM:

MYTH: Ethanol production diverts corn away from food and feed markets.
FACT: There will be plenty of corn available. And in addition to fuel, the ethanol process creates livestock feed and food products.

Every 56-pound bushel of corn used in the dry grind ethanol process yields 18 pounds of distillers grains, a good source of energy and protein for livestock and poultry. Similarly, a bushel of corn in the wet mill ethanol process creates 13.5 pounds of corn gluten feed and
2.6 pounds of high-protein corn gluten meal, as well as corn oil used in food processing.

The ethanol process removes only starch—not protein—from the feed and food market. The starch portion of the kernel is converted to ethanol, while the protein, fat and other nutrients are passed through to the feed coproducts or human food ingredients. Protein, which is left intact by the ethanol process, is a highly valued product in world food and feed markets. Conversely, starch is abundantly available and lower in value. Aside from preserving the protein, a considerable portion of the corn’s original digestible energy is also preserved in the distillers grains.

http://www.ncga.com/news/OurView/pdf/2006/FoodANDFuel.pdf

Engineer-Poet said at January 29, 2007 9:58 PM:

That's true, until the market for DDG is saturated and the ethanol producers turn to e.g. burning it for process heat.

Cattle tolerate DDG up to some relatively large fraction of their diet (I seem to recall 30%). I don't know about pigs and chickens, but they don't have rumens to digest the cellulose fraction.

rsilvetz said at January 29, 2007 10:40 PM:

And Cato goes off and slams ethanol: Cato's take on Ethanol

Randall Parker said at January 29, 2007 11:17 PM:

Larry, E-P,

We've discussed DDG here before. See the comments section here back in August 2006 where E-P and I talked about it. The problem is that we do not know what percentage of feed for various animals can be DDG. I went digging and came up with lots of experimental reports. Sure, 20-30% seems possible. Above that the answer is less clear and probably depends on the type of livestock.

Will DDG become cheap enough to compensate for the higher price of corn? If it does then that'll raise the cost of ethanol because less revenue will come from selling the DDG by-product.

Pedro Garza said at February 9, 2007 3:02 PM:

Just from the data shown here:
price of corn: $4/bu
ethanol yield: 2.8gal/bu
cost: $4/2.8 = $1.43/gal raw material
If $1.43 is 75% of total cost
Then, total cost = $1,91/gal
Avg. ethanol price = $2.00/gal

So, I don´t see where the profit for ethanol producers is.(The 51 cents/gal subsidy goes to the blender, not to the producer)

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