March 25, 2007
Ethanol Demand Driving Up Food Costs
In the last few years the price of corn has doubled to $4 a bushel and this is pulling lots of acreage away from other crops and in to corn production.
The entire agricultural industry is eagerly awaiting the first USDA Planting Intentions Report, which is scheduled to be released on March 30. The key question is how many acres will be diverted to corn production this year, because of the great demand for corn in the ethanol process and the resulting high corn prices.
The trade has been given an early indication of how big that acreage swing will be with the release of the Allendale Farm Survey, which was made public in early March. Their report suggests that an additional 12.4 million acres will be devoted to corn in 2007, raising the total corn acreage to 90.76 million. That would be the largest corn crop acreage since 1944, when 95.475 million acres were planted.
More corn means less soybeans for animal feed which means higher meat prices. Time to become a vegetarian.
The surge in corn acres will come mainly at the expense of soybeans, according to the survey. Soybean farmers are expected to plant 65.92 million acres, which represents a decline of 9.6 million acres from 2006.
Soybeans also get used for biodiesel (which makes far less sense than corn ethanol). Well, less soybeans plus more demand for soy for biodiesel equals higher prices.
The expected profit advantage from corn is so large that the debate in some farm circles is whether to plant all corn fields.
"These budgets have a corn-after-corn yield of 170 bushels per acre, a soybean yield of 55 bushels per acre, and $25 per acre of direct payments," he noted. "Total non-land costs are $338 per acre for corn and $249 per acre for soybeans. Costs include crop insurance premiums of $32 for corn and $18 for soybeans, representing the costs of a Crop Revenue Coverage policy at an 85% coverage level."
Using these budgets, operator and farmland return is $338 per acre for corn and $249 per acre for soybeans.
Every time you fill up with gasoline you'll also be driving up your cost of cotton clothing. In spite of growing worldwide demand for cotton acreage dedicated to cotton in the United States will drop 14%.
According to the National Cotton Council's Early Season Planting Intentions Survey, U.S. growers intend to plant 13.2 million acres of cotton in 2007. This significant decrease of almost 14% reflects the fact that we are facing very different market conditions than we were at this time last year.
Meanwhile demand for cotton is showing no signs of slowing around the globe, especially in China.
Compare Asian industrialization to that of the West. First off, it comes on in addition to the West's industrialization. Second, it involves a much larger group of people and so eventually a much larger growth in demand. This means much more demand for land for agriculture, housing, industry, and roads. On top of this comes increased land demand for biomass energy. I see a problem here.
Expect higher meat and dairy costs as farmers cut back on their herd sizes.
“It’s not the food made from corn, it’s food from animals that eat corn that will increase,” says Ron Plain, University of Missouri agricultural economist. “This is a major shift for agriculture. In the past, corn producers have grown food for people and feed for livestock. Now we add fuel to the list. I don’t see us doing that without having a lasting impact on the face of agriculture.”
“Higher feed costs put pressure on the livestock industry to cut production,” he adds. “When you consider that we’ve pushed corn prices up 16 dimes, that’s $80 less per head for the cow/calf operator.”
Plain expects U.S. cattle, swine and poultry inventories to shrink, resulting in higher grocery prices.
“Ethanol and inflation will raise prices for meat, eggs, milk, cheese and other dairy products about 12 percent by 2009,” he says. “I don’t expect consumers to reduce meat and dairy consumption much because of the increase, however.”
I'm hearing anecdotal reports of cuts in cattle herds and in pigs. For example, some Canadian farmers faced with a doubling of barley costs can not make a profit on their pigs and so are getting out of pig raising.
More land can get shifted into production and undoubtedly we will see more of that. But the land already in production achieves higher yields than the land not in production. The marginal productivity of additional production will be lower with higher costs.
China's rising living standards will generate more demand for meat and grains. On top of that the Bush Administration is promoting biomass energy in Latin America. Say bye bye rainforests.
The use of biomass energy brings more forms of demand directly into competition with each other. Demand for animal feed, human food, and textiles competes with demand for energy to move cars and trucks around. If biomass energy starts getting used for plastics and rubber that'll put more forms of demand in competition with each other. Plus, there's the demand for food on the part of wild animals. Land shifted into food production is land that is not feeding wildlife foodchains.
Can advances in biotechnology so increase yields of corn that prices can go down eventually? How much currently unused land can get shifted into corn production? Will cellulosic ethanol increase the ethanol yield per acre enough to provide some relief? Or will cellulosic ethanol lower the price of biomass ethanol production enough to provide incentives to move even more land into ethanol production?
Looks like grass-fed beef will soon be competitively priced with feedlot corn-fed beef. The grass-fed stuff is much leaner, and rich in omega-3 fatty acids, so those of us who can afford to remain carnivorous will get squeezed into a healthier diet. Tough on the poor bugger who's barely putting food on the table and clothes on his kids, though. And I don't even want to think about the Peak Soil crisis in 2050...
The Peak Soil crisis. I love it! I'm going to start using it.
The poor buggers who are barely making it: The bigger the SUV the rich guy drives the more the poor guy pays for food. The more industrialized China becomes the higher the demand there for meat and grain. Again, the poor bugger pays more for food.
This is why I favor nuclear, geothermal, wind, and solar.
Randall Parker said, “The use of biomass energy brings more forms of demand directly into competition with each other. Demand for animal feed, human food, and textiles competes with demand for energy to move cars and trucks around.”
It makes sense to be concerned about the impact of fuel crops; however, it is also important to emphasize that competition for land use is not a new phenomenon. Raising a crop to convert to ethanol is just one more option selectable from myriad existing options. There is already a vast economic equilibrium. Consider all the housing developments built on former agricultural land. The land converted to multiple rings of suburbs is lost to large scale farming.
Consider this website for The National Non-Food Crops Centre. Randall mentions the non-food crop of cotton but there are many other possibilities given on the website:
(1) Chemicals - Polymers and Plastics, Dyes, Paints and Pigments, Pharmaceuticals
(2) Speciality Chemicals - Adhesives, Agrochemicals, Personal Care Products, Soaps and Detergents, Specialised Organics
(3) Industrial Fibres - Paper and Board, Composites, Textile Fibres, Bulk Fibres
(4) Industrial Oils - Two Cycle Oils, Transmission Fluids, Lubricants
If someone is concerned about food prices it seems odd to single out just one non-food use for crop land for criticism. Another example, consider existing forest land: It can be cleared and used to grow a food crop; alternatively it could be used for a non-food crop; alternatively it could be remain a forest and timber could be harvested; alternatively it could remain a forest and be used as a nature preserve; alternatively it could be used for housing. Which is the “highest” use? Does it make sense to particularly condemn one use or another?
Researchers are working on obtaining ethanol and other biofuels from plants and trees that can be grown on land that is marginal with respect to other agricultural uses. If the researchers succeed then the food prices need not be severely negatively impacted by fuel crops. (Randall mentions cellulosic ethanol).
Of course a solar installation like Nevada Solar One that uses mirrored parabolic trough collectors and is built in the desert is unlikely to negatively effect the food supply. Also floating wind turbines would have no land footprint to interfere with crops.
I single out biomass as a land user for reasons I've outlined in previous posts: If we switched to corn ethanol for all our energy we'd need to use most of the land in the United States and the world. I did some rough calcs for the US with excessively optimistic yield of corn ethanol per acre assuming no energy input per acre (which is obviously false) and came up with well over a third of the US landmass.
Separately I've posted that we currently use an area of land equal to Ohio or twice the area of Ohio for all human structures. That's way way less than what we'd use for biomass energy. So, yes, I'm singling out use of land for biomass energy because it takes land use to a whole nuther level.
Can some other biomass form get more energy per acre? Sure. But I still do not see that working in practice. Lots of land is desert or mountains. How much land is available for biomass energy that is useful? Alaska is out.
Then we look at a place like India with 10+ times the population density at 1.1 billion people and on path to 1.6 billion people. The First World countries should not be promoting biomass. It might get taken up by India. Or, hey, First World investors could start converting Africa to a big biomass energy farm. As if animals in Africa aren't even in enough trouble as it is.
If the expected profit advantage from corn is so large, then it's time for the government to stop subsidizing it and to repeal the tariff on ethanol imports.
"More corn means less soybeans for animal feed which means higher meat prices." ...
But it means more corn meal for animal feed. Ethanol production does not use part of the corn used for feedstock. Both are produced. It may cost more, but it will be available.
"Every time you fill up with gasoline you'll also be driving up your cost of cotton clothing. In spite of growing worldwide demand for cotton acreage dedicated to cotton in the United States will drop 14%." ...
I live in cotton country (the South). The BIG issue driving farmers out of cotton is the cotton subsidy reduction required by the WTO. Corn just doesn't do as well here. It doesn't get the yields. I know corn needs more water than corn and I'm guessing it doesn't handle the heat as well as cotton or soybeans. You just don't see huge fields of corn in this area. It's either soybeans or cotton (and some winter wheat) with alfalfa rotated in. Three biodiesel plants have been approved in Memphis (and one smaller ethanol). If anything, I would expect cotton farmers to go to soybeans. So, in reference to your first suggestion that more corns means fewer soybeans, there still may be more soybeans because of less cotton.
Randall, I can't find the word "equilibrium" in your post, and the circumstance that there will be pushback from all of these other demands for land-use seems important. Now, I'll grant that governmental subsidies upset price equilibria, so that when subsidies are involved, equilibrium pricing becomes less than optimal even in the economic sense of "optimal." But had you brought up equilibrium pricing at all, you could have made that point yourself.
You've made a remarkable synthesis here, nevertheless. Thanks very much.
And now I see that "Garson O'Toole" has beat me to the point with a well-developed comment.
There ARE other biofuel feedstocks being developed that do not use cropland. The most promising of these is microalgae. These algae have an oil content of over 50% by mass, and on a per-acre basis can yield 5,000 - 20,000 gallons per acre. There are a lot of companies working on commercializing algae. The one I follow closely is GreenFuel Technologies.
Not only does their process make the flue gasses from powerplants into a profit source, but the results is a net reduction in CO2 emissions and foreign oil imports. We end up using the CO2 in the natural gas or coal twice.
Algae is the only biofuel source I've found that has the potential to completely replace petroleum.
I'm aware of distillers dried grains and if you check out the comments section of this previous post and search on DDG you'll see that E-P and I discussed DDG at some length.
Yes, if corn scales way way up then at some point the amount of DDG produced as a side effect will exceed the amount of whole corn, rice, barley, and other grains removed from use as food for livestock. But we aren't at that scale of production right now and currently the net effect of corn ethanol production is to drive up animal feed costs.
Also, we might find that as corn ethanol scales up scientists and chemical engineers will find a way to convert the DDG to fuel as well. Then the DDG by product would become more expensive for animal feed.
My guess is that when cellulosic technology matures it is going to shift crop lands away from corn toward crops that yield more total cellulose per acre.
Sure, the other demands will push back by driving up prices. The other uses of grain will drive up prices until grain becomes too expensive for ethanol.
Also, at some point there'll be political push back where higher food prices become a political issue.
Also, the farmers will split. Why should livestock farmers politically support corn ethanol subsidies? They ought to lobby against it.
Randall Parker said “Also, the farmers will split. Why should livestock farmers politically support corn ethanol subsidies? They ought to lobby against it.”
Right, there is evidence of a split now as depicted in the BusinessWeek article entitled Ethanol's Growing List of Enemies
Randall Parker said “Can some other biomass form get more energy per acre? Sure. But I still do not see that working in practice. Lots of land is desert or mountains. How much land is available for biomass energy that is useful?”
Regarding using desert for biomass energy there is an old proposal from 2004 by Michael Briggs at the University of New Hampshire in an article entitled Widescale Biodiesel Production from Algae. The proposal suggests that large algae farms could be situated on desert land such as the "The Sonora Desert". The scale of the land necessary is discussed in this quote: "Enough biodiesel to replace all petroleum transportation fuels could be grown in 15,000 square miles, or roughly 12.5 percent of the area of the Sonora desert (note for clarification - I am not advocating putting 15,000 square miles of algae ponds in the Sonora desert. This hypothetical example is used strictly for the purpose of showing the scale of land required)." JonBuck also mentions algae in the comment above.
Venture capitalist Vinod Khosla says that he has seen “proposals for ocean based dense algae farms (something that seems like a good idea) that convert algae to biodiesel and ethanol.” But he did not fund the proposals and provides no details. Ocean based algae farms may be a way to obtain biomass without negatively effecting food prices. The quote about algae is a side comment found in Khosla’s long defense of ethanol.
Slightly off topic:
There are other industrial and heating uses for oil but it is overwhelmingly used for transportation fuels. In government EIA totals for the year 2006, the US used almost as much petroleum energy (40.21 quadrillion btu) as it did combined coal and natural gas energy (22.55, 22.49 quadrillion btu). Nuclear electric power usage was 8.2 quads. http://www.eia.doe.gov/emeu/mer/pdf/pages/sec1_7.pdf
For me, the magnitude of adjustment to keep something resembling the current US liquid fuels transportation system in light of peak oil now comes into better focus. Even the plug-in electric cars I wish for will require an energy supply change like tripling our coal usage or a five fold increase in nuclear power generation.
We need a different system, from mass transit to methods of propulsion. Ethanol and hydrogen “replacements” are tinkering around the edges of the problem.
Making 5 times the number of nuclear power plants we now have would not be hard. It'd probably work ou to about a half trillion dollars. That's not even 5% of one year of the US GDP.
When you see big numbers you have to put those numbers in perspective. The US economy produces huge amounts.
I think full electric cars for 100 to 200 mile range are achieveable. We can generate liquid fuel for longer trips.