Thursday, July 20, 2006

Food vs. Fuel

When demand for oil goes up, so do prices, and this translates into higher product prices down the line. Anyone who thinks about energy understands this implicitly. With demand for biofuels rising, however, we're going to have to start thinking about the downstream implications for the alternate disposition of biofuel feedstock, especially as it relates to food prices. That was less of an issue a few years ago, when US ethanol production was under 2 billion gallons per year, and ethanol only accounted for about 10% of the corn crop. But with corn-based ethanol targeted to reach 7 billion gallons by 2012, it will become harder to ignore this competition.

The other day a friend suggested I look at the price of corn on the cob at the supermarket, indicating that it was much higher than last year. He proposed that this was due to competition with ethanol. I ran this idea by another friend with a strong agriculture background, and she assured me that this was unlikely, since food corn and ethanol feedstock corn were entirely different varieties. Her explanation for the higher prices focused on the high energy prices that are affecting agriculture and many other industries, in this case boosting the cost of fertilizer, cultivation, harvesting and shipment to market.

Whether we're already seeing it, or whether it lies a year or two in the future, it's inevitable that the demand for corn to feed the rapidly growing ethanol machine we're building will have manifest higher prices in many of the foods we consume. If you've read many food labels in the last few years, you won't be surprised by the number of places that high-fructose corn syrup has displaced cane sugar. Nor will substitution back to cane provide much relief, if increasing quantities of cane are going into ethanol, as well, in places like Brazil.

I looked at corn futures prices to see whether this effect was apparent already. The publicly available data I found in a quick internet search only went back a few years, and although this year's prices appear a little more volatile than last year's, they aren't dramatically higher, In fact, they are actually lower than they were several years ago. Too many factors influence corn prices for me to conclude that ethanol has had a big impact, yet. That doesn't make it any less inevitable in the future.

Our insatiable demand for energy and the enormous challenges faced by the global oil and gas sector have us looking in many directions for new supplies. Every alternative raises new challenges and new choices, though, whether it's the wildlife and aesthetic concerns posed by wind turbines, or the competition between food and fuel in agriculture-based biofuels. Breaking the latter dilemma will require the production of ethanol from the cellulose in non-food crops, but that's still a few years off, in any significant volume. Meanwhile, corn-based ethanol will continue to generate public controversy, whether over its energy balance, or its impact on the price of corn on the cob or a can of Coke.

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