Ethanol Demand Driving Up Food Costs
FUTURE PUNDIT
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."
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"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 do 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 loewr the price of biomass ethanol production enough to provide incentives to move even more land into ethanol production?
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