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Ethanol Push Adds to Forces Lifting Food Costs

WSJ.com – April 16, 2007

Interesting article about the affect of the increase in ethanol on the price of corn and pressure on food uses of corn. This was an obvious repercussion of the desire to move away from foreign oil sources for liquid fuel. While this push may be due to fears of global warming, it is convenient that it serves the goals of eliminating oil as a part of the geopolitical strength of portions of the world. 

It is unfortunate that the US is not adequately prepared for this rush of demand.  I hope that this price pressure does not significantly impact the poor and their desire to get adequate food and nutrients.

Americans face sizable increases in their grocery bills this year as a boom in ethanol production diverts more corn from the nation’s dinner table to its gas tank. Indeed, their pocketbooks could feel the pinch for years to come. High corn prices, bad weather and steep energy costs have combined to make food a bigger potential contributor to inflation this year than it has been at least since 2004, when a cutback in dairy production boosted dairy prices and beef prices rose as mad-cow disease disrupted trade.

The Agriculture Department says that retail food prices are likely to climb by 2.5% to 3.5% in 2007, fueled in part by strong demand for corn-derived ethanol. But Michael Swanson, an agricultural economist at Wells Fargo & Co., thinks the rise could be an even sharper 4.5%.

Kenneth Beauchemin, a U.S. economist with consulting firm Global Insight, says that the difference now is that the government’s push to promote ethanol, unlike a storm or other temporary factor, “could affect prices for the next 10 years.”

The price of cereals and baked products increased 4.2% during the 12 months ended in February, according to the Labor Department. Meat, poultry and fish prices gained 2.7% over the same period.

Corn is hovering around $4 a bushel, the highest price in nearly a decade, amid competing demand from feed lots, food manufacturers and a burgeoning ethanol industry. The high price has created a cost squeeze for many food producers.

Even so, higher corn prices are clearly having an impact. They have sharply increased the cost of livestock feed — typically a blend of corn and soybeans — and a major component of meat production costs.

CEO Dick Bond at Tyson’s annual meeting in February: “As more corn is being used for ethanol production, prices have gone up significantly. We have no choice but to pass along the higher costs to our customers who then pass along their higher costs to consumers.”

When farmers were making their planting decisions last season, they underestimated the demand for corn, shifting four million acres from corn to soybeans. At the time, corn prices were lower, having yet to signal the heavy demand from ethanol producers or the export market that have developed since. Even so, American farmers harvested the third-biggest U.S. corn crop on record.

To combat the idea that corn growers are wreaking havoc on the economy, Mr. Tolman, of the Corn Growers Association, says he tries to paint corn in a more positive light. “I have people at church stopping me saying ethanol’s driving up chicken prices,” he says.

You can read the article here.

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