By The Star Phoenix
Ethanol production is quickly falling out of favour with the rising food crises as if it were the only source of the turnaround in the grain supply situation. However, the argument is not so simple. The alternative to ethanol production, increased reliance on oil, is not a very palatable option.
By The Star Phoenix
April 30, 2008
Memories are short. It was only a couple of short years ago when analysts where questioning whether the Prairie grain industry had a future. Prices were below the cost of production and the idea of using cheap grain to produce ethanol was widely embraced.
Today we have high grain prices, which by the way are accompanied by very high input costs for producers. There are food riots and fears of food shortages in many poorer nations. The tide of public opinion is turning against ethanol production, as if it is solely responsible for the turnaround in the grain supply situation.
No doubt the big increase in American and Brazilian ethanol production has played a role in grain price escalation, but that's far from the complete picture. A more important factor than ethanol is the growing demand for food in India and China. Those economies have grown so rapidly that millions of people have more money to diversify their diets.
Transportation costs are also adding to food prices. Trucking, rail freight and ocean freight costs are adding to the bill.
And we need to put ethanol production into perspective. Last year, the Americans used 3.2 billion bushels of corn to produce ethanol, the most ever. However, the American corn crop was so large that exports were also a record.
The corn acreage increase in the U.S. came largely out of soybeans and it's true that the competition for acres has raised the prices of all commodities. But it's also true that speculative investment in commodity futures has been a new force in the markets.
Observers often quote the March futures price for spring wheat in Minneapolis, which hit $25 a bushel at one point, but that artificially inflated futures contract bears little resemblance to the $8 or $9 a bushel Prairie farmers will receive this year for their wheat.
When corn or wheat is processed into ethanol, it's not a total loss for the food chain. The co-product to ethanol is distillers' grains that are used as livestock feed.
From a Canadian perspective, some estimates suggest a million tonnes of Canadian wheat may be used for ethanol production this year. That would be about four per cent of an average Canadian wheat crop. Those million tonnes of wheat would produce about 400,000 tonnes of distillers' grains.
When producers grow wheat for the ethanol market, they choose varieties that have lower protein and higher yields, so total production will be higher than it would be otherwise.
Remember the years when we had mountains of feed wheat that no one wanted. All it takes is an early frost or lots of wet harvest weather and we will be in the same situation again. This time around, there will be an ethanol industry to use some of that wheat that's unfit for human consumption.
Canada's ethanol production is small compared to the U.S., even if you look at it as a percentage of production. We could stop producing ethanol in this country and world grain markets would hardly notice.
U.S. ethanol production is sufficiently large that it does have an effect on world grain prices. Unlike Canada, if the U.S. was to cut its ethanol production, it would have to import more foreign oil and that isn't a very palatable alternative.
What would happen to world oil prices if ethanol production stopped? Oil prices are setting new records. Taking billions of gallons of alternate fuel out of the system could cause the oil market to be even more crazed.
Transportation costs would keep upward pressure on food prices and the poor nations of the world may not be any further ahead.
The food versus fuel debate is an important issue, but it's a lot more complicated than some of the simplistic arguments coming from ethanol opponents.