Ethanol Driving Up Corn Prices

Published May 1, 2007

Continuing high demand for corn, fueled by increasing ethanol production, will keep corn prices at historic levels for the foreseeable future, the U.S. Department of Agriculture (USDA) announced on March 1.

Fuel Displacing Food

New ethanol requirements for transportation needs in the U.S. will pass the 2.15 billion bushels of corn projected for 2007 and rise to more than 3 billion in 2008, USDA reports. Corn consumers, including livestock farmers, will feel the impact as corn prices hover near $4 per bushel.

The primary driver of the rise in corn prices is the Bush administration’s strategy to replace 20 percent of petroleum usage with alternative fuels, such as corn-based ethanol, within the next decade.

Sugar cane, grown primarily in tropical climates, is a more efficient source of ethanol, but it cannot be widely grown in the United States. The U.S. currently imposes a 54 cent tariff on ethanol imports.

Not Viable Without Subsidies

Jerry Taylor, a senior fellow at the Cato Institute, explained the economics of ethanol versus petroleum fuels at The Heartland Institute’s March 17 Energy Summit in Chicago. Taylor pointed out that without government subsidies and mandates, there would be no commercial market for ethanol because it would cost roughly $4 to $6 per gallon at the pump.

“Ethanol subsidies are directly draining the wallets of American taxpayers,” Taylor said in an interview after the conference. “Not only that,” Taylor noted, “ethanol subsidies are raising prices for fuel consumers, raising prices for corn consumers, and causing a related rise in the price of numerous other food crops.”

Jake Caldwell, director of policy for the Resources for Global Growth program at the left-leaning Center for American Progress, argued at the Summit that up-front subsidies are a necessary component of the government supporting a fragile ethanol economy until it can stand on its own merits in the free marketplace.

Consumers Pay Price

Particularly hurt by rising corn prices are low-income Mexicans who rely on corn as an inexpensive dietary staple. Roughly half of Mexico’s 107 million citizens live in poverty, earning roughly $18 per day on average. Tortilla prices have risen 14 percent during the past year due to increasing corn prices.

“When there isn’t enough money to buy meat, you do without,” observed Mexican citizen Bonifacia Ysidro in the January 13 Chicago Tribune. But “you can’t do without” tortillas, Ysidro added.

The price shock is also being felt by the agriculture industry. Livestock and poultry farmers told the U.S. House of Representatives Agriculture Committee on March 8 high corn prices are making it difficult for them to meet feed costs.

“U.S. pork producers support the development and use of alternative and renewable fuels as a way to reduce America’s dependence on foreign oil,” Joy Philippi, a Nebraska farmer and past president of the National Pork Producers Council, told the committee, “but we continue to have jitters over the rapid expansion of the corn-based ethanol industry and the unintended consequences it is having on the U.S. livestock industry.”

Jay Lehr, science director for The Heartland Institute, expressed optimism that technology may soon provide an answer to the corn-based ethanol dilemma. “Scientists are currently performing intensive research on creating, through biotechnology and genetic modification, grains that will be as good or possibly one day better for ethanol production,” said Lehr. “It is not likely that corn as we know it will be our major ethanol feed stock within another 10 years.”

John Dale Dunn, M.D., J.D. ([email protected]) is a member of the Science and Policy Advisory Board of the American Council on Science and Health and teaches emergency medicine at CR Darnall Army Medical Center, Fort Hood, Texas.