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Ethanol's Corn-Fed Boom Holds Hidden Costs: Higher Food Prices

by 5m Editor
9 February 2007, at 9:37am

US - Arturo Esquivel shakes his head as he pays 10 pesos (90 cents) for tortillas in Mexico City, two- thirds more than a year ago. He'd be even angrier to learn that Chicago bond analyst Philip Adams's SUV may be to blame.

The General Motors Corp. Yukon XL sport-utility vehicle runs on ethanol, a fuel made from the corn that also influences the cost of Esquivel's tortilla, feeds the chickens, pigs and cows raised for consumption worldwide and sweetens soft drinks.

Demand for corn as the raw material for an alternative vehicle fuel is creating unintended consequences throughout the global food chain. Midwest corn growers are commanding prices not seen in a decade: the crop surpassed $4.20 a bushel Jan. 17, almost double its September price. Yet farmers who raise livestock are seeing feed costs soar, and companies from Tyson Foods Inc. to Coca-Cola Co. are warning of higher prices. Even environmentalists say using more corn will have drawbacks.

``We are seeing the most dramatic, fast-moving changes in Midwest agriculture in at least half a century,'' says Robert Wisner, an economics professor at Iowa State University, in Ames.

Hog farmers, cattle ranchers and poultry producers are among those in the $125 billion U.S. livestock industry losing money. The U.S. Department of Agriculture says the cost of American staples such as pork and chicken may increase 6 percent at current corn prices. The fallout is especially severe in developing countries, including China. Mexican President Felipe Calderon is pressing tortilla makers to cap prices.

'Making Life Harder'

"It is making life much harder for those of us who make the minimum," says Esquivel, 38, a maintenance worker in paint- splattered overalls who earns the equivalent of $6.03 a day.

Prices of the white corn that go into Mexican tortillas are indexed to yellow corn traded in the U.S. and used in ethanol plants, says Antonio Ochoa, vice president of Latin America at R.J. O'Brien and Associates Inc., a futures brokerage in Chicago. "Every time corn here goes up, it is going to have a direct impact on tortilla pricing," he says.

Source: Bloomberg.com

5m Editor