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Ethanol's Popularity Means Pricier Corn

by 5m Editor
6 February 2007, at 9:22am

NEW YORK - Forget about oil as the inflation bogeyman we should fear the most. The surging price of corn is the latest threat to Americans' wallets, and where it hits them may go beyond the supermarket.

The issue here really starts with the government's push to increase the use of alternative fuels, such as ethanol, to reduce a reliance on foreign oil.

Because most ethanol produced here is made from corn, that burgeoning boom is straining corn supplies and boosting prices.

That makes everything from soda (sweetened with high-fructose corn syrup) to the steak from corn-fed beef more expensive. It's also crimping ethanol producers' profitability, which could lead to calls for increased federal subsidies to keep them afloat.

This is all happening just as consumers are starting to feel some relief from lower energy prices, which are down nearly 30 percent from the highs reached last summer.

Inflationary concerns have now shifted to corn, which has doubled in price from a year ago to a 10-year high of about $4 a bushel today.

Last year's corn harvest was the third-largest in U.S. history, but as Merrill Lynch chief North American economist David Rosenberg notes, that large supply is being met by even bigger demand from the fast-growing ethanol market.

Congress passed an energy bill in 2005 that mandated the doubling of alternative-fuel use by 2012, to 7.5 billion gallons a year. Then President Bush upped the ante in his State of the Union speech in January by seeking a boost to 35 billion gallons a year by 2017.

That would be a big climb from where we are right now: An estimated 4.9 billion gallons were produced in 2006, according to the Renewable Fuels Association, a trade group representing the ethanol industry. In 2000, 1.6 billion gallons were produced.

There are 112 active ethanol plants; 77 are under construction, and seven are being expanded, the trade group said. Big companies, such as Archer Daniels Midland Co., and smaller start-ups and farmers have jumped in on the ethanol-driven corn rush.

But making money on ethanol has become increasingly difficult, with corn prices surging at the same time that oil prices are falling to 18-month lows. The spread between the sales value of finished fuel ethanol - which is tied to gasoline prices - and the price of corn is getting squeezed fast.

The net profit of a 50-million-gallon ethanol plant today is about 1.1 cents a gallon of ethanol produced, down from 50 cents a gallon on Jan. 1 and $2.50 a gallon in June, said Rick Kment, an analyst at DTN, an agricultural commodities research firm.

Source: courant.com

5m Editor