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Study: Ethanol Raises Food costs

by 5m Editor
18 May 2007, at 4:20am

US - Booming ethanol production may help lessen U.S. dependence on foreign oil, but it has already increased the grocery bill for the average American by $47 since July, according to a study from Iowa State University.

An ethanol boom could lead to largest U.S. corn boom in 60 years.

U.S. ethanol is made primarily from corn, which is a major source of feed for chickens, hogs and cattle. As a result prices for both meat and eggs will rise, according to the study from the Center for Agricultural and Rural Development, which was partly funded by the livestock industry and released May 11.

"We are going to end up paying more for food domestically because we have an ethanol policy that is basically tying the price of corn and feed and the resulting food to the price of imported oil," said J. Patrick Boyle, chief executive of the American Meat Institute, one of the organizations which helped fund the study.

The livestock industry held a conference call with reporters to draw attention to the impact ethanol is having on food.

"Energy security is an admirable goal but its benefits of ethanol must be weighed against its consequences," he added.

A widely used alternative to gasoline would affect the revenues of companies such as BP (Charts), Chevron (Charts, Fortune 500), ConocoPhillips (Charts, Fortune 500), and Exxon Mobil (Charts, Fortune 500).

Food versus fuel

The rise in ethanol production during the past year has already raised food prices by $47 per person, or 1.3 percent of the cost of a basket of goods typically consumed annually, due to higher corn prices, the study found.

In February this year, corn futures at the Chicago Board of Trade hit a 10-year high of $4.37-1/4 a bushel, which prompted U.S. farmers to plant a record corn crop this spring, according to the Agriculture Department. With traders anticipating a large harvest this fall, corn prices have since fallen to $3.73.

The $47 increase in food comes as ethanol plants produced 4.9 billion gallons in 2006. Ethanol plants are expected to use 27 percent of the U.S. corn crop to make 9.3 billion gallons in the marketing year that starts Sept. 1, according to estimates from the Agriculture Department.

If ethanol production climbs to 30 billion gallons a year by 2012, food prices will have risen a total of $67, or 1.8 percent, the study found.

Meat would cost 7 percent to 8.5 percent more, while egg prices would climb 13.5 percent. Corn prices would climb to $4.43 a bushel.

Biotech companies are working to boost the amount of corn that farmers can produce per acre. The study said that higher corn yields could limit the rise in food prices if ethanol production peaks at 15 billion gallons annually by 2010.



Source: CNN Money.com

5m Editor