Bush's ethanol dreams make corn a hot commodity

By Frank Brandmaier Sep 1, 2007, 10:10 GMT

   Washington - When Americans fire up their grills for late summer barbecues over the next few weeks, a cloud will be hanging over them in the form of higher prices for steak, chicken and ribs.

The reason can be found in the rapid rise in the cost of corn, which is used not only as food for animals that provide meat, but also as an important basic ingredient used in the production of ethanol in the US.

President George W Bush unleashed the new popularity of ethanol when he set a goal to lower US dependence on foreign oil. The price of corn has shot up to nearly double 2005 levels in response to the increased demand.

It's no wonder that ethanol refineries are springing up like mushrooms, particularly in mid-western US corn belt states. As of May there were 120 corn refineries countrywide and 75 more were under construction.

The White House's fuel dreams are ambitious. In his State of the Union address in January, Bush set a goal of reducing petrol consumption in the car-loving country by 20 per cent in the next 10 years, largely by turning to ethanol and other alternative fuels.

Ethanol is already mixed in with gasoline, but it accounted for only around 3.5 percent of US fuel consumption last year. Reaching the goal of 15 per cent would require 133 billion litres.

Last year, one-fifth of US corn production was used for ethanol. That compares with 12 per cent two years earlier. Wheat and soybeans also cost more because land used to grow those crops is being turned over to grow corn.

'Anybody that knows anything about the marketing of the corn market knows that when you raise the price of corn you are going to create problems in all of the markets that use corn,' said Ronald Cotterill, director of the Food Marketing Policy Centre at the University of Connecticut, in the Washington Post.

Corn is used not only as feed for chickens, hogs and cattle, it is also used to make high-fructose corn syrup found in products such as cookies and soft drinks. US chocolate maker Hershey has lowered earnings projections because of higher milk costs, and corn flakes producer Kellogg's has raised the price of cereal.

The phenomenon of rising food prices is not limited to the US. Last year food prices rose worldwide about 10 per cent, largely due to more expensive corn, wheat and soybean oil, the International Monetary Fund said in a report early this year. A poor harvest and demand for biofuels in the US are the chief reasons.

Increased demand for biofuels is expected to continue pushing prices for corn and soybean oil higher, the IMF said in its prognosis.

In Mexico the result of higher prices for corn has been dramatic: corn tortillas, a staple of the Mexican diet for 50 million low-income people, suddenly cost double. The government has been forced to intervene with price controls.

Now there is evidence that ethanol made from corn, as it is in the US, is neither cheaper nor cleaner, the magazine Economist reported. The biofuel provides only about 1.5 units of energy for every one unit needed to produce it.

State subsidies lie somewhere between 5.5 billion and 7.3 billion dollars a year, according to the International Institute for Sustainable Development.

Ethanol made from sugar cane, by contrast, produces far more energy than is needed to grow it - an ouput-input ration of about 8-1 - the Economist said. Brazil is the main producer, but Washington has placed duty on the import of sugar cane-based ethanol.

'The US should trash its silly policy. If it stopped taxing good ethanol and subsidizing bad ethanol, the former would flourish, the latter would wither, the world would be greener and the US taxpayer would be richer,' the magazine recommended.