Monday, January 31, 2011
Grain usage for food or fuel..?
Continuing a similar theme from last weeks report, should food be used for fuel or for human consumption? The UN Food and Agriculture Organisation (FAO) food price index has surpassed the previous high set in June 2008. With world grain prices and especially corn (the major ethanol crop) continuing to rise, there will be some uneasiness what the future holds for the US ethanol and corn industry.
Henry Ford originally designed his model T to run on pure ethanol (however the vast aquifers of newly discovered oil were soon substituted), but it wasn’t until the last 10 years that crops grown for ethanol has readily gained momentum. Australia has lagged behind the US and their powerful farm lobby with tax credits and forcing ethanol mandate levels. The major crops our fledging industry absorbs is a small portion of sugar and sorghum in QLD.
Based on data from the USDA, in 2001 only 7% (18mmt) of U.S. corn went for ethanol. By 2010, the ethanol share was 39.4% (127mmt) out of total U.S. production of 316.2 mmt! And with corn ending stocks at historical tight levels, these are big numbers for critics to ignore. In short this new demand for corn is a large factor in creating increased prices for grains over the last couple of years.
The elements are in place for another big jump in corn prices this spring, if farmers in the US don’t plant an extra 5 million acres of corn above the 88 million they planted last year. Early indications are that farmers may add only 2 - 3 million acres nationally this May/June, largely because high prices for soybeans provide little incentive to plant more corn.
The ethanol industry is not with out its critics, The Wall Street Journal last week described as "immoral" the renewal of the 46 % gallon tax subsidy for ethanol, and US government a week ago expanded the blend ratio of ethanol in unleaded petrol from 10 % to 15 %. This damage coincides with a growing consensus that ethanol achieves none of its alleged policy goals. Ethanol supporters claim the biofuel reduces U.S. dependence on foreign oil and provides a cleaner source of energy. However US oil imports have increased.
At a time when traditional exporters have experienced supply issues, critics are arguing that it makes no sense devoting scarce farmland to make a fuel that exists only because of taxpayer subsidies and mandates. If food supplies tighten and prices keep rising, critics argue such a policy will soon become immoral but more importantly to what determent to the grain grower who has been enjoying these boom in prices?