Associated Press

11-22-08

Is biofuel still blamed for high corn prices?

By Deborah Jian Lee

AP Writer

Q: Now that corn prices have plunged, is the ethanol industry still in the hot seat for driving up prices?

A: Just a few short months ago, when agricultural commodity prices reached their peaks, U.S. biofuel companies took the heat for a litany of woes: high food prices, world hunger and misplaced government spending. The corn-dependent industry faced blame from a diverse alliance of cattle ranchers, grocers and environmentalists.

From the spring through the summer of this year, the two sides sparred publicly in a food versus fuel debate. As corn prices hit a record high of nearly $8 a bushel and consumers buckled under hefty grocery prices and a bleak economy, many pointed to the ethanol industry, buffeted by government subsidies and mandates for high production, as the primary culprit.

Corn prices, like most commodities, have plunged since the summer buying frenzy, falling from almost $8 in July to $4.25 in October. Ethanol production hasn't eased up and the industry is on target to meet its goal of churning out about 9 billion barrels of ethanol this year.

John Miranowski, a professor of economics at Iowa State University, said, "it's really misleading to blame ethanol" for 2008 food price spikes.

"It was really the demand for oil that was driving things last spring and summer, and a growing demand for livestock products globally," Miranowski said in a phone interview. "When the price of oil falls, commodity prices are likewise going to fall."

A weakened dollar and Midwestern floods that wiped out corn fields also bolstered already soaring corn prices. And the ethanol industry played its part too, adding to the competition for the limited supply of corn.

But since the midsummer price highs, the din of the food versus fuel debate has since receded to a murmur, and even the Grocers Manufacturers Association, one of the most vocal biofuel critics, seems to be backing off a bit.

Ethanol production is just one in seven sources of commodity price inflation, Scott Faber of the Grocers Manufacturers Association said. The rise in global demand, energy prices, speculation, the weak dollar export restrictions and poor weather also contributed to the surge in corn prices over the past three years, he added.

"Our view continues to be that accelerating the development of second generation fuels that convert crop waste and wood waste is ultimately the best way to meet our energy needs without undermining our food security needs," he said.

Ethanol is now made primarily from corn that can be used in feed, or as food.

The movement toward more efficient biofuels, however, will be a long process, said Chad Hart, an agricultural economist.

The drawback of biofuel production is that it does contribute to food price increase but it also holds back gas prices as it represented seven percent of our gasoline usage this year, Hart said. Pushing toward second generation fuels, or cellulosic ethanol, could be a difficult process, one that may introduce indirect energy costs, storage problems and other environmental drawbacks.

Though it has simmered in recent months, criticism of the ethanol industry will likely re-ignite, Hart said, but that's just part of the growing pains of forging a new industry.