Ethanol Mandate Seen Disrupting Food Supply

WASHINGTON — President Bush's proposal to increase America's use of ethanol fuel to 35 billion gallons a year in less than a decade would send a shock wave through the nation's food supply, industry analysts said Thursday.

"The days of the United States meat industry in its current state now appear to be numbered," David Nelson, an agribusiness analyst for Credit Suisse Group, said in an e-mail to clients.

President Bush acknowledged Thursday that the goal he described in Wednesday's State of the Union address could hurt farmers, at least temporarily.

"There is a constraint, and that is, the ethanol use today comes from corn, and we've got hog growers and chicken growers that need corn to feed their animals," the president said. "And therefore, it's going to be kind of a strain, at some point in time, on the capacity for us to have enough ethanol to be able to make us less dependent on oil."

The president spoke during a visit to a DuPont laboratory in Delaware where scientists are working on solving a variety of chemical puzzles that so far have blocked commercial use of "cellulosic" ethanol, which can be squeezed from switch grass, sawdust or any other substance that contains cellulose.

So far, there are no commercial-scale cellulosic ethanol plants in operation.

The country is now using ethanol fuel at the rate of over 5 billion gallons a year, according to industry publications. Although that is only one-seventh the quantity Bush foresees for 2015, the demand has pushed corn to near-record prices.

Corn futures for March delivery closed at pennies over $4 a bushel Tuesday on the Chicago Board of Trade. The price is nearly twice as high as traders were paying a year ago.

The livestock industry is not the only part of the food economy that feels the pinch.

— Soft drink bottlers, who use millions of gallons of corn-derived fructose sweetener, are likely to increase prices this year by around 4 percent, independent industry analysts say. Coca-Cola spokesman Charlie Sutlive said the effect of corn prices will appear in the company's annual report in February, and likely would be a topic discussed at its earnings conferences at that time.

— In Mexico, President Felipe Calderon was forced last week to abandon his free-trade principles and pressure producers of corn products to accept a price ceiling in order to hold down the soaring cost of tortillas, the staple food of his country's poorest people.

— Bourbon drinkers may contribute to the country's fuel savings by making fewer trips to the liquor store. Jim Beam Brands in 2004 spent $10.3 million to purchase 3.4 million bushels of corn. This year, that corn will cost the bourbon producer nearly $14 million.

In his note to clients, Nelson said that if only a little more than one-third of the ethanol fuel in the president's goal comes from corn, roughly half of the country's corn crop would end up in gas tanks instead of the troughs that feed chickens, pigs and cattle or the tanks that brew corn sweetener.

In response to record corn prices, American farmers already are planting corn on land they normally would use for soybeans — an expected 8 million acres this year and possibly another 5 million acres next year, Nelson said.

Meanwhile, European and Asian economies are moving rapidly into "biodiesel" fuel, which is synthesized from soybeans and other oilseeds.

The expected increase in biodiesel demand by 2010, accompanied by reductions in U.S. production, could lead to the clearing of "tens of millions of acres" of forest in Brazil, Indonesia and Malaysia, he said.

"The gates are down. The lights are flashing. Does anyone see the train coming?" Nelson said.

Officials of the Renewable Fuels Association, the trade group representing owners of America's ethanol plants, most of which are new, said the president's speech outlined an "eminently achievable goal."

Asked in a telephone news conference Thursday if such a rapid increase in ethanol use could disrupt the country's food supply, Bob Dinneen, the association's president, replied, "Absolutely not."

"We believe U.S. farmers can indeed provide growing demands for ethanol as well as meet the needs of the livestock industry," Dinneen said. He added that part of that belief is based on the assumption that per-acre yields will increase dramatically in the next decade.

The National Energy Policy Act of 2005 set national mandates that require refiners to use a climbing quota of ethanol in gasoline, and allows them 51 cents per gallon in tax credits.

The mandates require national consumption of 7.5 billion gallons in 2012.

Dinneen said the industry expects to pass that goal by next year.

Dave Warner, a spokesman for the National Pork Producers Council, said even the current price of corn likely will drive small pig farmers out of business.

"A large operator may survive with $4 corn and pass the price on to the consumer," he said, "but small farmers will go under."

The price of pig feed has gone up 25 percent since summer, he said, "and it's not the price so much as the fact that it's just not available."

Warner said that the 111 ethanol refineries now in operation, the 75 under construction or expansion, and others still being planned would be able to use 10 billion bushels of corn per year by 2009 — roughly the same as the entire 2006 crop.

On the Web:

Renewable Fuels Association: www.ethanolrfa.org

National Pork Producers Council: www.NPPC.org