February 16, 2008

Ethanol is to food prices as greed is to gasoline prices

There is an article in the news today that is good example of what I am talking about.

The pending global food crisis is due, in part, to a rich twist of irony: One of the factors driving up the price of T-bone steak, a dozen eggs and a carton of milk is a perfectly edible vegetable, a staple of many diets - corn.

To add to the irony, we're growing more corn than ever before. We're just not eating it.

"The U.S. is now using more corn for production of ethanol than our entire crop in Canada," says Kurt Klein, a professor of agricultural economics at the University of Lethbridge. "It's huge."

Further the article says...

And this is just the tip of the iceberg when it comes to the relationship between corn and rising food prices. As corn prices rise, farmers plant more corn and fewer fields of wheat, barley, soybean, canola and anything else that sprouts from the ground. Mr. Klein, who seeded his farm to canola last year, notes that soy and canola prices have doubled in the last year and a half while the price of wheat is up 80%.

Full Article

When you check the facts you see that the amount of corn planted last year was at a high point. In fact it was the largest amount of acres planted in the last 50 years.

Corn Acres Planted

2007 - 93,600,000 acres
2006 - 78,327,000 acres
2005 - 81,779,000 acres

So that must mean that the acres planted in wheat, barley, soybean, canola and anything else that sprouts from the ground must have gone last year if what he is saying is correct.

Wheat Acres Planted

2007 - 60,433,000 acres
2006 - 57,344,000 acres
2005 - 57,229,000 acres

Barley Acres Planted

2007 - 4,020,000 acres
2006 - 3,452,000 acres
2005 - 3,875,000 acres

Soybeans Acres Planted

2007 - 63,631,000 acres
2006 - 75,522,000 acres
2005 - 72,032,000 acres

Canola Acres Planted

2007 - 1,183,000 acres
2006 - 1,044,000 acres
2005 - 1,159,000 acres

And as far as anything else that sprouts from the ground, that is a lot of stuff to check. But look at it this way, corn harvesters are very expensive pieces of equipment and unless you already have one chances are you aren't going to switch from something you already know how to grow to corn. So the most likely crops to lose acreage to corn production will always be crops that are normally used in crop rotations with corn.

So as you can see, except for soybeans all other crops mentioned gained acres in 2007 over 2006 numbers. And as far as soybeans goes, since the byproduct of ethanol production (distillers grains) is a substitute for soybeans in livestock feed, increased ethanol production at least partially offsets the need for soybeans. I went into this a little further in this recent post.

Factors effecting food prices are complex issues. For instance since we all know that it takes diesel to run farm equipment and natural gas at food processing plants, how have the recent increases in energy effected food costs? How has the drought in Australia that limited their crop production effected food prices? How has the increased demand for commodities from developing nations such as China and India effected food prices? How has Argentina's ban on most beef products effected meat prices?

Likewise the factors that go into the price of gasoline are equally complex. How do geopolitical tensions in the middle east effect gasoline prices? How does OPEC market controls effect gasoline prices? How does limited refinery capacity effect the price of gasoline during the peak driving season?

There are a lot of factors that go into the price that we pay for food and gasoline, but most people don't care about all of that stuff. They just want a quick, simple answer as to why prices are going up that they can understand. And for food prices that answer is ethanol and for gasoline prices that answer is greed.

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