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Food vs. fuel debate is ignited: Price of ethanol-ingredient corn soars, squeezing margins for livestock, food

February 5, 2007

The ethanol gold rush sweeping Indiana and other states that grow its prime ingredient, corn, is threatening profit margins for livestock producers and portends higher prices at the supermarket.

Perhaps no sector is more nervous these days than pork, where Indiana ranks fifth in production nationally.

"Much higher feed costs are likely to eliminate the profit potential for pork production in 2007," Chris Hurt, a Purdue University agriculture economics professor, said in his recent market outlook report.

Corn, the primary feed for hogs, has risen more than 65 percent in the last year, topping $4 a bushel. A big reason is speculation over the corn needs of 75 U.S. ethanol distilleries announced or under construction.

At the Indiana Pork annual meeting Jan. 30, an Iowa State University professor of economics warned corn prices could rise 40 percent, noting that demand for corn for ethanol is expected to double to 4 billion bushels next year.

"That was a shock to us," said the professor, Dermot Hayes, noting that the total U.S. corn harvest last year was almost 11 billion bushels.

Pork producers used about 1.1 billion bushels as feed.

Just a 25-percent increase in corn prices costs the pork industry $200 million a month, Hayes said.

By some estimates, demand from the ethanol industry could soar to 8 billion bushels as the distilleries go online. About 20 of those are slated for Indiana, where two ethanol plants already are operating.

While the leftover grain in ethanol production can be used as animal feed, this socalled distiller's grain is more problematic to use for hogs than in poultry and beef, because of nutritional deficiencies and incompatibility with feeding systems.

The biggest single cost for pork producers is feed, said Mike Platt, executive director of Indiana Pork, a trade and lobbying group. One silver lining is that some pork producers, like David Hardin of Danville, also grow their own corn.

For farmers who don't, rising corn prices have an immediate effect on their bottom line, Hardin said. Fortunately, for the moment, "hog prices have stayed at high levels."

Also, the pain could be eased if a lot more corn is grown in the next few years.

Still, "it's something that we're going to have to deal with," Hardin said. "There's been a paradigm change, a whole new use for what is our primary feedstock."

Many in the pork industry say it's an unintended consequence of Gov. Mitch Daniels' push to position Indiana at the center of the burgeoning ethanol industry.

To the applause of Indiana's corn farmers, the state has pledged incentives worth more than $10 million, not to mention a tax credit of 12.5 cents per gallon of ethanol they produce, to lure new plants. The federal government already provides a 52-cent tax credit for every gallon of pure ethanol that plants refine.

But the heightened demand for corn nationwide has squeezed some of the 3,000 pork operations in Indiana, where pork is a $3 billion industry.

"It's no secret that growth in ethanol is putting significant pressure on corn prices," Indiana Agriculture Secretary Andy Miller told pork producers meeting at the Indiana Farm Bureau downtown.

Miller said Daniels also wants the state to lead the way in developing ethanol from grasses and other so-called cellulosic, non-food sources.

"We can't solve this nation's energy prices on the back of corn" alone, Miller added.

Daniels' team is backing House Bill 1548, introduced by state Rep. Dan Stevenson, D-Hammond, which would set aside $20 million in credits for cellulosic ethanol production.

Cellulose to the rescue?

Purdue University has been on the cutting edge of trying to make ethanol production cost-effective from common plants not used for food. Almost two years ago, it developed a strain of genetically altered yeast that allows 40 percent more ethanol to be made from sugars found in things like cornstalks and wheat straw.

Purdue licensed the technology to Canadian company Iogen Corp., which is trying to build plants competitive with those milling corn. But Purdue researchers are still trying to improve the efficiency of the yeast, said Nancy Ho, a senior research scientist at Purdue and one of the nation's top researchers in the field.

Ho, who sat near first lady Laura Bush during President Bush's State of the Union address last month, said it should be a couple of years before the cellulosic process is cost-competitive.

Bush has called for greater use of ethanol, which is used as an additive to help gasoline burn cleaner and as a virtual alternative to gasoline as E85-an 85-percent ethanol/15-percent gasoline blend that can be burned by millions of vehicles.

"For policymakers, it is most important to realize that there are many positive advantages of using corn for bio fuel ... but there are unintended negative consequences in other sectors," Hurt said.

For now, corn farmers are smiling ear to ear.

"Ethanol is the mistress of the corn industry," said Christopher Novak, executive director of the Indiana Soybean Alliance, who also represents the Indiana Corn Growers Association.

"And yet the wife-we recognize the wife is there ... and the wife is the livestock industry," Novak told pork producers. But, he added: "We won't cast the mistress aside, unfortunately. Ethanol is here to stay."

Novak said the rise in corn prices amounts to a "period of change and transition, but the market will stabilize."

He noted that there is no corn shortage in Indiana. Rather, the overall market for corn is being bid up on ethanol speculation.

He said farmers will find a way to plant more corn and that there are 40 million acres in reserve land set aside by the federal government. Couple that with biotechnology advances that improve yields and new research to make distiller's grains more palatable for hogs, he said.

If farmers don't dramatically increase corn yields this year, the country could face a corn shortage in 2008, thanks to demand for ethanol, Hayes said.

Corn supply already is growing tight in some parts of Iowa, which has dozens of ethanol plants. In fact, the state soon could become a corn importer. That's a big problem because the availability of inexpensive feed has been one reason the United States has been so successful as a pork exporter, Hayes said.

"It will be an enormous challenge for the pork and poultry sectors to continue to export meat if the U.S. becomes a grain [corn] importer," Hayes said.

Moreover, if the cost of corn for feed doubles, "we will also see some significant impacts on retail meat prices."

Not just meat

Purdue's Hurt said that, as corn prices rise, some farmers will be inclined to grow corn rather than other crops, such as tomatoes. As the logic goes, tomato processors then would have to pay tomato growers more for their crops to keep them aboard, resulting in higher prices for tomato products in supermarkets.

Steve Smith, director of agriculture at Elwood-based tomato processor Red Gold, said there's no immediate concern about that scenario. Tomato growing is specialized, so many farmers couldn't quickly switch to corn. Besides, they receive enough of a premium to keep growing "so it's a very profitable crop."

"What we are very concerned about is two to three years out" if corn keeps soaring, he added.

Meanwhile, corn-based foods and products already have become vulnerable to rising corn prices. New Jersey-based National Starch, which has a large plant in Indianapolis, recently raised prices for its food ingredients by up to 10 percent-particularly for unmodified cornstarch products.

Late last month, Illinois-based Archer Daniels Midland Co. told analysts that corn soon might top $5 a bushel-the first time since 1996.

That could take steam out of the ethanol gold rush. Purdue's Hurt estimates that the break-even point for some ethanol refineries is when corn costs $4 to $4.50 a bushel. Already, one plant proposed for Defiance, Ohio, has been put on hold.
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