Growers and Grocers

Ethanol is all over the news these days because it offers the promise of home-grown, renewable fuel for transportation as a gasoline replacement. At this time, corn is the main source of ethanol in the United States — and will be for some time until the cellulosic ethanol process becomes feasible. According to the UDSA’s Feed Grains Database Yearbook (Tables 4 and 31), the amount of corn used for fuel alcohol production has nearly tripled since 2001, to about 15% of the total supply.

Corn is also a major source of food in the U.S. (primarily as an animal feed) and thus diversion of the supply to ethanol production will affect food prices. A recent article by Jennifer Bjorhus, writing for the Pioneer Press in Minneapolis-St. Paul, Minnesota, describes the “ripple effect” on food prices:

…food inflation is coming - anywhere from five months to a year or two out, economists and other food industry professionals say.

After all, corn, the country’s No. 1 crop, goes into thousands of household products ranging from the obvious - corn flakes and frozen niblets - to the not so obvious - peanut butter and a six pack of suds. The U.S. consumes so much Zea mays that “Omnivore’s Dilemma” author Michael Pollan calls us “processed corn, walking.”

It’s the meat aisle where U.S. consumers may feel corn’s biggest hit. Corn is the dominant ingredient in livestock feed. And feed forms about half the cost of raising beef cattle and more than half the cost of raising chickens. It’s a whopping 65 percent to 75 percent of the cost of raising hogs. (my emphasis)

Bjorhus continues:

Meat and poultry prices will likely rise 3.5 percent to 4 percent this year if corn remains at $4 a bushel, Wells Fargo agricultural economist Michael Swanson said in an interview. That’s lower than the 7.4 percent increase in 2004 on the “mad cow” scare, but higher than the 0.8 percent they edged up last year. It’s also higher than the official USDA forecast for meats, poultry and fish to rise 0.5 percent to 1.5 percent this year. The USDA, Swanson said, “is in a state of denial.”

[…]

[Cattle raisers are] adjusting, he said, by keeping cattle longer to fatten them and using other food, such as grazing them more on grass and experimenting with co-products of dry-mill ethanol production called distillers grain.

Unfortunately, distiller’s grain doesn’t work as well for chickens and hogs, so those farmers have fewer options to cope with corn’s rally.

“There’s almost no substitute for corn. Chickens like corn. They’re not going to eat tofu,” said National Chicken Council spokesman Richard Lobb in Washington, D.C. Experiments with wheat substitutes haven’t gone well, Lobb said. And too much fish meal gave the chickens an “off flavor.”

Indirect Effects

Production costs for meat are directly affected, but prices on other foods seemingly unrelated to corn might be indirectly affected, as Bjorhus explains:

“Not only is the rising price of corn raising the price of processed corn, it’s also raising the cost of other vegetables,” said Nickolas George, president of the Midwest Food Processors Association, a Madison, Wis.-based group whose members include Seneca Foods Corp. and Del Monte Corp. That’s because food processors, in the middle of setting the year’s contracts with farmers, are finding farmers mulling switching acreage to more profitable corn. As Seinfeld would say, they’ve got hand.

The run-up in corn prices could be another setback for local foods in corn country. For example, farmers who might have been considering growing vegetables, fruit, or grass-fed beef to sell to local markets (like schools and hospitals), might plant corn in the spring since it could be more of a “sure thing.”

Could the Ethanol Boom Make People Healthier?

Overconsumption of soft drinks has been implicated as a potential cause of the obesity epidemic. If drink prices rise, will consumption decrease? Probably not, because sweetener makes up a fraction of the cost of soft drinks. The Pioneer Press article cited above says that “The sweetener represents about 10 percent of the cost of goods sold in the U.S. for Coke and Pepsi’s main bottlers…” Assuming a two- or three-fold markup from raw materials to retail price, that means that the sweetener cost is less than five percent of the retail cost of a soft drink, something easily handled by a nickel retail price increase. How many people will say no to a large soda because of a nickel increase? Not many.
A (Small) Silver Lining for Some?

Reducing America’s corn exports might be a welcome change in Mexico, where small farmers are being crushed by the influx of subsidized corn (see this article by Michael Pollan, for example). This is not only a human issue, but a plant issue: whereas U.S. corn comes from a small number of hybrids and GM-hybrids, the corn grown in Mexico is much more biodiverse. Recently, the LA Times reported on some optimistic farmers in Mexico.

Non-farming Mexicans, however, are not so happy, as “[t]ortilla prices have soared more than 60% in some markets in recent weeks, sparking outrage from consumers and calls by some legislators to regulate the price of the main source of nutrition for Mexico’s poor.” (LA Times)

In some parts of the U.S., cotton is being pushed out in favor of corn (see for example, this article in the Southeast Farm Press), and so other winners might be cotton farmers in developing nations, who often see their crops made uncompetitive by highly-subsidized U.S. cotton (Oxfam has been pushing for reform for a while).

Cheap Fuel or Cheap Food?

When it comes to a choice between cheap meat and cheap fuel, fuel is probably going to win out. A few months ago I wrote about two studies of consumer responses to rising prices. One was for grapefruit, and the other for gasoline. A price increase of 1 percent for grapefruit resulted in a demand decrease of 1.5 percent. But 1 percent price increase for gasoline resulted in a demand decrease of between 0.034 and 0.077 percent — 30 times less than the change for grapefruit. It is a lot easier to make a slight change in one’s diet than to trade in the SUV for a smaller hybrid or remake the suburbs so that every single trip need not be made in a vehicle.

Photograph by John Vachon, from the Library of Congress Farm Security Administration - Office of War Information Photograph Collection.