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Discussion: Food vs. Fuel - Ethanol's Place in the Economy

posted on May 22, 2008

So, how responsible is ethanol for all the ills for which it has been blamed? What effect has the fuel had on gasoline prices? And how serious an impact is it having on food prices? And, if food production is so reliant upon corn, how much of the annual crop can be diverted to fuel production without farming the broader economy? We'll take up these questions to Iowa State University economist, Bruce Babcock.

Yeager: And first of all, Bruce, thanks for coming in tonight. Is ethanol deserving the bad rap that it appears to be getting and the blame for many of these causes right now?

Babcock: Well, no, in a word. It is getting a bad rap and one reason why it's getting a bad rap is it's so easy because corn is in almost all the food that we eat that people just think, well, if the price of corn has gone up by three or four dollars a bushel that must mean that it's responsible for everything that is happening with food prices.

Yeager: But the high fructose corn syrup is such a small -- that's what it's used mostly for in most every food product -- but it's such a small percentage of the overall food product.

Babcock: Well, yes, the corn syrup is a small percentage of soft drinks, of final consumer dollars spent on soft drinks, it's a very small percentage. So, that is almost not having much of an effect on soft drink prices at all. But really where almost all the corn in our food supply is going is in livestock feed. And so as feed costs go up we'll eventually see higher meat prices because of that.

Yeager: Because corn is used to fatten up the animal, they go to some 30, 60, 90 day feed operation and that is the feed corn that we see in the majority of fields in this state.

Babcock: Yeah, that's right. Up until ethanol came in that feed use of corn was the vast majority of the corn crop.

Yeager: Has ethanol kept our fuel prices -- the price at the pump is almost to $4, pretty darn some close as some premium blends are at $4. How much has ethanol done to keep prices down to not already be past $4?

Babcock: That's such a hard question to answer but a colleague of mine, Professor Hayes and his graduate student, did a study on that and they came up with about 30 cents a gallon. I did another kind of study that said given where we are today with ethanol what if we backed off a little bit, what would it be? And so if you had a 20% reduction in ethanol production I estimated somewhere about four or five cents a gallon, not big but every little bit helps I think.

Yeager: And do we think that the political climate is right to continue to reduce some of those things?

Babcock: Well, right now the political climate may be moving against corn ethanol but the economic climate actually is moving towards corn ethanol because the higher the price of gasoline the more profitable it is to produce ethanol and so the markets are pretty much screaming at us, we want more transportation fuel, we don't care what kind of it and corn ethanol is the one alternative fuel that we have.

Yeager: And we're starting to see so many other ethanol types whether it's cellulosic, switchgrass -- in those types of products how far is that advancement going to help and is that the answer? Some of those are used for food or other byproducts of food. Is that the right direction that we're going?

Babcock: Well, I think the right direction to where we're going is to try to make our buyer fuels out of something that doesn't use land that could be grown for crops. I mean, corn ethanol has been a huge success story for Iowa but there's probably limits to what we want corn ethanol to do given our current yields and so I think eventually within two or three years we might be capped out or maxed out on corn ethanol and I think what we might start doing is start incentivizing feed stocks for biofuels that don't use up land that could be used to grow food. And the first example of that, of course, is corn stover, the stalks and the cobs of corn land, which Iowa has plenty of, will probably be the first widespread feed stock for cellulosic ethanol.

Yeager: And so that is one direction that we're going in. Where are some of those technologies? Who is helping push those technologies and work on those?

Babcock: Well, many players are helping to push the move towards cellulosic ethanol. One of them is the Department of Energy is putting in about a billion dollars for pilot projects and research projects on how to convert kind of waste, woody lignocellulose into biofuels. The other is venture capitalists. They're getting into the game big because at $4 gasoline if you can find a solution that produces a substitute for $4 gasoline at say, $2, well you've made yourself $2 a gallon. So, venture capitalists see this as a very big area so both private capital and public capital are working to solve the problem.

Yeager: Are those part of the factors in what is throwing off the price so much? We talk about speculators or things like that. Are those more of the variables that are throwing off some of this market?

Babcock: Well, why this market is so high I don't think anyone knows. They just had a hearing in the Senate and the oil companies didn't know why it was.

Yeager: Well, and one of them, I believe it was maybe the Chevron CEO had said that ethanol is the big blame -- he's putting everything across the board and blaming the ethanol for that. What is the thought from your standpoint and understanding how ethanol and more of the economy based -- when an executive says things like that how accurate is what they're saying to what really is?

Babcock: I heard that statement, he was saying that corn ethanol is helping increase the volatility in gasoline prices. I'd say it's the opposite. It's reducing the volatility because essentially as we expand corn ethanol what we're doing is creating refinery capacity out there essentially as a substitute. So, we're not running the refineries, the gasoline refineries as heavy as we would which means that we don't have these bottlenecks in production of fuel so I think corn ethanol probably has reduced gasoline volatility, not increased it.

Yeager: Why does it seem that the scientific argument has been thrown out the window and this has become a public relations battle?

Babcock: Because corn ethanol threatens certain other vested interests. It threatens the vested interests that rely on inexpensive corn to create food, inexpensive corn to feed livestock and it threatens the oil companies who, you know, that 30 cent a gallon decrease in gasoline prices comes right out of the pockets of oil companies and refineries. And so corn ethanol is a threat to vested interests and because the ethanol industry really owes its existence to a large part to a government decision, a public policy decision to find alternative fuels it's ripe for attack on saying why are we subsidizing the corn ethanol industry. So, I think that is why you're getting the heavy guns out in the public relations.

Yeager: Well, and there was a federal mandate for ethanol but then there was a Texas Governor who was like we're going to, let's put the brakes on this Mr. President, who is from Texas. Texas seems to have a lot of oil. Is that where that interest is coming from?

Babcock: Well, actually I think that interest comes because Texas has a lot of cattle that are being fed very expensive corn and I think that in large part I'd rather see it as a cattle interest rather than an oil interest there.

Yeager: Well, you talk about cattle, we need to get a little bit into food more. Why are we seeing food prices so much? We've seen wheat go up. There's a lot of factors going in. There's droughts, there's floods, there's no crop being put in. Worldwide market, we're so much more of a worldwide market now. Why is that and why is that such an impact on our food price, what happens in Vietnam or in China?

Babcock: Well, over the last 20 years we've globalized. We've become more integrated in almost all markets, not just food but aircraft, automobiles, steel, anywhere you look it's been more of a globalized, integrated market and food is no exception. So, what happens in Australia if you have a drought and they have a shortage of wheat affects the demand for wheat in the Minneapolis grain exchange or down in Kansas City or North Dakota. So, those things have ripple effects and frankly the world wheat stocks, the reserve stocks have gotten so low that's really driven up, caused people to worry, some panic buying, some hoarding and that caused the wheat price to shoot up like crazy.

Yeager: When you say the reserves aren't as high why have we started to bleed out some of those reserves?

Babcock: I think we took agricultural production for granted and the low prices that we saw for almost all of the commodities throughout the early part of this decade, the late part of last decade, we had a certain complacency among farmers, among investors, among governments that we'll always have inexpensive commodities. So, over the last eight years we've been basically consuming more than we've been producing and right now we're suffering the consequences of that particularly on soybeans, wheat and now corn.

Yeager: Americans love to consume whether it's the latest trend or food or fuel. The long-time argument against the United States, if anybody who has every traveled to Europe, they're like when we complain about gas prices it's like haven't you see what it's like in Europe. Well, food prices, we've always had a relatively cheap food market. Look into your crystal ball. Where do we see these prices going the next six months to a year to two years? How far can you look out I guess?

Babcock: I'll look out two or three years with the rice and wheat markets. Those ought to be self-correcting. We ought to see rice come down significantly from today's level and that's good news for the world's poor who rely on, a lot of whom rely on rice as a staple crop. Wheat prices have to come down too over the two or three years. It just doesn't cost $8 a bushel to grow wheat so I think the markets are signaling the world's farmers to grow more wheat. For corn and soybeans it's a little bit more complicated because we do have these mandates in place and so the demand for corn and soybeans is going to be high relative to how much the U.S. is going to be producing so I see price strength for corn and soybeans for quite a while which means that our domestic and world livestock industries are going to have to cut back a little bit and we're going to see higher livestock prices in the future.

Yeager: Which translates to higher meat which we'll continue to maybe see higher prices in the grocery store.

Babcock: That's correct.

Yeager: Bruce Babcock from Iowa State University Center for Rural and Ag Development. Thank you for coming in tonight to help in our debate, I appreciate it.


Tags: agriculture biofuels corn economy Energy/Environment ethanol farmers farms fossil fuels HEAT hunger Iowa politics pollution poverty renewable fuels soybeans transportation