Monday, February 25, 2008

Ethanol Production Versus Food Production

Two very important stories appeared in the media recently. The first entitled “Drive for biofuels could hurt at pumps”, and the second, “Food costs increase in past year.” These items each were frightening enough when read separately, they were all the more ominous when linked together.

The biofuel item suggested that gasoline production probably will be curtailed in the future because of the increase in ethanol availability. Refinery owners say that to increase their production would mean spending billions to increase capacity. In addition Congress has demanded that auto manufacturers increase fuel efficiency. This will, the refiners say, reduce public need for their product. That then becomes their excuse for not building any more refineries. That could be the truth. Or the truth could lie somewhere between their comments and the following scenario. Consider this possibility. The refiners do not want the competition of ethanol. They also do not want Congress further requiring auto manufacturers to increase fuel efficiency. The price of gasoline is where it is because of two factors. Supply and demand. The supply is controlled by the refiners and the demand is controlled by the consumers. As long as oil companies are the only game in town, they get to call the tune. Is it possible that they are letting everyone know who is really running this show?

Ethanol becomes a competitor for fossil based gasoline. You have surely heard that competition is healthy. Well it is healthy for the consumer. It is not so healthy for the competitors. As long as oil companies control the production of fuel, they have a much better chance of controlling the price. When an interloper such as ethanol enters the picture, they lose some of their competitive edge. They then lose their opportunity to control the price of their product.

The second article had to do with food costs. Just recently I was shopping at a local grocery store and happened upon a posted notice near the dairy section. The ominous warning advised that the price of milk was going to be going up dramatically. According to the other story in the media, food and beverage costs increased 3.9 percent from May a year ago. That, it seems, is just the beginning. All sorts of reasons are offered for these increases. Of course there are the old standbys of energy costs as well as bad weather. There was another reason given also. The demand for corn by the ethanol industry.

As I am sure you are aware, corn is the basic feed of most livestock. It is utilized extensively in the production of milk and eggs. Humans also eat corn products from the vegetable itself to corn meal, sugar, and corn oil. Corn is one of the most commonly consumed agricultural products grown today.

Here then is the link. Oil companies, in order to insure control over their price, will probably cut back on gasoline production, thereby driving the price upward. Ethanol producers will probably make as much ethanol as their refineries will allow to take advantage of the higher price of gasoline. Dairies, livestock feeders, and hatcheries will have to pay through the nose for feed. Food processors will also. This, of course, will force the price of all basic food commodities to go higher and higher.

Who wins and who loses? I can remember when gasoline and milk was twenty five cents a gallon. Bread was fifteen cents a loaf. Those days are over forever. The question is, are the days of ten dollar milk and ten dollar gasoline, as well as five dollars for a dozen eggs just around the corner? I don’t know the answer but I see some truly ominous signs.

Ron Scarbro February 2008

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