Corn fuel’s role in food costs debated
July 15, 2007
Steamboat Springs — A farmer plants corn in the Midwest, and people in Steamboat Springs drink less beer.
It may sound like something out of chaos theory, but the increased production and rising cost of corn in response to the push for ethanol fuel has put upward pressure on the cost of other goods, from eggs to microbrew. Call it the ethanol effect.
Retail food costs were up 4 percent in the second quarter from 2006, according to the American Farm Bureau Federation. And the consumer price index for all food is expected to rise 3 to 4 percent in 2007, according to the Department of Agriculture.
Jamie McQuade, owner of Winona’s Restaurant in downtown Steamboat Springs, said the price she pays for dairy products and eggs has doubled. And Chris Kaminski, co-owner of Steamboat-based beer distributor B & K Distributing said consumers could see a 50-cent to $1 increase in the cost of a pint come this winter.
Nationwide, ethanol has been a widely blamed cause for food cost increases, but the extent to which it is fair to blame the production of the corn-based fuel is a source of debate. Food-as-fuel opponents such as Fidel Castro have gone as far to say ethanol production is starving the world’s poor, while corn proponents say the claims are more rhetoric than reality.
A government mandate to increase production of renewable fuel such as ethanol and tax incentives for the production of biofuels have combined to drive up the demand, and therefore the price, of corn. USDA projections show average corn prices reaching $3.75 a bushel in the 2009/2010 marketing year, declining to $3.30 by 2016/2017 as the ethanol expansion slows. These prices represent record highs, according to the USDA, and are unprecedented during such a sustained period of time.
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As farmers are lured by the higher prices and decide to plant corn instead of other crops, such as soy, the costs of those crops also rise. This domino effect leads to higher food costs worldwide, and the claim that the U.S. is favoring the feeding of cars instead of people.
Blame the weather
Those on the other side of the argument say weather and energy costs have far more to do with the rising costs of food.
The ethanol effect has more validity in situations where competition for corn is direct, said Paul Westcott, agricultural economist with the USDA. For example, the type of low-grade corn used in ethanol production also is used in animal feed.
This has had a significant effect on one of Colorado’s biggest industries: cattle. As feedlot ranchers pay more for feed, they are paying less for cattle calves, which are raised on wide scale in Routt County. Steamboat ranchers such as Jo Stanko said the price she fetches for her calves has been in decline.
The ethanol effect was a topic of discussion at the Colorado Cattlemen’s Association’s annual meeting last month in Steamboat. The association’s executive vice president, Terry Fankhauser, said the subsidies given to ethanol producers to purchase corn are unfair.
“We’re an organization that promotes fair and free markets,” Fankhauser said before the convention. “We don’t have a problem with the competition, but we’re at an unfair disadvantage when it comes to purchasing food.”
Corn is a popular ingredient in chicken feed, and McQuade said her suppliers have cited ethanol as a source for the cost increases she has seen for eggs as well as milk. McQuade said the price she pays for milk and eggs usually increases in the winter, then falls in the summer. This year, however, McQuade said prices have remained high.
“We usually take a hit in the winter and bounce back in the summer,” McQuade said. “We’re not going to balance out this year.”
When it comes to other products, ethanol may not be as responsible for price increases as some claim. The claim that corn is displacing barley and increasing the price of beer, is one such example.
“That hypothesis is not supported,” said Westcott.
Westcott said barley acreage has increased by 600,000 acres out of 4 million this year. And while the cost of feed barley has increased 60 percent during the past year, the price of the malting barley used to make beer has only increased 15 percent.
“Ethanol is unfairly getting a bad rap because people aren’t looking at all the other factors that are involved in food prices,” said Terry Franci, an economist with the farm federation.
Charlie Noble, owner of Mahogany Ridge Brewery and Restaurant in Steamboat, buys 30,000 pounds of barley every year. He said he has not received word from any of his suppliers of a major price increase or heard anything about ethanol driving up prices. Noble has not raised the prices of his pints in a year and a half, when he went from $3 to $3.50.
Both Noble and McQuade said energy and labor are the primary source for rising costs for their businesses.
Doug Odell, founder and brewmaster of Fort Collins-based Odell Brewing Co., said ethanol is only one factor contributing to the rising cost of barley.
“There are other forces involved here,” Odell said, citing poor crop seasons in Europe and Australia and the falling value of the dollar as examples.
Furthermore, Odell said price increases for consumers would depend on the persistence of high barley costs and what competitors do.
“Brewers can only absorb increases for so long,” Odell said.
Kaminski said brewers across the board are increasing prices this year. He said the Rockies Brewing Co., makers of Boulder Beer, are increasing prices for the second time in 13 months. He estimated a 50-cent to $1 increase in the average price of a pint by the first of the year.