Is boom a boon?: Ethanol among factors pushing prices sky-high
Jan 17, 2008 (The News-Sentinel - McClatchy-Tribune Information Services via COMTEX) -- Ethanol is no flash in the pan, and it's only part of the reason commodity prices are booming, with more growth on the horizon, a Purdue University economist said Wednesday at the Fort Wayne Farm Show. "It looks like it's going to be a couple of years before we can get supply up to meet the demand surge. After that, there will be a continuing growth in demand," said Chris Hurt, a professor in the Department of Agricultural Economics. The demand ethanol creates for corn has contributed to a doubling of corn prices in the last two years. And with more farmers switching some of their acreage from soybeans to corn last year, now soybeans don't meet demand, either. "We have this week seen record high prices on soybeans, at least in soybean futures," Hurt said. "This is a massive increase in demand for our crops, but it's also worldwide. Is the world going to be a panic buyer on corn and soybeans?" So far, it appears that commodity buyers around the world aren't cutting back on demand, he said, and recent price increases almost look like panic bidding. "We are not far from food emergencies. ... We're getting into ouch points, critical points -- panic points -- with some of the end users," he said. If bad weather cuts yields, Hurt warned, "We could be looking at food emergencies or grave concerns about basic food supplies." What makes for such an emphatic forecast from an economist? First, the ethanol boom. About 1 billion bushels of corn were harvested in Indiana last year. Two years ago, ethanol consumed 4 percent of that yield. Last year, ethanol plants had expanded so rapidly that they used 16 percent of the corn grown in the state. Now add ethanol plants due to begin operating this year, and the share of that billion-bushel bounty devoted to fuel could rise to about 30 percent by the end of this year. In other words, ethanol brewed in Indiana will increase corn demand more than 25 percent in a period of 18 months. Second, the energy bill passed by Congress and signed by President Bush last year fixes a continued strong demand for ethanol in law. Fuel distributors are required to use 36 billion gallons of ethanol in 2020, up from 11.5 billion gallons a year due to be produced by the end of 2008. Of that 36 billion gallons, 15 billion gallons are supposed to come from corn. Furthermore, the United States isn't the only country diverting crops from food and livestock to fuel. Europe is going to 10 percent biofuels, Hurt said, and Canada is working on a 5 percent biofuels mandate. Brazil continues to rely strongly on biofuels, he said, and Malaysia and Indonesia are using palm oil to make fuel. Because palm oils compete with soybean oil in some markets and products, that increases demand still more for soybeans. Even China, increasingly ravenous for petroleum, has a biofuels program. Meanwhile, China and India -- together home to about a third of the people on Earth -- are increasingly prosperous. When people of developing countries begin to earn more money, a disproportionately large share of their new income is devoted to food. That builds yet more demand for corn, soybeans and wheat. The weak dollar continues to make U.S. grains affordable for foreign buyers, even as the food produced by farmers grows more expensive, thereby increasing the price of farmland. Hurt predicted that Hoosier farmland could reach an average value of $5,300 per acre in 2009. Indiana farm families saw their net worth rise about $9 billion last year, Hurt said. Of course, increasing commodity prices are a mixed blessing for farmers. Livestock farmers may face their most difficult year since the 1990s. High feed prices will compel many to experiment with different feeding regimens or diet components. Even as crop prices skyrocket, the diesel fuel, natural gas and fertilizer that must be used in modern agriculture also rise in cost. It's been 35 years since the United States has seen this kind of near-panic buying in commodities markets, Hurt said. The most important lesson that the 1973 market should teach Americans is not to embargo food supplies, he said. That's short-term thinking at its worst, because it encourages U.S. customers to cultivate alternate suppliers or substitutes.
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