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Soaring Demand for Crop-Based Biofuels Raising Food Costs Woldwide

Patrick Barta, writing in yesterday's Wall Street Journal, reported that, "Soaring prices for farm goods, driven in part by demand for crop-based fuels, are pushing up the price of food world-wide and unleashing a new source of inflationary pressure.

"The rise in food prices is already causing distress among consumers in some parts of the world -- especially relatively poor nations like India and China. If the trend gathers momentum, it could contribute to slower global growth by forcing consumers to spend less on other items or spurring central banks to fight inflation by raising interest rates."

The article explained that, "One of the chief causes of food-price inflation is new demand for ethanol and biodiesel, which can be made from corn, palm oil, sugar and other crops. That demand has driven up the price of those commodities, leading to higher costs for producers of everything from beef to eggs to soft drinks. In some cases, producers are passing the costs along to consumers. Several years of global economic growth -- led by China and India -- is also raising food consumption, further fanning the inflationary pressures."

After documenting some inflationary statistics from around the globe, Mr. Barta stated that, "The U.S., too, is seeing some stirrings, with food costs rising 3.1% in February from the year before -- a rate one percentage point higher than in mid-2005. Economists say U.S. food prices are expected to rise faster than the general rate of inflation this year. Wholesale prices of meat, poultry and eggs have already increased.

"If the trend continues, U.S. consumers are likely to see higher prices at the supermarket for everything from milk to cereal to soda pop, since corn is used to feed livestock and make high-fructose corn syrup, a key ingredient in many soft drinks. A spokesman for the National Chicken Council, a poultry-industry group, recently testified to a congressional subcommittee that Americans should expect higher chicken prices because of what the group described as 'the ethanol crisis.'"

However, the Journal article did temper the food inflation assessment with this observation; "So far, higher prices haven't sparked a major rise in overall global inflation, which remains relatively low and stable by historical standards. Moreover, food prices are notoriously volatile, and some of the increases are due to short-term or local factors that could reverse in time.

"But many economists believe the forces causing the current bout of food inflation will persist, or recur in years ahead. Many countries are facing shortages of land and water that didn't exist during past food-price spikes, so they can't easily plant more to ease the strain."

Interestingly, Purdue University Agricultural Economist Chris Hurt noted yesterday ("Hog Producers Slow to Recognize Ethanol Era") that reaction to the market signals associated with higher commodity prices are not necessarily falling completely in line with expectations.

Specifically, Dr. Hurt stated that, "Maybe it's because hog producers have yet to witness the local ethanol plant using much of the corn they use to feed, but as a group they have not gotten the message yet. And what is that message? Feed prices are much higher and the quickest way for hog prices to move higher is to cut production. Instead they continue to expand.

"In the March inventory update from USDA, hog producers reported they have increased the size of the breeding herd by one percent. This means pork production will continue to increase by about two percent in 2007, establishing the eighth consecutive year of record pork production."

With respect to the recent ease in the corn market, the report noted that, "The break in corn prices after the USDA's March 30 Prospective Plantings report was welcomed by hog producers, giving them added hope that crop producers could provide enough corn for both fuel and feed in the 2007-08 marketing year. However, one week after the report, costs of production are still expected to increase from around $47 per live hundredweight currently to near $49 by late 2007 and early 2008. In the week after the report, corn prices dropped sharply, but also recovered substantially, and meal prices were little changed. After all the excitement of the March 30 report, estimated costs of hog production are down less than $.50 per live hundredweight over the next 12 months."

In conclusion, the report indicated that, "There are a few signs of adjustment, such as lighter weights and unchanged farrowing intentions, but producers need to make greater adjustments to the ethanol era. Larger declines in the breeding herd are needed in coming months."

More detailed analysis regarding the corn market was noted in a report posted yesterday by University of Illinois Agricultural Economist Darrel Good ("Corn: Focus Turns to U.S. Weather").

In part, Dr. Good explained that, "The immediate question is how many acres of corn will actually get planted in 2007. The price decline following the release of the intentions data along with a cold, wet start to April in the midwest ignited ideas that acreage could fall short of intentions. However, corn prices rebounded sharply following the initial decline and it is a little early to be overly concerned about planting delays in the midwest. Extended delays might result in fewer acres planted to corn, but extensive freeze damage to the winter wheat crop would likely result in additional acreage being planted to corn or sorghum. The most recent experiences with planting delays were in 1995 and 1996. In 1995, actual acreage planted to corn was 3.844 million (5 percent) less than March intentions while in 1996 actual plantings were only 691,000 (0.9 percent) less than March intentions. With current high corn prices, like those of 1996, producers will likely extend the planting window for corn if required by unfavorable weather. At this juncture, acreage near intentions should probably be expected."

This report also noted that, "If 90.454 million acres of corn are planted in 2007, area harvested for grain might be near 83 million acres with average growing season weather. A yield of 149 bushels, then, would produce a crop of 12.367 billion bushels. With beginning stocks of 902 million bushels and imports of 10 million bushels, the total supply of corn for the 2007-08 marketing year would be 13.279 billion bushels, 767 million larger than the supply for the current year. With adequate supplies and 'reasonable' prices, consumption of U.S. corn will likely increase during the 2007-08 marketing year. The increase will be led by corn used for ethanol production. Those increases could push total domestic processing use of corn to 4.585 billion bushels. U.S. corn exports, however, are expected to decline modestly due to continued high prices and increased competition from South American corn and a rebound in world wheat production. Those exports are forecast at 2.1 billion bushels. Uncertainty about export demand for U.S. corn centers on China. A shortfall in production there along with escalating domestic consumption could add 100 to 200 million bushels to U.S. corn exports. Domestic feed use of corn may also continue to decline modestly if livestock feeding margins remain tight and feeding of by-product feed from ethanol processing continues to increase. An additional one billion bushels of corn used for ethanol production from corn would produce about 8.8 million tons of by-product feed. If 75 percent of that is fed domestically and 40 percent of that replaced corn in livestock rations, domestic feeding of corn would be reduced by 95 million bushels. We use a forecast of 5.8 billion bushels for feed and residual use of corn during the 2007-08 marketing year. Total consumption of U.S. corn during the 2007-08 marketing year could reach 12.485 billion bushels, leaving year ending stocks at only 794 million bushels, or 6.4 percent of consumption."

The U.S. Department of Agriculture's National Agricultural Statistics Service released their weekly Crop Progress report yesterday, a weekly report that tracks crop development progress for various commodities throughout the country.

The report revealed that as of April 8th, in the 18 states that accounted for 93% of last year's corn crop, 3% of the corn crop has been planted.  The 2002-2006 average for this time is 4% and last year on this date, corn planting had also progressed to 3%.

In a side note on alternative fuels, Matthew L. Wald reported in yesterday's New York Times that, "Scientists worldwide are struggling to make motor fuel from waste, but Richard Gross has taken an unusual approach: making a 'fuel-latent plastic,' designed for conversion. It can be used like ordinary plastic, for packaging or other purposes, but when it is waste, can easily be turned into a substitute diesel fuel.

"The process does not yet work well enough to be commercial, but the Pentagon was impressed enough to give $2.34 million for more research. The technique could reduce the amount of material that the military has to ship to soldiers at remote bases, because the plastic would do double duty, first as packaging and then as fuel. It would also reduce trash disposal problems, according to the Defense Advanced Projects Research Agency, known as Darpa.

"Dr. Gross, a professor of chemistry at Polytechnic University, in Brooklyn, is turning plant oils, of the kind already used to make biodiesel, into 'bioplastic.' The plastics can be films or rigid, as are commonly found in food packaging. Then he uses a naturally occurring enzyme to break down the plastic into fuel."

Meanwhile, Associated Press writer Becky Bohrer reported yesterday that, "Cotton acreage is expected to decline across the South this season as farmers, faced with high production costs and cotton from last season remaining unsold, move to corn or soybeans, crops with higher profit potential.

"The sharpest decline is projected for Mississippi and Louisiana; farmers in Louisiana, where construction of at least one corn-based ethanol plant is planned, are expected to seed their fewest cotton acres since 1975 and their most corn in nearly a decade, according to the U.S. Department of Agriculture.

"Demand from the growing ethanol industry, which last year reached record production levels worldwide, and traditional markets, such as livestock feed and export customers, has helped drive corn to more than $4 a bushel this year while cotton prices have remained relatively low, according to agricultural leaders and the Renewable Fuels Association."