USDA projects an ethanol future — Feed and food costs to rise

Each year the U.S. Department of Agriculture releases 10-year commodity projections to provide figures for the budget and to estimate the cost of farm programs. The latest report, “USDA Agricultural Long-term Projections to 2016,” was released February 2007 and includes some interesting projections about expected increases in feed costs and consumer prices with a shift to more corn grown for ethanol production. There are also implications for exports, as more corn is used domestically for ethanol.

Here are some of the USDA projections:

— Farm-origin expenses rise less than the general inflation rate. Feed expenses rise the most as demand for corn for use in the production of ethanol competes with feed demand and pushes corn prices higher.

— Consumer prices for red meats, poultry, and eggs exceed the general inflation rate in 2008-2010 as the livestock sector adjusts to higher feed costs due to the expansion in corn-based ethanol production. As a result, overall retail food prices rise faster than the general inflation rate in those years.

— Prices of poultry, and especially pork, rise relative to the price of beef because cattle can more effectively use the increasing supply of distillers grains, produced as a coproduct when grain is used to make ethanol. Corn, needed for broilers and swine, becomes more expensive while distillers grains, used for cattle, become abundant and relatively less expensive.

— The United States dominates world trade in coarse grains, particularly corn. However, increasing use of corn for U.S. ethanol production and rising world prices are assumed to limit U.S. export growth. During the next half decade, some countries respond to higher world prices by increasing corn production and exports — most notably Argentina, some countries in Eastern Europe, the Republic of South Africa, Ukraine, and Brazil. Still, U.S. corn exports are projected to grow after the ramp up in domestic ethanol production slows in 2009. The U.S. share of world corn trade stays close to 60 percent as few countries have the capability to respond to rising international demand for corn.

Dennis Avery’s CEI monograph “Biofuels, Food, or Wildlife? The Massive Land Costs of U.S. Ethanol” predicted some of these effects last September.