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FEATURE - Green Fuel Revolution a Challenge for Grain Sector

Date: 10-Oct-05
Country: USA
Author: Christine Stebbins

More and more, crops like corn and soybeans -- now primarily used as animal feed and ingredients in hundreds of food products -- will be used to make ethanol and biodiesel in coming years, in what could have a ripple effect in the form of higher food prices, some economists say.

"There are already some asking questions -- should we be using basic foods when you have a hungry world?" said economist Chris Hurt at Purdue University. "When you start using food for fuel, it has some implications for food prices over time."

"There's going to be winners and losers out there. It's a pretty dramatic event for the grain industry," he added.

For 2005, the US Agriculture Department estimates that 1.3 billion bushels of corn -- 11 percent of this year's US crop -- will be used to produce ethanol, an alcohol distilled from corn and used as a gasoline additive or substitute.

Interest in biofuels like ethanol, which is also made from sugar, and biodiesel, now made mostly from soybeans, got a big boost in the United States after gasoline prices topped $3 a gallon in many parts of the country last month.

Oil prices, already high due in large part to China's growing demand for energy, spiked even higher as hurricanes Katrina and Rita shuttered US refineries on the Gulf Coast.

Such home-grown fuels carry the benefits of being renewable, running cleaner than petroleum fuels, and potentially reducing US dependence on foreign oil.

BOOST FOR GREEN FUELS

Boosted by the latest US government energy bill, US production of ethanol and biodiesel is projected to climb to 7.5 billion gallons by 2012. Midwest economists estimate that would equate to between 5 and 7 percent of total gasoline consumption by then, about double the 2005 projected level.

Part of the jump is tied to a $1-per-gallon government rebate on biodiesel that went into effect this year.

But US cities and states are also rushing to boost green fuel use. City buses from San Francisco to Cincinnati now fill up with biodiesel, which runs in any diesel engine -- and emit exhaust fumes that smell like popcorn.

Last week, Minnesota became the first state to require that all diesel fuel sold contain at least 2 percent biodiesel.

The big winners in the home-grown fuel market will be US grain farmers who stand to cash in on the run for their crops.

But it will be a different story for US livestock producers who are likely to see higher prices for smaller available supplies of grain for feed. This would affect every producer in the billion-dollar livestock markets, from the beef producers on the Plains to the hog producers of the Midwest, the poultry farms of the Southeast and the dairy factory farms of California.

Grain analysts also foresee smaller corn and soybean export volume -- and income -- in the coming years. Right now 11 percent of the US corn crop is used for ethanol production, compared with 15 percent that is exported to livestock producers as far away as Japan and South Korea.

"We are using increasing amounts of corn for ethanol ... by 2009, we have corn exports marginally lower than corn use for ethanol," said Pat Westhoff, economist with the Food and Agricultural Policy Institute (FAPRI).

EXPORT OR PROCESS?

That demand outlook has sparked global agribusiness firms and top US exporters, like Cargill and Archer Daniels Midland Co., to take an active development role in biofuels.

Both are already top suppliers of renewable fuels, and they are expanding with new ethanol and biodiesel plants dotted across the Midwest. This summer Cargill announced a joint venture to build ethanol plants in Indiana, Nebraska and Ohio.

ADM said Tuesday it will construct its first wholly owned US biodiesel facility in North Dakota.

But even with a demand spike in renewable fuels, they are a very small slice of the energy pie: still just 3 percent of the total US gasoline market. But some backers say

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