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Ethanol boom, rising prices divide corn lobby

The tension between grain producers and food producers is roiling agricultural markets around the world as high oil prices spur governments to subsidize food-based fuels like ethanol and biodiesel. The political waves — and their effect on government policy — can mean life or death for the budding biofuels business.
Keith Witt
Corn farmer Keith Witt checks the quality of freshly harvested corn on Sept. 12, 2007 in Warrenton, Mo. The growing ethanol industry, and related rises in corn prices, is staking corn growers and farmers that use corn for feed against each other.Tom Gannam / AP
/ Source: The Associated Press

As a chief advocate for corn farmers around the country, Rob Litterer will be working the halls of Congress this fall to push for increased ethanol production. But he’s facing stiff opposition from what on the surface seems an unlikely source — the farm lobby.

The burgeoning ethanol industry is creating a wave of prosperity for rural towns throughout the Midwest, but the energy bonanza is also pitting farming groups on separate sides of the fence.

Corn farmers are pushing for more ethanol production as the industry creates an enormous new market for their crop, giving corn prices the kind of lift they haven’t seen in years. But the corn farmer’s win is the hog farmer’s loss. Meat, dairy, and other food producers are pushing back against the ethanol boom as higher grain prices cut into their already slim profit margins.

So as Litterer, incoming president of the National Corn Growers Association, visits with members of Congress in coming months, he knows that meat and dairy lobbyists will be close behind, delivering the opposite message.

“There is no question they have a policy that they are opposed to an increase,” Litterer said. “But I don’t think their opposition carries any water.”

The tension between grain producers and food producers is roiling agricultural markets around the world as high oil prices spur governments to subsidize food-based fuels like ethanol and biodiesel.

The Mexican government this week put a cap on tortilla prices after prices shot up between 20 and 30 percent over uncertainty that there would be enough U.S. corn available for export. Brazil will ask the World Trade Organization to formally investigate U.S. farm subsidy programs — including payments for ethanol production. Brazil is the second-largest producer of ethanol in the world after the United States, but is the No. 1 exporter of the fuel, which in Brazil is mainly made from sugarcane.

The political waves — and their effect on government policy — can mean life or death for the budding biofuels business. Ethanol and biodiesel served a niche market before the U.S. government imposed a mandate — called the Renewable Fuel Standard — requiring the U.S. to use 7 billion gallons of renewable fuels by 2012.

This fall, Congress will consider a new fuel standard that could boost production as high as 36 billion gallons by 2022. But the future of that bill is uncertain because of the food fight shaping up between grain producers and livestock lobbyists.

“It’s very true that the agricultural lobby will speak with a louder voice if it’s saying the same thing. In that sense, it’s been a less united voice than it has in the past,” said Pat Westhoff, an economist with the Food and Agricultural Policy Research Institute at the University of Missouri.

Westhoff said it’s inevitable that a rise in corn prices will increase the cost of food. Corn and its derivatives like corn syrup are staples for a variety of foods, from soft drinks to wheat bread.

But that doesn’t mean the average person will notice a price increase at the grocery store, Westhoff said.

U.S. consumers spend about $700 billion a year on food. A $6 billion increase in the cost of corn — which amounts to about $1 a bushel — would still only raise food costs about 1 percent, he said.

But the pain is more acute for corporations like Tyson Foods Inc., the nation’s largest meat company. The Springdale, Ark.-based company’s stock fell 13 percent earlier this month when it lowered its profit projections for the year.

Part of Tyson’s problem is higher grain prices — the company said grain costs for its chicken feed shot up $113 million in the third quarter of this year alone when compared to the year before.

The American Meat Institute has taken heed. AMI spokeswoman Janet Riley said the group is “absolutely” opposed to more ethanol mandates and will continue to lobby against them. The AMI has joined dairy, egg and turkey lobbyists to fight any increase in ethanol mandates that could divert yet more feed into fuel refineries.

The coalition launched a Web site recently called “Balanced Food and Fuel.” The home page is filled with stories and editorials culled from media outlets around the county, spelling out the seemingly dire consequences of growing demand for biofuel.

Headlines on the site warn of a “spiral of rising prices” as “corn prices skyrocket.” One story outlines an ominous increase in pizza prices.

Corn growers have responded in kind. The group’s Web site features “white papers” that try to deflate fears of food inflation with charts and graphs.

Litterer said fears of rising corn prices are over-hyped. While prices did spike between 2005 and 2007 by about $1 a bushel, that doesn’t mean they’ll keep rising, he said. The higher prices have induced farmers to plant more, which increases supply and brings the price back down.

Westhoff, with FAPRI, said corn prices now stand at roughly $3.10 a bushel. The price is expected to rise to $3.38 next year but will fall again and plateau at about $3.25 a bushel by 2012, according to FAPRI estimates.

While meat companies are seeing profits dwindle, rising grain costs are not causing them to lose money overall, said Terry Francl, senior economist with the American Farm Bureau Federation.

Demand for meat remains relatively steady in spite of modest price swings, which means most of a meatpackers’ rising feed costs can be passed on to consumers, he said.

Francl noted that the ethanol industry is expected to help push overall farm income to a record level of $87.1 billion for this year. That forecast level would be an increase of 48 percent over last year when farm income was $59 billion.

Francl emphasized that that he’s not choosing sides in the argument between the Farm Bureau’s members who raise livestock or grow corn.

“It’s one of the many delicate situations we face,” as an umbrella group for farmers, Francl said.

“I am not trying to judge one versus the other.”