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Now that the year’s grain harvest is safely in the bin, it is time to take stock and look ahead. This year’s harvest of 1,967 million tons is falling short of the estimated consumption of 2,040 million tons by some 73 million tons. This shortfall of nearly 4 percent is one of the largest on record.
Even more sobering, in six of the last seven years world grain production has fallen short of use. As a result, world carryover stocks of grain have been drawn down to 57 days of consumption, the lowest level in 34 years. The last time they were this low wheat and rice prices doubled. (See data.)
The growth in world grain consumption during the six years since 2000 averaged roughly 31 million tons per year. Of this growth, close to 24 million tons were consumed as food or feed. The annual growth in grain used to produce fuel ethanol for cars in the United States alone averaged nearly 7 million tons per year, climbing from 2 million tons in 2001 to 14 million tons in 2006.
Now the amount of grain used to produce fuel is exploding. Investment in crop-based fuel production, once dependent on government subsidies, is now driven by the price of oil. With the current price of ethanol double its cost of production, the conversion of agricultural commodities into fuel for cars has become hugely profitable. In the United States, this means that investment in fuel ethanol distilleries is controlled by the market, not by government.
The huge profits from converting corn into ethanol following the late 2005 oil price hikes have led to a jump in groundbreakings for new ethanol distilleries in the last few months. The World Ethanol and Biofuels reports, published biweekly by F.O. Licht, show construction starting on an astounding 54 new ethanol distilleries in the United States between October 25, 2005, and October 24, 2006. With a typical construction period of 14 months, virtually all of them will be producing by the end of 2007. Together these plants, with 4 billion gallons of annual ethanol production capacity, will consume 39 million tons of grain per year, nearly all of it corn. (See data.)
The pace of groundbreakings is accelerating. From November 2005 through June 2006, ground was broken for one new plant every nine days. From July through September 2006, construction starts increased to one every five days. In October 2006, it was one every three days.
Since it typically takes many months for a company to decide to build a distillery, select a site, buy the land, acquire the needed permits, and arrange the financing, the post-Katrina jump in oil prices has only begun to show up in groundbreakings for new plants in the last few months.
To calculate the amount of grain that will be going into ethanol, we start with the 41 million tons of the 2005 crop that were used to produce ethanol and add to that 39 million tons for the new construction starts for a total of 80 million tons of corn. This does not include the additional grain required by the expansion of several existing plants. Nor does it involve the numerous new grain-based ethanol distilleries in other countries, principally those in Europe and China.
Given the recent acceleration in new groundbreakings and the scores of new plants in the planning stages, we could see even more construction starts in the next 12 months. If so, these distilleries could easily absorb an additional 40 million tons of grain.
In looking forward to 2007, how much will we need to increase the harvest to avoid a further drawdown in stocks? First, we need a rise of 73 million tons just to overcome the 2006 production shortfall. Beyond that we will need 24 million tons of additional output to cover the estimated annual growth in food and feed needs. If we then add 39 million additional tons to supply the 54 new distilleries cited above, for the U.S. alone we are looking at a growth in demand of 136 million tons of additional grain from the 2007 harvest if we are to avoid a further decline in stocks.
For a world where the growth in the grain harvest has averaged scarcely 20 million tons per year since 2000, the chances of such a huge jump in the harvest next year are not good, even with the stimulus of high grain prices. Beyond this, farmers must contend with spreading shortages of irrigation water and the prospect of even more intense heat waves as the earth’s temperature rises.
Escalating competition for the U.S. corn crop is already driving up prices. In some corn-growing states such as Iowa, Indiana, and South Dakota, completion of the plants under construction and those planned means distillery requirements would take virtually the states’ entire corn harvest.
The local competition between new distilleries, on the one hand, and more traditional feedlots, dairies, and pork, poultry, and egg producers, on the other, will be intense. To some degree, the one-third of the corn byproduct that emerges from the distillery as distillers grain will offset the loss of corn for feeding. Distillers grain, consisting mostly of fiber and protein and containing little energy, is, however, much better suited to feed beef and dairy cattle with their unique digestive systems, than pigs and chickens.
Corn importers like Japan, Egypt, and Mexico are also worried that the likely reduction in U.S. corn exports, which are 70 percent of the world total, will disrupt their livestock and poultry industries. In some importing countries in sub-Saharan Africa and in Mexico, corn is the staple food. In the United States corn supplies sweetener for soft drinks and is used in breakfast cereals, but most corn is consumed indirectly. The milk, eggs, cheese, chicken, ham, ground beef, ice cream, and yogurt in the typical refrigerator are all produced with corn. In effect, the refrigerator is filled with corn. And the price of every item in the refrigerator is affected by the price of corn.
Wheat and corn prices have climbed by a third or more over the past several months. Corn and wheat futures are both trading at 10-year highs. With corn stocks at the lowest level on record and demand soaring, corn prices appear headed for historic highs. Wheat and rice prices will likely follow corn prices upward. By the end of 2007, the emerging competition between the 800 million automobile owners who want to maintain their mobility and the world’s 2 billion poorest people who want simply to survive will be on center stage. If grain prices do climb to all-time highs, food riots and political instability in lower-income countries that import grain, such as Indonesia, Nigeria, Mexico, and scores of other countries, could disrupt global economic progress.
This clash between motorists and people over the food supply is occurring when 854 million of the world’s people are chronically hungry and malnourished and some 24,000 of them, mostly children, die each day. The U.N. Millennium Development Goal of reducing by half the proportion of people suffering from hunger by 2015 is now failing as the number who are hungry edges upward, and it could collapse completely in the face of the food-for-cars onslaught.
The attempt to solve one problem—growing U.S. dependence on imported oil—is creating another far more serious problem. Fortunately this can be avoided. The 3 percent of U.S. automotive fuel supplies now coming from ethanol could be achieved, several times over and at a fraction of the cost, by raising automobile fuel-efficiency standards by 20 percent.
On the food-versus-fuel issue, the world desperately needs leadership—a strategy to deal with the emerging food-fuel competition. As the world’s leading grain producer and exporter, as well as its largest producer of ethanol, the United States is in the driver’s seat.
Copyright © 2006 Earth Policy Institute