No quick resolution to food versus fuel debate

Reuters
Saturday September 20 2008
By Christine Stebbins

ST. LOUIS, Sept 19 (Reuters) -

The government mandate for a much more aggressive U.S. policy to produce crop-based fuels is less than a year old but it has spurred one of the biggest battles within the agricultural industry in decades.
The mandate, included in a landmark energy law signed in late 2007, set off a record run in prices of corn and soybeans, the main crops used for bio-based fuels like ethanol. Farmers, and their bankers, applauded, as demand exploded.
But that huge new crop demand from energy refiners also has choked off profits of food producers from cereal makers to vegoil producers to the livestock growers, dairy farmers and fish farms faced with soaring feed prices.
Food raw material prices have risen at rates that have alarmed economists, including the U.S. Federal Reserve and other policymakers. In August, wholesale food prices were 9 percent above a year ago -- the biggest jump since 1981.
The critics all cite the same reason: the biofuels "craze" as a wrong-headed, shortsighted policy that has to change. That view had ample play on Friday at a round-table discussion of experts at the annual Soyatech soybean industry conference.
"The fact that we've framed this as a food versus fuel debate is absolutely correct," Bill Lapp, president of Advanced Economic Solutions and a consultant to food industries, said.
"Ultimately we are going to find out that it is going to be tough to find enough acres to meet all these demands."
The U.S. energy bill mandated that biofuels production must jump roughly five-fold to 36 billion gallons by 2022. Some eventually will be made from new materials like straw and switchgrass. But meanwhile -- especially in the last year -- the law has meant much bigger portion of the U.S. corn and soybean crops have been diverted to non-food use.
Almost a quarter of the U.S. corn crop will be diverted to ethanol production this year. Biodiesel, made from soybean oil, is also expanding steadily.
"Food guys are not going to leave themselves short. They will win the battle although it may come at a great deal of cost and expense to manufacturers and consumers," Lapp, formerly head of economic research at food giant Conagra Inc, said in predicting more retail food price gains.
Gary Blumenthal, chief executive of Washington-based World Perspectives, agreed: "Food will win out first and foremost because we will choose to eat ahead of driving our car."
Faced with soaring food inflation, the battle over using food to produce fuel has created a growing backlash against biofuels that put the Bush Administration, a strong backer for last year's biofuel's legislation, in an odd cross-fire.
Last month, the Republican Party even included a plank in its 2008 campaign platform calling for an end to the biofuels mandates for ethanol.
But proponents of biofuels at Friday's round-table were undaunted, claiming that biofuels were not just necessary for U.S. energy independence but for a stronger rural economy.
"It makes us a much more energy independent nation -- it also allows us to create an America where we once again construct, make and build things," said Tom Vilsack, former governor of Iowa, the top U.S. grower of corn and soybeans.
Biofuels boosters also continued to argue about the extent that soaring crop prices are linked to increased biofuels demand versus other factors, including rising world population, soaring energy and transport and fertilizer costs, and demand for higher protein diets in a wealthier China and India.
Recent government and private studies have estimated anywhere from 3 to 15 percent (some say even higher) of the rise in U.S. corn and soybean prices can be tied to expanded biofuels demand.
But analysts at the round-table said there is a tighter price correlation between Chicago Board of Trade corn and soybeans with crude oil than with ethanol or other energy prices.
"The cause is the question -- no doubt about the correlation," David Lehman, director of commodity research for CBOT parent CME Group, told the conference.
Government regulators are now reviewing the role of big speculators in the record price rallies in both energy and agricultural futures markets over the last year.
(Reporting by Christine Stebbins; editing by Carol Bishopric)