U.S. Clean Energy Investment Puts Upward Pressure on Rising Food Prices

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In U.S. President Barack Obama's State of the Union address Tuesday, he highlighted clean energy investment as a key component of America's future, one that will be reflected in his budget proposal for fiscal 2012.

"With more research and incentives, we can break our dependence on oil with biofuels, and become the first country to have a million electric vehicles on the road by 2015," the president said in his speech to members of Congress. "[I]nstead of subsidizing yesterday's energy, let's invest in tomorrow's."

This commitment to clean energy investment increases the importance of biofuels like ethanol, made from corn and other agricultural products. About 40% of U.S. corn is used to make ethanol, and increased ethanol production leads to higher corn and food prices.

A reader who has spent years in the biofuels industry, watching ethanol plants struggle to function with rising food prices, sent the following letter to the Money Morning Mailbag regarding the future of U.S. clean energy investment.

I have worked the last seven years building ethanol plants and have see corn prices rise because of this. And when the price of corn goes up, so do food prices. This is no surprise with corn being a feed source for most animals in the commercial industry.

I still work building ethanol plants now, just not so many. I've also found out that quite a few of these plants went bankrupt before the first year because of the price of corn going up so high that they were unable to make enough profit to afford to keep running.

President Obama wants to start back up on building more biofuel plants like former President Bush started. I seriously believe a price cap needs to be placed on the price of corn as well as soy beans (which are used to make biofuel in diesel). This may make the farmers mad, but I'm sure they've made a lot of money already off the boom of crops sold over the last seven years -it doesn't take a rocket scientist to put one and one together to get two.

Is this just hype, or do you think using corn for biofuels has merit as to one of the problems with food prices going up?

-Robert M.

There is a definite correlation between an increase in biofuels production, especially bioethanol, and corn prices. U.S. corn prices surged 52% last year, and helped push the Food and Agriculture Organization's Food Price Index to an all-time high in 2010. The index tracks the prices of 55 food commodities and climbed for the sixth consecutive month to hit 214.7 points in December, its highest reading since the measure was first calculated in 1990.

The last time food prices spiked was June 2008 when the Food Price Index hit 213.5. Corn reached its highest price in July 2008, climbing over $7 a bushel and squeezing the profit margins of ethanol producers. Most of the plants were built in 2006 when the commodity pulled in about $2 a bushel, making the industry so profitable that plants could be paid off in as little time as six months. But after corn's price surge, ethanol plants were shut down and later that year corn fell to around $3 a bushel.

Then U.S. farmers in 2009 produced the biggest bumper crop of corn in the nation's history - in excess of 13.11 billion bushels. While this usually pushes prices down, corn demand skyrocketed partly due to U.S. government subsidies for ethanol, which reached as high as $7.7 billion in 2009. In December 2010 the U.S. government voted to extend ethanol subsidies for another year, despite the protests of environmentalists and livestock producers who argue the tax credits drive up livestock feed prices and increase fertilizer and pesticide runoff in farmlands.

Supporters of clean energy investment said cutting the subsidies could close plants and reduce the U.S. ethanol industry workforce by as much as 30%. There are currently more than 200 ethanol plants in the United States with production centered in the midwest.

"The success of all biofuels hinges on the success of ethanol from corn -on the growth of an ethanol industry that is leading the way, sustainably increasing in economic, environmental and energy efficiency," National Corn Growers Association Chairman Darrin Ihnen told Corn & Soybean Digest.

But the biofuels industry is facing the same problems it saw in 2008 as rising corn prices are threatening ethanol facilities. While corn prices are hovering around $6.50 a bushel, ethanol prices are not gaining as much. An average ethanol plant in Iowa is losing 9 cents on every gallon produced, while an average Illinois plant is losing 8 cents a gallon, according to online grains information service Ag Trader Talk.

In order to continue profitably while food and corn prices are pushed higher by global demand, U.S. government subsidies will need to continue. And from the sounds of the State of the Union address, President Obama will support such spending in the coming year.

There is also an alternative to corn-based ethanol, and increasing its role in biofuels could support President Obama's clean energy investment goals while reducing the pressure on rising food prices.

Cellulosic ethanol is a biofuel produced from wood, grasses and non-edible parts of plants. The U.S. Department of Agriculture and the U.S. Department of Energy announced last week four loan guarantees worth $645 million to cellulosic ethanol projects.

Diamond Green Diesel, a joint venture between oil refiner Valero Energy Corp. (NYSE: VLO) and rendering company Darling International Inc. (NYSE: DAR), received a loan guarantee of $241 million for a Louisiana biofuels plant. The plant could produce more than 9,300 barrels a day of renewable diesel.

"Strong biofuels projects like Diamond Green Diesel can help to diversify our transportation fuel supply while creating jobs and strengthening our economy," U.S. Energy Secretary Steven Chu said in a statement.

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