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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.

(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Web site. Please include your name and hometown with your email.

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  1. david s hovda | January 28, 2011

    the government should threaten to put 18-20 million acres of crp good non erodable crop land back into production, to raise another 2-3 billionn bu of corn and the same of soybeans. I can not understand there thinking, as with Nixson and Regan, they put on all kind s of rules and bs regulations ,after the grain robbery of the 70s and the huge surpluses of the 80s causing commodities to sell at less than cival war prices of the 1800s!!! How long could gm ford, Florida light and power last, selling there products for 10 years at 1800 prices. the american farmers did it for 1o years in the 80s!! at 17.5% intrest rates. And american workers think they have it tough!!!

  2. Abdul Rahim | January 28, 2011

    Every advantage of renewable energy comes with its own disadvantages. One of these is because the current methods and technology that are available nowadays are still so costly and is not readily available to most of the world’s population. This is the only major disadvantage that can be encountered by those who wants to avail of renewable energy resources. Still, once it’s installed and are working properly, it can contribute to big savings in the long run.

  3. Norma Friedemann | January 28, 2011

    Food prices are going up all over the world because the world is running out of good soil, water and acreage of good cropland. Corn is harder on soil than other crops and is shrinking good soil. Top soil is only half or less than what there used to be in most places from all crops. There are several studies that show it takes as much energy to get ethanol as the energy ethanol gets. For one thing it takes more than a gallon of ethanol to equal a gallon of gasoline as far as energy goes. Maybe with the new genetically modified corn, a better ratio of input versus output of energy can be made. It still should not require subsidies of any kind in a true capitalistic system, especially with out government running out of money.

  4. Dave R. | January 28, 2011

    Why do our national "leaders" continue to waste our resources in the form of corn-to-ethanol subsidies? The short answer is because they "have to" for political expediency.

    For a thorough analysis of the boondoggle our grain-to-ethanol industry actually is, using our federal government's own best figures and information, look up an article by Patrick Bedard that appeared a few years ago in Car and Driver magazine. He showed that at best, grain derived ethanol provided a net energy gain of a few percent (and maybe is even a net energy loss). Many environmentalists who once supported grain based ethanol now recognize it as a boondoggle with deleterious environmental effects in terms of erosion and consumption of other resources including fossil fuels. If the government is going to encourage alternative bio-based fuels, they should focus on those that utilize cellulosic biomass that would otherwise be considered waste, e.g. sawdust and cornstalks. According to an article appearing January 6, 2011 in Business Week magazine, George Huber, a professor of chemical engineering at University of Massachusetts Amherst has invented and patented an efficient catalyzed process for conversion of biomass into compounds including benzine, toluene and xylene which are common components of gasoline, and formed a company named Anellotech to exploit it, beginning with pilot scale production. The current grain-to-ethanol production plants consume huge amounts of energy because they have to remove the water from the ethanol by distillation whereas Huber's process doesn't involve any similar step, as it is conducted on biomass in a single step reactor at much higher temperatures in the absence of oxygen. If the description in the Business Week article is accurate, this could be a significant technical breakthrough. Of course, the federal government already has its fingers into Huber's technology in the form of a government grant to help launch Anellotech.

  5. fred stork | January 28, 2011

    Not one single comment on something every high school graduate should know, you can't create energy out of nothing. Converting organic matter to ethanol takes more energy than the energy in finished product. It can't be improved by "new technology and methods" like Abdul Rahim claims. This a law of physics.
    The profits the early bio-fuel made, were profits from government subsidies. Early "profitable" plants were producing a dollar worth of fuel at cost of $1.35. When experts tried to notify public abut this scam. they were quickly silenced. Another pork barreling scam.
    But i guess wishful thinking opportunists hate laws of physics, esp. when the facts would cut into their profits.
    BTW same applies to hydrogen, it costs more energy for electrolysis of hydrogen than the amount of energy produced in finished fuel.
    And government, we wouldn't expect their reasoning to be on high school level, would we…..
    Let public pay for it, in produce prices, they don't care.
    Like Romans used to say "world needs to be fooled"

  6. Wayne Dusek | January 28, 2011

    The cost of the corn in a box of cereal in 1950 was about a nickel. The box of corn flakes in the store was about 50 cents. Now the cost of the box of corn flakes is about $4.00, the cost of the corn in the box is a dime. Since the 1950's everything has increased in price about 10 times while the cost of the commodities has remained the same until about two years ago. If commodities had kept up with inflation, a bushel of corn would be about $20.00, a bushel of wheat about $30.00 and a pound of beef on the hoof would bring $10.00 not $1.00. Every time commodities go up the prices in the stores go up but are never reduced when commodities prices are reduced and the consumer blames the farmer every time. Setting price limits just reduces production and causes speculators to profit more handsomely.

  7. Doris Kelsey | January 28, 2011

    The comments so far are so filled with misinformation it is scary. First, there is no such thing as good, non-erodable soil in the CRP program. To get your field into the program it HAS to be erodable!
    The cost of producing bio-fuels is close to equal to the imputs. If the government was not giving subsidies, the inputs cost MORE than the finished product. Even with the subsidies, the costs are greater when the loss of soil is factored in. We are only doing it because you can't pour grain or coal in your gas tank. So we burn coal to produce the energy to make gas for your car. Buy a bicycle!
    Cellulostic bio-mass sounds good until you realize the paradigm is the same. Input is equal or greater than output, you are just saving the grain to eat. But, you are loosing the fertility the stalks and other residue would have added to the soil. Wayne is close, the value if the corn in a box of cereal during the 60's was 3 cents, not 5. Also, when prices to farmers go down, they produce MORE! Their mortgage is the same, and if what they sell is worth less, they must produce more to make their payments. They tear out fences, cut down trees, plant in waterways, and use more fertilizer. In short, the environment is further degraded. The answer? Permaculture, organic farming and local consumption (don't eat anything that came from more than 100 miles away).

  8. Greg Shine | January 28, 2011

    Lets not talk about whether ethanol raises the price of food. Lets talk about the real reason corn and bean prices have gone up. Two things, demand and supply. Last year mother nature gave us a summer that was to wet in many places. Yields were down. Demand was up, because many areas in the world also had poor growing conditions. this has left us with a very tight world stocks position for corn and soybeans, along with many other commodities. We need to quit listening to the media about farmers making a lot of money. After 2008 when prices went up because of a short crop, so did my imput costs. Guess what, we raised a big crop in 2009, and I sold an expensive crop with smaller income, because the price went down. Seems that more people need to talk to a farmer, and find out how good a job most of us do at conservation, and taking care of the environment while feeding the world of ungrateful people with their mouths full.

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