Demand for corn as the raw material for the alternative vehicle fuel ethanol, is creating unintended consequences throughout the global food chain. Midwest corn growers are commanding prices not seen in a decade: the crop surpassed $4.20 a bushel Jan. 17, almost double its September price. Yet farmers who raise livestock are seeing feed costs soar, and companies from Tyson Foods Inc. to Coca-Cola Co. are warning of higher prices.
‘We are seeing the most dramatic, fast-moving changes in Midwest agriculture in at least half a century,’ says Robert Wisner, an economics professor at Iowa State University, in Ames. Hog farmers, cattle ranchers and poultry producers are among those in the $125 billion U.S. livestock industry losing money. The U.S. Department of Agriculture says the cost of American staples such as pork and chicken may increase 6 percent at current corn prices.
‘We as an industry are facing unprecedented issues on cost,’ John Brock, CEO of Atlanta-based Coca-Cola Enterprises Inc., Coke’s chief bottler, said at a Dec. 11 conference in New York. The company raised North American prices as much as 4 percent in October. Prices may rise 5 percent in 2007, Morgan Stanley analyst Bill Pecoriello wrote in a Nov. 12 report.
The top planning agency in China, the world’s No. 2 corn grower, demonstrated its concern in December when it halted construction of ethanol plants without state approval. Corn futures on the Dalian Commodity Exchange jumped 25 percent in 2006 as soaring demand swallowed a record harvest and analysts forecast China may soon become a net corn importer. The nation’s Ministry of Agriculture said Jan. 26 that it couldn’t rule out the possibility of grain shortages.
Microsoft Corp. Chairman Bill Gates, British billionaire Richard Branson, New York-based investment bank Goldman Sachs Group Inc. and California venture capitalist Vinod Khosla are all investors in the industry. Its growth rests partly on the 2005 Energy Policy Act, which requires that 7.5 billion gallons — 5 percent — of the nation’s annual gasoline consumption come from renewable fuels by 2012. Exxon Mobil Corp. and other refiners get a 51-cent tax refund for each gallon of ethanol they blend with gasoline.
For all the excitement, ethanol share prices haven’t taken off as expected. One reason: After soaring to more than $77 a barrel in mid-July, oil prices have dropped back to about $60 a barrel. The rising cost of corn is another factor, cutting profit margins. Many ethanol refiners become unprofitable once corn rises to $4.50 a bushel, according to analysts at the commodity fund Krom River Partners LLP in London. That’s just 50 cents more than yesterday’s price.
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