Is Ethanol cause of rising food prices?

Automakers are still promoting ethanol as an alternative to foreign oil.

Detroit Free Press

WASHINGTON — The ethanol bandwagon has run off the road.

Thanks to rising food prices, ethanol has lost its luster in Washington. Lawmakers reworked the recent farm bill to lower incentives for ethanol. The governor of Texas wants a waiver from federal requirements for more of the fuel in the coming years. And critics from around the world — from food companies to United Nations officials — say ethanol’s to blame for more expensive food.

In the middle sit Detroit’s automakers, which have made ethanol the centerpiece of their environmental efforts — supporting ethanol mandates, building about 5 million flex-fuel vehicles so far, and pledging to make half their fleets capable of burning 85 percent ethanol fuel by 2012. So far, automakers have sat this debate out, but it could affect efforts to move toward biofuels from other sources.

What’s fueling the debate is a jump in food prices not seen in decades. After rising 4 percent last year — the largest increase since 1990, according to federal experts — retail food prices are expected to climb another 4 percent to 5 percent this year. Global demand, weather, oil prices, the weaker U.S. dollar — all have played some role.

But just how much of the inflation in food prices can be traced back to more expensive corn has been a raging debate in Washington over the past few weeks. Ethanol and farm advocates, including the Bush administration, say biofuels play a minuscule role in the overall food price increases, compared with a growing world population demanding more food than ever.

The U.S. ethanol industry has come under special scrutiny since it relies almost exclusively on corn, which is also used by livestock farmers and industrial food processors.

As with oil, corn prices could rise further, despite a startling 48 percent increase over the past year. Yet while prices stand at about $5.80 a bushel, and there was a record crop last year, U.S. farmers are expected to plant 8 percent fewer acres of corn this year.

Experts cite several reasons for the reduction: Many farmers swap fields every season between corn and soybeans to preserve the soil; wheat, soybeans and other crops also have seen prices soar, and the costs of growing corn have grown with fuel prices.

Meanwhile, U.S. ethanol production continues to grow. Federal energy law requires the industry to produce at least 9 billion gallons this year, up from 6.5 billion last year. Combined with the decline in U.S. production, the ethanol industry could consume about 25 percent of the corn U.S. farmers grow.

Robert Moskow, an agricultural market analyst with Credit Suisse, said last week that as long as oil costs more than $120 a barrel, energy from corn will be worth more than $8 a bushel. He forecasts that given the ethanol industry’s growth, it eventually could claim one third of U.S. corn output a year.

While corn has risen sharply, the price of other crops, including wheat and soybeans, have risen further. The worldwide production of wheat has been hit by droughts in Australia, and higher oil prices have raised costs for farmers and food processors.

Edward Lazear, Bush’s chief economic adviser, told a Senate panel last week that ethanol production was responsible for just 3 percent of the inflation in food prices over the past year.

“The bottom line is that ethanol production is a significant contributor to increases in corn prices, but neither U.S. nor worldwide biofuel production can account for much of the rise in food prices,” he said.

Some industries see a political opening. As reported by Roll Call newspaper earlier this month, the Grocery Manufacturers Association solicited lobbying firms earlier this year to craft an anti-ethanol campaign, a proposal that drew a rebuke from ethanol advocates such as Iowa Republican Sen. Charles Grassley.

Worries about ethanol “create a window to change perceptions about the benefits of biofuels and the mandate and, ultimately, to build a groundswell in support of freezing or reversing” them, the association wrote in its proposal.

So far, the auto industry has stayed above the political fray, while continuing to promote ethanol and other biofuels as an effective alternative to foreign oil. The two industries’ political ties have grown tighter in recent months, as ethanol backers have sided with automakers against the California greenhouse gas limits on vehicles that several states are considering. California’s law offers no credits for flexible-fuel vehicles, as federal rules do.