Analysis: In food vs fuel debate, U.S. resolute on ethanol

WASHINGTON Mon Feb 14, 2011 8:47am EST

A process operator shows a handful of corn at the GreenField Ethanol plant in Chatham, Ontario, in this April 10, 2008 file photo. REUTERS/Mark Blinch

A process operator shows a handful of corn at the GreenField Ethanol plant in Chatham, Ontario, in this April 10, 2008 file photo.

Credit: Reuters/Mark Blinch

WASHINGTON (Reuters) - As world food prices reach new highs, a handful of U.S. politicians and hard-hit corporations are readying a fresh effort to forestall the use of more U.S. corn and soybeans as motor fuel.

They are likely doing so in vain, say experts.

Unlike in 2008, when a wave of global panic over grain supplies provoked a fierce "food vs fuel" debate, there's so far only muted outcry over biofuels, even after corn surged last week to within 10 percent of its 2008 peak following a forecast showing even higher use in the ethanol sector.

While that may yet change as higher prices fuel inflation and trigger worries over supply security, officials and experts say ethanol is too ingrained in public policy and the economy of the U.S. heartland to be easily dislodged.

"What would it take for this public policy to be altered? The answer -- a lot," said Gary Blumenthal of World Perspectives, a private consultant.

"The best voices for demanding change are U.S. consumers themselves, but that will require a food price spike larger than the 2 to 3 percent currently forecast by USDA. And since the Fed focuses on core inflation and ignores food and energy, it gets ignored there as well."

U.S. ethanol production this year will consume 15 percent of the world's corn supply, up from 10 percent in 2008. That share will continue to rise as the industry faces a mandate to boost minimum production an additional 20 percent by 2015. And exports are booming thanks to costly sugar-based rivals.

Ethanol has become a lightning rod for criticism from opponents including foodmakers, livestock feeders, environmentalists and budget hawks.

The largest U.S. meatpacker, Tyson Foods Inc, which also raises chickens, and No. 1 pork processor Smithfield Foods Inc, which raises hogs, say ethanol drives up feed costs sharply and hurts consumers.

"It makes a lot more sense for us to burn our trash than burn our feed," Tyson CEO Donnie Smith said last month.

As yet, foes have not found an electric argument to compel broad-scale change.

On the global stage, the hand-wringing over soaring prices has focused on markets, not biofuel.

French President Nicolas Sarkozy, who has made food security a centerpiece of his one-year term leading the Group of 20 leading economies, has called for rules to curb commodity volatility, not to roll back widespread efforts to convert more crops to fuel.

That finding has the support of a World Bank study released last July, that said: "The effect of biofuels on food prices has not been as large as originally thought, but that the use of commodities by financial investors ... may have been partly responsible for the 2007-08 spike."

But with spending cuts the top issue for lawmakers this year, ethanol subsidies may be swept into the deficit debate.

"Before this (debate) is over ... I suspect a lot of things will be looked at," said House Agriculture Committee Chairman Frank Lucas of Oklahoma, where major industries are ranching and oil and gas -- two sectors skeptical of ethanol.

NO GOING BACK

Backtracking on existing ethanol mandates would be almost unthinkable at this point. At some 900,000 barrels per day (bpd), ethanol now makes up about 10 percent of the gasoline pool in the world's largest oil consumer.

"The fact is the industry has pretty much been built," Joe Glauber said this week. "This isn't a question of just saying 'cut it off.' It's much more complicated than that."

And food prices, at least at home, have yet to pinch.

Prices at U.S. grocery stores and restaurants shot up 5.5 percent in 2008 without inspiring an ethanol overhaul. They were a negligible 1.8 percent in 2009 and a tiny 0.8 percent last year, so 2.5 percent may seem large this year. The overall inflation rate is forecast for 1.9 percent.

Nor is there great political will to make it an issue.

Republicans, including the Tea Party caucus, pushing for deep budget cuts, could single out the 45-cents-a-gallon fuel tax credit that encourages biofuel production, and helps ensure the sector remains profitable.

But at $6 billion a year, they are a drop in the U.S. budget bucket, and overturning them would likely face stiff opposition from President Barack Obama -- whose determination to boost domestic resources is as resolute as his predecessors.

"Biofuels continue to be an important component of our clean energy strategy," a White House spokesman said when asked about ethanol, tight corn supplies and rising food prices.

"These home-grown, renewable fuels reduce our dependence on oil and create jobs and rural economic development."

Besides the tax credits, a 2007 law guarantees renewable fuels a rising share of the market. For corn ethanol, the mandate is 12.6 billion gallons this year and 15 billion gallons annually from 2015.

Production is set to reach 13.5 billion gallons this year -- up 46 percent from 9.235 billion gallons in 2008. Makers will exceed the mandate this year due to exports and profit-making moments when ethanol is cheaper than gasoline.

TEXAS UNSUCCESSFULLY SOUGHT MANDATE CUT

When grain prices skyrocketed in 2008, Texas, home of the U.S. oil industry, asked the Bush administration to halve the ethanol mandate for that year. The request was rejected.

Last year, Congress battled over ethanol subsidies before approving a one-year extension.

Senator Dianne Feinstein of California is working on legislation to trim ethanol subsidies. "Federal subsidies and tariffs for ethanol are wrong for our fiscal policy and wrong for the environment and rising commodity prices are another indicator of that," she said.

"It's unfathomable that the corn ethanol industry can continue to assert that using 40 percent of the corn crop has no impact on food stocks or commodity prices," said the Environmental Working Group, an ethanol critic.

Ethanol defenders say that critique ignores the benefit of distillers dried grains, an ethanol co-product that can substitute for corn in livestock rations. Forty million tons of grains are available at lower cost than corn, they say.

Comparatively small numbers of lawmakers oppose corn ethanol, while farm-state lawmakers are a strong bloc of support. Last year, the argument centered on possible cuts in the tax credits rather than elimination of them.

The major U.S. makers are privately owned POET, Archer Daniels Midland Co and Valero Energy Corp.

Advanced biofuels, such as ethanol from cellulose found in grass and woody plants, are the darling of corn ethanol critics. But the next-generation fuels amount to only a trickle of output and will need years to grow.

"Without ethanol, you have to have 10 percent more gas derived from oil. If you look at the impact on consumers, it would be huge," said Tom Buis of the ethanol trade group Growth Energy.

(Graphic by Emily Stephenson; Editing by Russell Blinch)

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