Ethanol Demand in U.S. Adds to Food, Fertilizer Costs

Feb. 21 (Bloomberg) -- U.S. plans to replace 15 percent of gasoline consumption with crop-based fuels including ethanol are already leading to some unintended consequences as food prices and fertilizer costs increase.

About 33 percent of U.S. corn will be used for fuel during the next decade, up from 11 percent in 2002, the Agriculture Department estimates. Corn rose 20 percent to a record on the Chicago Board of Trade since Dec. 19, the day President George W. Bush signed a law requiring a fivefold jump in renewable fuels by 2022.

Increased demand for the grain helped boost food prices by 4.9 percent last year, the most since 1990, and will reduce global inventories of corn to the lowest in 24 years, government data show. While advocates say ethanol is cleaner than gasoline, a Princeton University study this month said it causes more environmental harm than fossil fuels.

Oil prices tripled since the end of 2003, causing the government to consider alternative fuels. Now, the competition for corn is leading to higher costs for food companies, raising prices for everything from cattle to dairy products.

Corn doubled in the past two years, touching a record $5.29 a bushel today in Chicago. The price of young cattle sold to feedlots gained 8.7 percent in the past year, reaching a record $1.1965 a pound on Sept. 6 on the Chicago Mercantile Exchange. Average whole milk rose 26 percent to $3.871 a gallon in January from a year earlier, the Department of Labor said yesterday.

``For thousands of years, humans grew food and ate it,'' said Andrew Redleaf, 50, chief executive officer of Whitebox Advisors LLC, a Minneapolis hedge fund that manages $3 billion. ``Now we are burning crops to make fuel.''

Researchers led by Timothy Searchinger at Princeton University said their study showed greenhouse-gas emissions will rise with ethanol demand. U.S. farmers will use more land for fuel, forcing poorer countries to cut down rainforests and use other undeveloped land for farms, the study said.

Searchinger's team determined that corn-based ethanol almost doubles greenhouse-gas output over 30 years when considering land-use changes. Bob Dinneen, president of the Renewable Fuels Association in Washington, said the study used a flawed model and overestimated how much land will be needed.

Ethanol is important in reducing emissions, ending energy dependence on the Middle East and creating jobs in rural areas, Dinneen said today at the USDA conference.

``There are still some who want us to choose between food and fuel,'' said Dinneen, whose organization represents ethanol producers including Archer Daniels Midland Co. ``I don't think we have to choose.'' Research shows cellulosic ethanol made from grasses and crop waste may contribute 21 billion gallons by 2022, and farmers will be able to boost yields, he said.