Trade Offs

There is an old adage about complicated situations that has been attributed to a 14th century English philosopher, William of Occam. It’s a simple bit of logic that is not much in vogue these days but perhaps a good idea to keep in mind when trying to sort out all the issues that surround the conversion of corn into ethanol. William’s words of wisdom simply put suggest that, “All other things being equal the simplest solution is the best.”

I like to keep this in mind as I sort though the interface between corn production, energy independence and the world’s food supply since each of these topics, by themselves, is the subject of intensive discussion and debate. So following Will’s advice let me try to define the basic facts that we know about each of these topics.

Corn, generally speaking, has been a major crop in American for thousands of years. We now grow more of it, about 65 million metric tons this year, than the rest of the world combined and every year our government pays the corn growers a subsidy. We also export more; about 35% of the world exports are US grain and corn. Most of this corn is feed corn, which is fed to our poultry and livestock industry.

This year it is estimated that the United States Department of Agriculture, USDA, will pay out more than $10 billion dollars to corn growers. How much does it take to fatten up that calf? Well here is a simple comparison of how much corn it takes to make a pound of each animal:
Chicken = 2.6 pounds of feed
Pork = 6.5 pounds of feed
Beef = 7.0 pounds of feed
Source: USDA Economic Research Service

Still confused, well add to this the fact that from 2007 to 2008 the price of corn rose by 60% and that from July of 2008 until now it has fallen by almost 60%. This mirrors almost exactly the same drop in a barrel of oil but here’s the difference… you can’t eat the oil!

When oil was $140 per barrel a bushel of corn rose to almost $8.00. At this price we had food riots in many parts of the world. The same barrel today is less than $60 and corn is selling for $4.50 a bushel. Since there is no direct linkage between these two important commodities why do they track one another so closely?

We asked for William’s help and here’s what he thinks. “It’s the ethanol stupid” he quipped. “When we convert it into fuel you can’t eat it!”

Thanks Will.. but there’s a little more to it than that.

Now that we have stated the basic facts about corn lets talk about oil and energy independence. In July of this year oil was selling for $147/brl. It is now below $60.00. While major oil companies have been through these cyclical troughs before they have never had to blend ethanol into the fuel supply. Although at present ethanol represents less than 1% of our nation’s energy needs it takes about 20% of our annual harvest to produce this much ethanol. In 2005 Congress mandated the introduction of certain volumes of renewable fuels, corn derived ethanol, into retail gasoline. EPA then set goals of 4 billion gallons in 2006, 4.7 in 2007, 5.4 in 2008, 6.1 in 2009. 6.8 in 2010, 7.4 in 2011 and 30 in 2012. These seemed reasonable when a bushel of corn sold for $2.00, a gallon of gas was $2.25 and a barrel of crude oil was $50.00.

Still confused well let’s see if we can take Will’s advice and make it simple.

In America we spend about ten cents of every income dollar on food and about three cents of that on corn based food. In many other parts of the world less fortunate people must spend seventy cents of every dollar on food. They must also spend about 30% of that seventy cents on corn-based foods.

If the price of corn from the worlds major exporter doubles to $8.00 a bushel it will now cost him about forty two cents of every food dollar to get the same amount of corn. Without other food sources “food insecure countries” have no alternatives but to live on less food. And as Will tells us…if you burn it you can’t eat it.
It’s that simple.