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StudyCorn prices driven up by ethanol subsidies

19 Sep 2007 14:49 EDT DJ Study: Ethanol Subsidies Unnecessarily Drive Up Corn Prices

By Bill Tomson


WASHINGTON (Dow Jones)--Government ethanol subsidies are no longer necessary and are unfairly driving up the cost of corn and livestock feed, according to a new study financed by U.S. meat and poultry producers.

The American Meat Institute, National Chicken Council and the National Turkey Federation, commissioners of the study by agriculture economist Thomas Elam, said their increased feed costs - spurred on by the subsidization of corn-based ethanol - are translating into higher retail food prices for the public at supermarkets.

Elam said that because ethanol prices are tied closely to currently high oil prices, ethanol producers no longer need the 51-cent-per-gallon federal Volumetric Ethanol Excise Tax Credit that the U.S. implemented in 2005 and is set to run through 2010.

"The bottom line is that, with oil at $80 a barrel, U.S. ethanol producers simply do not need any federal subsidy in order to be able to afford corn ...," Elam said Wednesday. "The only real consequence of the subsidy program is to artificially raise the price that ethanol producers can afford to pay for corn, which raises the price of corn to everyone in the system ..."

And ethanol demand for corn will continue to rise over the coming years, Elam said, pushing corn prices even higher as the refining industry grows to produce enough ethanol to meet the 10% oxygenate demand by gasoline producers.

The U.S. is expected to produce about 6.5 billion gallons of ethanol this year, Elam said, but that will eventually rise to 21 to 22 billion gallons per year in order to provide enough of the oxygenate for all U.S. gasoline production, which he put at 140 billion gallons per year.

That forecast is too high, though, according to the Renewable Fuels Association and U.S. Department of Agriculture Chief Economist Keith Collins.

The ceiling for ethanol production growth in the U.S. - to produce 10% ethanol gasoline, or E10 - will be 13 billion to 14 billion gallons per year, Collins said earlier this year. The RFA, in reaction to the study, said the ceiling would be "at most a 15 billion gallon market."

The USDA prediction of how much ethanol will eventually be needed to meet gasoline demand is based on a straight-forward 10% calculation because the standard gasoline-to-oxygenate ratio is 90-10. But Elam said it was not that simple because of the lower energy content of ethanol.

Elam did not say how long it would take to reach an ethanol production level of his prediction of 21 to 22 billion gallons per year, but USDA Secretary Mike Johanns predicted earlier Wednesday that U.S. refiners could be churning out 12 to 14 billion gallons in "18 to 20 months."

USDA's Collins, Elam and Dick Lobb, spokesman for the National Chicken Council agree, though, that the ethanol industry's demand for corn is hurting meat and poultry producers.

Lobb, in a teleconference with reporters Wednesday, said: "The reason we commissioned this study ... is that the meat and poultry industries are by far the largest buyers of corn in the United States. Corn is the basis of most of the poultry and livestock feed in this country, so of course we have been very concerned about the rising costs of corn and all the implications of that ... The cost of acquiring feed ingredients for chicken producers has gone up over 40% over the last year."

Elam told reporters Wednesday he believed U.S. corn buyers have paid an additional $16 billion because of the government ethanol subsidy.

-By Bill Tomson, Dow Jones Newswires; 202-646-0088;

(END) Dow Jones Newswires

September 19, 2007 14:49 ET (18:49 GMT)

Copyright (c) 2007 Dow Jones & Company, Inc.

19 Sep 2007 14:49 EDT DJ Study: Ethanol Subsidies Unnecessarily Drive Up Corn Prices

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