Ethanol production spikes corn prices

SCHERERVILLE | Ethanol production may be a two-headed coin for consumers, lowering the cost of fuel but eventually hiking the price of meat, an agricultural economist said Friday.

Indiana corn farmers are seeing higher earnings with the increasing demand for corn as a feedstock for the state's ethanol plants, said Corinne Alexander, assistant professor of agricultural economics at Purdue University. But rising corn prices adversely affect the state's hog and poultry farmers who are being hit by higher feed costs, she said.

Alexander was a member of the panel presenting the 2007 Economic Outlook seminar Friday, an event hosted annually at Tiebel's by the Lake County Community Development Committee.

"High energy prices are great news for agriculture," she said, "They're farming for fuel not just for food."

The demand for ethanol has been spurred by the Administration's call for an improvement in domestic energy resources. In fact, Sen. Richard Lugar, R-Ind., wants ethanol production to increase to 100 billion gallons annually by 2020 from its current 4 billion gallons per year level.

Currently there are two ethanol plants in Indiana and another five under construction, including the Iroquois Bio-Energy Co. plant outside of Rensselaer.

"There's a gold rush in ethanol," Alexander said, adding ethanol plants repay the $150 million cost of investment within 12 months.

The demand for ethanol production increased the price of corn 67 cents a bushel between Oct. 12 and Nov. 3, Alexander said. At a projected yield of 167 bushels an acre, the 67 cent increase means an additional $112 an acre. With Indiana's full-time farmers having 1,000 acres of corn and 1,000 acres of soybeans in production, the price hike means an extra $112,000, which is "a huge, huge income increase," she said.

Soybean prices have gone up 50 cents a bushel in recent weeks, she said. The extra money is important because farmers have seen huge increases in the price of energy, seed, fertilizer, Alexander said.

But what's good news for one group of Indiana farmers is bad for another, she said. The cost of feed is the major cost for pork and chicken producers. Thus, the recent 67 cents a bushel increase in the price of corn wiped out their profits.

Because there is usually a time lag in meat prices, consumers won't see a hike in meat prices for a couple of years, but if high feed costs remain, herds will be reduced, Alexandra said.

"In about two years we'll see increases in the price of pork," she said. "In about four years we may see increases in the price of beef. So this does translate to us at the grocery store level in a couple of years."

It won't affect the price of the corm consumers eat, such as corn flakes, tofu and corn chips, Alexander said, adding there's only about 3 cents worth of corn in a $4 box of corn flakes.

"If you're a vegetarian this isn't going to affect you, but if you like to eat meat, two to four years from now you'll see higher prices," she said. "The livestock industry in Indiana is going to have a tough time."

The demand for corn for ethanol production also will increase the cost of farmland and will put corn in the $3 a bushel range in 2007.

Scientists are seeking other sources of feedstock for ethanol production, but currently plants are being built to produce ethanol from corn because there isn't a good alternative .

"Cellulosic ethanol has been held out there as the holy grail," she said. "It's coming, but it's been five years away from commercialization for the last 25 years. It's still five years away from commercialization. The good news is given energy prices and the fact that ethanol is profitable, we are seeing large investments from lots of companies."