Shock and Awe at Retail. Ethanol Is King

Food versus fuel has everyone feeling the pinch in their pockets.

“The world has discovered capitalism and it’s sweeping the globe,” says Clyde Harrison, a confident and urbane man who is president and director of Brookshire Raw Materials Group Inc., and a former partner of Carl Icahn.  “Capitalism is easy to understand.  It is nature with a balance sheet.  The difference is, if you’re wrong, you go broke instead of being eaten.”  In his opinion, 20 years of restrained and neglected “stuff” supply is being overwhelmed by prosperity-driven demand, thus the rise in value of raw materials (“stuff”) such as land, raw materials, art, etc.  In fact, Harrison predicts that 2000 was the beginning of one of the most spectacular stuff cycles in history because for the first time the cycle included the entire world, not just the G-8 countries.

“Markets appear to have cycles of approximately 18 to 25 years,” says Harrison, “and they alternate between paper and stuff.  The last full stuff cycle was 1966 to 1982.  Oil rallied from $2.90 per barrel to $28 per barrel; gold started at $35 an ounce, zooming to $850 an ounce.  Paper – stocks and bonds – was in the dead zone during this period.”

All of this discussion around raw materials was a result of the ongoing news stories of predicted shortages of corn for feed and food, due to the push for biofuels.  Since last fall, as anyone in our industry can testify, whether due to weather (wheat and soy) or new use/demand (corn), prices for ingredients have shot up.  Back in January, the U.S. Bureau of Labor reported that the average price paid for white pan bread move up above 115¢ per pound, which was a record high.  Whether starch or corn syrup, any ingredient derived from corn has climbed in price, what with more and more acres devoted to ethanol production, and those left being fought over by livestock producers as well as food manufacturers.  Perhaps Harrison is wrong – capitalism is reverting back to dog eat dog in an ethanol world.  In addition to weather concerns, the USDA has expressed its concern regarding the drop in global stockpiles of corn by as much as 31 per cent – the lowest since 1978, with corn prices at a 10-year high.  For edible oil producers, the outlook is worse, since the corn rally could encourage farmers to plant more acres of that crop at the expense of other less profitable crops, such as wheat, soybeans, canola and flax.  The world has failed to produce enough corn to match demand in six of the last seven years, and that was before President Bush made his commitment to the use of ethanol and renewable resources – 35 billion gallons over the next decade.  The EU has set a target as well, of 10 per cent of all vehicle fuel being biofuel by 2020, creating outcries in a food industry that feels the standards are too high.  The European baking association has presented its case that the current targets negatively impact on both the companies and their consumers, who will end up having to pay the burden of the additional input costs.

Canadian companies are efficient, with minimal costs passed along so far.  Our consumers are mainly vocal about the price of filling their gas tanks, rather than their breadboxes, but that, too, will come. 

“Third world real incomes are just beginning to rise to levels that create large demands for consumer goods,” says Harrison.  “China is currently 40 per cent urban, 60 per cent rural.  It has 20 per cent of the world’s population on seven per cent of the land base.  China’s grain imports will grow from 14 million tons today, to 57 million tons by 2020.”  And China’s grain imports are for feed and food, not fuel.  If we haven’t met demand in six of the last seven years, how are we going to meet the demand as it continues to triple every 10 years or faster?

“Today, one billion people consume two-thirds of the world’s raw materials,” says Harrison.  “Almost six billion people consume the other third, and are becoming more successful.  You don’t need to connect the dots – they overlap.

“Demand for raw materials has increased.  In many cases, the capacity to produce them has declined dramatically in the last 20 years,” says Harrison.  “Before this stuff market is over, you will see an oil rig on every California beach and a copper mine in Al Gore’s backyard.  The ethanol program is just a giant farm subsidy program – it will be more polluting than crude coming out of the ground.”

According to an MIT scientist, there’s not enough corn available in the U.S. to make ethanol a viable long-term resource.  Professor Gregory Stephanopoulos, in Science, reported that even if all the U.S. corn went into ethanol production, there would only be enough for four to five per cent of America’s annual liquid fuel consumption.  “There is no single silver bullet that will make a robust transportation fuels industry a reality,” said Professor Stephanopoulos.

Total Canadian ethanol production capacity is approximately 700 million litres annually.  Three ethanol plants are currently operating in Ontario, with an additional five plants under construction across Canada.  Farmers – particularly in the U.S. — continue to switch crop acres to plant corn, illustrating how much faster the ethanol industry has taken off in relation to biodiesel.
The U.S. has 117 ethanol plants on line and 70 more under construction, so the current demand for corn is not a weather situation, it’s not a temporary situation – it’s a permanent food fight, with prices able to climb higher than the 80 per cent increase they’ve already achieved, thanks to North American ethanol demand.  Even with significant new developments in seed technology, agricultural know-how and supply chain efficiency, it’s still going to take some doing to meet the growing global food demand and keep prices from creating shock waves at the supermarket.