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Surging US Corn Prices Spark ‘Food Versus Fuel’ Debate 

The surge in grain prices amid the worst drought in the U.S. in more than half a century, has led to livestock farmers demanding the Obama administration reduce or temporarily cancel a federal mandate, which requires part of the corn crop be set aside to produce ethanol for blending into cleaner-burning gasoline.

Photo: Carmen Gonazalez

The livestock lobby argues such a waiver will free up more supply and help ease record prices for corn, a key ingredient for animal feed. This year gasoline refiners will use some 13.2 billion gallons of ethanol, which will consume some 40 percent of the corn crop.

The debate is resurrecting painful memories of the food crisis of 2008 when farmers diverted corn crops from food production into the lucrative biofuel market. That contributed to a jump in prices and sparked food riots in Haiti, Bangladesh, Egypt and Mexico.

Now, a variation of the same 'food-versus-fuel' debate is pitting livestock producers against corn growers and the U.S. ethanol industry. But cattlemen and ranchers looking for a reprieve of the mandate by the U.S. Environmental Protection Agency (EPA) are likely to be disappointed.

Washington "remains unwilling to make changes to the Renewable Fuels Standard (RFS) and is therefore not likely to grant waivers," said Divya Reddy, Global Energy & Natural Resources analyst at consultancy Eurasia Group.

Granting a waiver will send a negative signal about the administration's support for biofuels, Reddy said, ahead of the November presidential election.

More than a hundred Republicans and Democrats in the U.S. House of Representatives are calling on the federal government to reduce its production mandate for corn-based ethanol in an effort to bring down prices for the grain, Dow Jones reported Thursday.

'Backlash'

That said, any decision in favor of a waiver "would inevitably risk backlash in farm states, where the ethanol program remains popular, including several swing states like Iowa, Ohio, and Wisconsin," Eurasia Group's Reddy said.

Even if a waiver did materialize, agronomists say it may not help ease corn prices appreciably. A recent Iowa State University study estimated the price of corn would drop an average of only 28 cents across a range of corn yield outcomes even after a full waiver of the mandate.

"The EPA does not necessarily have the ability to substantially ease the plight of livestock producers in 2012-13 at the stroke of a pen," wrote Scott Irwin and Darrel Good at the University of Illinois' Department of Agricultural and Consumer Economics.

From a pure supply and demand perspective, Societe Generale analysts Michael Wittner and Christopher Narayanan argue that there's no need for the U.S. EPA to lower or waive the ethanol mandate "for this year or next."

"Our analysis indicates that a waiver of the RFS is not necessary," the analysts wrote in a report on July 27. "Increased ethanol stockdraws, lower ethanol exports, the use of RINs (Renewable Identification Numbers, or tradable ethanol credits), and higher ethanol output — driven by ethanol price increases which have already taken place — will combine to increase ethanol supply and reduce corn demand, which will balance both markets."

They concluded: "We do not believe that there actually is a crisis that requires an RFS waiver."

That's unlikely to convince the livestock lobby who're likely to intensify their campaign in the run-up to the election.

"I support American ethanol and what it has done for rural communities in Nebraska and in many other states throughout the country," said J.D. Alexander, Nebraska cattleman and National Cattlemen's Beef Association president. "I find it concerning to the viability of the livestock industry that these mandates are allowed to continue today in the worst drought I have seen in my lifetime. This isn't rocket science. Implement the law, waive the RFS, let the market work and embrace free market principles."

—By CNBC's Sri Jegarajah

Follow Sri Jegarajah on Twitter: @cnbcSri

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