First generation biofuels compete

2010, New Biotechnology

Abstract

Rising petroleum prices during 2005-2008, and passage of the 2007 U.S. Energy Independence and Security Act with a renewable fuel standard of 36 billion gallons of biofuels by 2022, encouraged massive investments in U.S. ethanol plants. Consequently, corn demand increased dramatically and prices tripled. This created a strong positive correlation between petroleum, corn, and food prices resulting in an outcry from U.S. consumers and livestock producers, and food riots in several developing countries.Other factors contributed to higher grain and food prices. Economic growth, especially in Asia, and a weaker U.S. dollar encouraged U.S. grain exports. Investors shifted funds into the commodity's future markets. Higher fuel costs for food processing and transportation put upward pressure on retail food prices.From mid-2008 to mid-2009, petroleum prices fell, the U.S. dollar strengthened, and the world economy entered a serious recession with high unemployment, housing market foreclosures, collapse of the stock market, reduced global trade, and a decline in durable goods and food purchases. Agricultural commodity prices declined about 50%.Biotechnology has had modest impacts on the biofuel sector. Seed corn with traits that help control insects and weeds has been widely adopted by U.S. farmers. Genetically engineered enzymes have reduced ethanol production costs and increased conversion efficiency.

Figures (19)

Contents E-mail address: marshallmartin@purdue.edu. — Contents E-mail address: [email protected].

U.S. ethanol plant locations. Source: www.renewable-ag.com. Others factors contributed to higher commodity prices. Eco- nomic growth, especially in Asia, increased U.S. grain export demand [1]. A weak U.S. dollar encouraged U.S. grain exports, and drove up petroleum prices expressed in dollars. Investors shifted funds from capital markets to commodity future markets causing commodity prices to rise sharply. While the ethanol boom influenced food prices, some of the increase in retail food prices could be attributed to the higher fuel costs for transportation of raw materials to the processing plants and food to the retail outlets. Ethanol is an alcohol produced by yeast from sugars through fermentation [2]. Fuel ethanol is ethanol that has been highly

U.S. ethanol production (gallons). Source: Fastech LLC, March 2009.

Ethanol producer net returns. Source: Glauber, USDA Chief Economist, February 2009.

FIGURE 5

Deflated commodity prices and indices, 1970-2008 (2002 = 1). Source: Abbott et al., What's Driving Food Prices, Farm Foundation, July 2008.

Renewable fuels standards Source: Renewable Fuels Association. TABLE 1

Rapid economic growth in developing countries such as India and China over the past decade has increased demand for raw materials ranging from petroleum and steel to agricultural com- modities. When per capita income rises, countries experience a dietary transition with increased demand for animal protein which requires livestock feed such as corn and soybeans. The U.S. Energy Independence and Security Act of 2007 contains a renewable fuel standard with a target of 36 billion gallons by 2022 (Fig. 6). The conventional biofuel category encompassing ethanol from corn grain is mandated to increase to 15 billion gallons by 2015 and remain at that level. Except for modest amounts of biodiesel from vegetable oils such as soybean oil, most of the rest

FIGURE 7

U.S. dollar exchange rate. Source: Barchart.com, May 2009.

FAO food price index. Source: Brian Wright, University of California Berkley. Snyder Lecture, Purdue University, April 17, 2009 .

Retail food price changes, year-over-year annual rates, by months, 2006-July 2008. Source: Corinne Alexander, Department of Agricultural Economics, Purdue University, August 2008.

TABLE 2

Estimated hog prices and costs per live hundredweight. Source: Chris Hurt, Department of Agricultural Economics, Purdue University, April 2009.

U.S. blended gasoline consumption. Source: Energy Information Administration.

U.S. corn, soybean, wheat and cotton planted acreage. Source: Glauber, Chief Economist, USDA, February 2009

World fuel ethanol production. Source: Enzyme Use for Corn Fuel Ethanol Production, Novozyme, July 2007. Although higher food prices do adversely impact high-income consumers, those who spend 15% or less of their income on food experience a much less severe impact from food price increases than those who spend 25-50%. Expenditures on food consumed at home in 2007 in the United States were only 5.7% compared to 8.6% in the United Kingdom, 11.4% in Germany, 13.7% in France, 14.5% in Italy, 14.6% in Japan, 24.6% in Brazil, 28.7% in Russia, 32.4% in India, 34.9% in China, 38.8% in Egypt and 45.7% in Pakistan [5]. Hence, even though the impact of the increased The sharp rise in commodity prices in global markets in 2008 was a double-edged sword for developing countries. For market-oriented farmers, in contrast to subsistence farmers, this increased their income. However, for low-income consumers, especially in urban areas, who are dependent on the market for their food, increases in food prices had a negative impact. The impacts of higher food prices are especially severe for low-income consumers because they often spend from 25% to 50% of their disposable income on food.

Adoption of transgenic corn. Source: GMO Compass, October 9, 2008. www.gmo-compass.org.

Increases in area planted and yields have contributed to the availability of corn for ethanol production in the United States. To satisfy this surge in demand for corn for ethanol, the proportion of corn destined for export and domestic livestock feed has declined. Von Braun [14] provides a perspective on the impacts of food price increases on developing countries. Higher food prices cause the poor to limit food consumption. This can result in under- nutrition and adverse health impacts, especially for children who are already at risk. Ivanic and Martin [15] further note that food price increases in 2008 probably increased overall poverty in low- income countries. U.S. corn production and usage by category. Source: Steve Meyer, Paragon Economics, Inc., March 2009.