The fight between fuel and food: as the rise of ethanol as an alternative fuel begins to stress commercial corn supplies, risk managers need to ask themselves—at what point does sustainability become unsustainable?

Risk Management, April, 2007 by Youmna Sakr

Surviving in the business world today means embracing sustainability on all levels--economically, socially and environmentally. Maintaining sustainable operations is necessary to ensure that the resources needed to ensure long-term profits are not eliminated.

This ideal will only be amplified as we continue into the emerging Age of Accountability, where corporations are increasingly being held responsible not only for their actions, but also for how the unintended effects of these actions change the world around them.

What would happen, however, if sustainability in one industry began directly competing with the sustainability of another? The burgeoning ethanol industry reveals competing interests between the development of alternative fuels and agriculture.

Imagine being forced to choose between filling your gas tank and feeding your family. It seems like an unrealistic ultimatum. But according to many analysts and economists, this might soon prove to be more of a reality than you would think.

With the rapidly growing demand for alternative fuels, corn-based ethanol has emerged as the top substitute to alleviate the nation's dependence on foreign oil and create a more renewable source of energy. The rush for new ethanol plants has been spurred by the government's call for increased production on renewable fuels. Everyone from farmers to Wall Street investors have been pouring billions of dollars into the new industry and hurriedly building more ethanol plants.

But the rapid rise in ethanol production has led to concern about the possibility of major food shortages. According to reports, these plants could use as much as half of America's corn crop next year as the growing demand for corn needed to produce ethanol may be much greater than the government realizes. The Renewable Fuels Association (RFA), the national trade association for the U.S. ethanol industry, says that in order to meet the growing demand for ethanol production, the industry will require about 60 million tons of corn from the 2008 harvest.

The Earth Policy Institute (EPI), a Washington think tank, believes this estimate is too low, however, claiming 139 million tons of corn as more realistic--a figure that would require over half of the projected 2008 harvest.

Bob Dinneen, RFA president, claims that his organization's estimates show that there will be enough corn available to satisfy the demands for both fuel and food, and that all estimates are as accurate as possible. He believes that the EPI failed to take into account as much as 10 million more acres of farmland that may be put into production next year. Dinneen, however, admits that "there are limitations to how much ethanol you can produce from grain" and explains that almost all ethanol producers are looking at making it from other feedstocks.

The chief economist at the U.S. Department of Agriculture, Keith Collins, has acknowledged that the industry has produced lagging estimates of the production needs for the ethanol plants but remains wary of the EPI estimates, claiming that they strike him as high. "The point they're making is a valid point. The expansion in the industry has been outstripping everybody's expectations," Collins said to the Associated Press.

The USDA Baseline Projections suggest that the share of ethanol in total corn usage will rise from 12% to 23% by 2015. The problem is not the increasing demand for ethanol, however, as the energy industry could use more than the current level of production. The problem, according to EPI president Lester Brown, is that the diversion of corn usage from food to fuel will have adverse effects on society, leading to higher food costs and widespread food shortages.

Rising Food Prices

Though ethanol plants have been breathing new life into rural communities and raising the income of grain farmers across the country, not everyone is benefiting from this alternative fuel boom. The increased demand for corn is likely to drive up the cost for food in the long run, as the higher corn prices have made it more expensive for ranchers to use feed corn for cows, chickens and pigs.

The rising prices not only affect food products made directly from corn but also those coming from livestock that rely on corn as a food source. Prices of corn have already climbed to $3 a bushel, but the strong returns that have been seen in the ethanol industry suggest that this price could rise to as much as $5 a bushel.

Agricultural economist Ron Plain claims that hog producers, expecting to find corn prices in 2007 similar to those of 2006, would need to receive $50 per hundred pounds of meat to break even but will likely receive only $46. "The big thing is much, much bigger feed costs, and that will give us red ink, I'm afraid, in 2007 and 2008," Plain said to the Associated Press.

Earnings for meat producers such as Smithfield Foods and Tyson Foods have been falling due to the increased costs involved in livestock production.

Government subsidies for corn production have also contributed to the losses felt by ranchers and meat production companies. According to Cal Dooley, the head of the Food Products Association, "We wouldn't have a concern with this if it was strictly the result of market forces, but what is driving a lot of this use of corn for ethanol is a fairly generous subsidy for the production of ethanol."