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Food or Fuel?

-- Ellie -- 06/21/2007

Charleston's Post and Courier recently reported that International Bio Energy is considering building an ethanol plant in the Charleston area. The Charleston plant would be Bio Energy's first in the United States and one of the largest in the country. The $450 million plant would produce about 216 million gallons of ethanol annually, a rate of production that would call for 80 million bushels of corn each year.

The swift increase in ethanol production over the last couple of years is driving corn prices to record highs, and South Carolina farmers are eager to profit from the expanding ethanol industry. But the rising price of corn has greater repercussions than one might think; after all, farmers not only harvest corn for food, they use it to feed livestock. A large increase in ethanol production will necessarily drive up the prices of meat and dairy products, disrupting the balance of agricultural trade worldwide.

In Mexico, higher corn prices have led to skyrocketing tortilla prices and even increased that country's inflation. Indeed, corn may find itself becoming a volatile world commodity like the fuel source it's meant to replace: oil. According to Michael Swanson, agricultural economist at Wells Fargo in Minneapolis, the future price of corn will depend in large part on the price of oil. Higher oil prices will generate more demand for ethanol, driving up corn prices; lower oil prices will lower demand.

"You need to be an oil bull to be a corn bull," Swanson says. "It's the new paradigm."