Grain-Based Ethanol Risk Hinges On Supply Projections

The Earth Policy Institute reports that "This year's world grain harvest is projected to fall short of consumption by 61 million tons, marking the sixth time in the last seven years that production has failed to satisfy demand. As a result of these shortfalls, world carryover stocks at the end of this crop year are projected to drop to 57 days of consumption, the shortest buffer since the 56-day-low in 1972 that triggered a doubling of grain prices" "The newest, potentially huge claimant on world grain supplies, the use of grain to produce fuel ethanol, is concentrated in the United States where a projected 55 million tons, or one fifth of the projected 268-million-ton corn harvest for 2006, will be used for this purpose". Just as world demand growth is the driving factor for US gasoline price increases, a burgeoning world demand for food grain is showing signs of compromising the ability of the US to supply itself with cheap grain-based ethanol. Specifically, if the 1972-scenario is replayed, and lasts for several years (we're not giving any odds), the US has only one good risk management choice: rapidly accelerate the changeover to switch grass as ethanol feedstock. How critical is the need? Stir in a few hurricane clogged ports and drought parched prairies, and significant ethanol price increases could result. Which would translate to an eroded price advantage for E85 (the preferred blend for flex fuel vehicles)

Positive consequences? Perhaps the Smithsonian will set up a last-of-the-gas-guzzlers exhibit . Good for tourism in the Capital. Grain traders are sure to come out on top. As for the farmers, only those with good yields will benefit, unfortunately. Corn suger laced process foods will go up in price, adding an impetus to switch to a better diet. Soil erosion will be reduced if corn acres are planted to prairie grass on a large scale. Pesticide use will go down as well.