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By Robert Rapier on Nov 30, 2006 with no responses

Ethanol Demand Boosting Corn Prices

A new story today from Yahoo News:

Ethanol demand boosting corn prices

Some excerpts:

INDIANAPOLIS – The ethanol industry’s growing appetite for corn has pushed prices for the grain to their highest levels in a decade amid a surge that agricultural experts say could lead farmers next spring to plant their largest corn crop in 60 years.

Farmers who plant more corn in 2007, however, will be betting that the nation’s burgeoning ethanol industry won’t go bust and oil prices stay high, keeping up demand for the corn used to make ethanol, said Chris Hurt, a Purdue University agricultural economist.

With a growing amount of corn being diverted from food products and livestock feed toward ethanol production, per-bushel prices have increased about $1 since mid-September.

As of Tuesday, the average price of a bushel of corn was $3.45 — far above the $1.50 to $1.80 a bushel corn fetched at the same time last year, Hurt said.

The U.S. Department of Agriculture’s current estimate for 2006′s average farm price of corn is $3 a bushel, Hurt said. His early prediction for next year is an average farm price for a bushel of corn of $3.40, which would eclipse the current record of an average $3.24 price set during the 1995 marketing year.

Gary Schnitkey, a farm financial management specialist at the University of Illinois, also expects American farmers to plant significantly more corn next year, but he cautions that many factors can influence how much acreage is eventually shifted to corn.

“We’ve never been in a position where we’ve seen this much new demand for a commodity,” he said.

So, over $3.00 a bushel. In 2005, it took 1.6 billion bushels (from a total of 11.1 billion bushels) to produce 4.2 billion gallons of ethanol. So, the national average is 2.7 gallons of ethanol per bushel of corn. That means that the corn cost alone has risen to $1.11 per gallon of ethanol.

I wonder if all of the people projecting ethanol costs falling in the future will update their graphs next year, since costs increased in 2006, and look to again in 2007. Vinod Khosla has claimed numerous times that the production cost for ethanol is less than $1.00/gallon. From Vinod Khosla Debunked:

Vinod Khosla: Even in the U.S., and this is a conservative number, ethanol costs – most of the plants I look at – costs are about $0.90 a gallon to produce. [In contrast, slide 5 says gasoline costs $1.60 a gallon to produce.] Compared to any price you can imagine for gasoline, down to about $35 a barrel, ethanol is cheaper.

One thing we know for certain: That claim is not true (and it never has been). $1.11 a gallon means that the corn alone adds $46.67 per barrel of ethanol (and next year it will be even higher). Given that ethanol only has 65% of the energy content of gasoline, this is the same as $72/barrel gasoline, and we are still only talking about the corn costs – which are predicted to rise next year!

Corn ethanol is not the way. It is a jobs program, and a feel-good measure. It is doing next to nothing for us with respect to energy indepedence, and is now driving up food costs.