The Associated Press reported yesterday that, “Battered by bad economic news, consumer confidence plunged while wholesale food, energy and medicine costs soared, pushing inflation up at the fastest pace in a quarter century.”

The AP article added that, “Food prices, which have been surging because of increased demand stemming from ethanol production, rose by 1.7 percent last month, the biggest monthly increase in three years. Prices for beef, bakery products and eggs were all up sharply.”

Meanwhile, AFP reported yesterday that, “World oil prices struck fresh record highs in New York and London in Tuesday trading amid fears of declining OPEC oil output ahead of the cartel’s looming meeting next week, traders said.

“New York’s main oil futures contract, light sweet crude for delivery in April, closed up 1.65 dollars at a record 100.88 dollars a barrel.

“Although the contract finished on a new high, it hit a record 101.32 dollars during intra-day trading on February 20.”

And Tom Petruno and Maura Reynolds reported in today’s Los Angeles Times that, “Vigorous economic growth abroad is lifting foreign consumers’ wealth and spending power. That is translating into greater demand for food, in particular for meat — which in turn drives up demand for grain to feed livestock.

“The cost of a bushel of soybeans rocketed above $14 this month, up from $10 in October and $8 a year ago.

“Wheat now costs nearly $12 a bushel, up from $9 at the start of the year.”

The L.A. Times indicated that, “Bad weather in some crop-producing nations has reduced grain supplies at a time of strong demand. The U.S. Department of Agriculture estimated this month that global wheat inventories would fall to 30-year lows this year.

“Another factor helping to drive up commodity costs: investors flooding into futures markets hoping to cash in on a sustained rise.

“‘There is clearly a speculative element in the market’ for commodities, said William O’Neill, an expert on the markets at Logic Advisors in Upper Saddle River, N.J.

“That raises the possibility that commodity markets are experiencing a bubble that is bound to pop as the economy weakens, driving down prices when it does.”

Petruno and Reynolds also stated that, “But at least for now, even though raw materials generally account for a small percentage of the retail prices of goods, the bite they are taking is becoming more noticeable.

“Kraft Foods Inc., maker of Nabisco crackers and Maxwell House coffee, said last week that it was facing ‘unprecedented input costs’ and had ‘redoubled efforts to reduce overhead and other costs.’”

Lauren Etter, writing in today’s Wall Street Journal, reported that, “The little-known Minneapolis Grain Exchange is suddenly one of the hottest spots in the global financial markets as the price of its flagship commodity — the wheat used to make bread and pizza crust — shatters records, enriching farmers and fueling fears about shortages.”

Ms. Etter indicated that, “Yesterday, wheat closed at $22.40 a bushel on the Minneapolis Grain Exchange, up from about $5 a year ago. Monday, the price of the hard red spring wheat that trades in Minneapolis closed at a record $24 a bushel, touching $25 during intraday trade.

“Ordinarily, the Chicago Board of Trade dominates the wheat market, but that changed in January when the U.S. Department of Agriculture said winter-wheat plantings were less than expected. That put pressure on the next wheat crop in the ground, the hard red spring wheat that trades on the 126-year-old Minneapolis exchange.

“So Minneapolis has become ground zero for the global wheat shortage, which has been caused by drought in Australia and poor weather in other grain-producing countries. Global stocks are projected to reach 30-year lows this year, while U.S. stocks will reach 60-year lows, according to figures from the Agriculture Department.

“In the trading pit, floor traders say they are in disbelief as records get tested daily.The worry among traders is that prices have gone up too far and the market could collapse.”

The Journal article noted that, “Higher prices are likely to entice farmers to plant more wheat, along with corn and soybeans. Prices for those commodities are up in part because of demand for biofuels, and those higher prices led to more planting. Already, farmers are ramping up acreage in all of the major crops. Corn, soybean and wheat combined will reach 225 million acres this year, the highest since 1984, according to the USDA.”

Ms. Etter explained that, “The rise in agricultural prices, combined with high oil prices (crude futures closed above $100 a barrel yesterday) have contributed to higher food inflation in the U.S. and around the world. Last year, U.S. food prices increased 4% from the year before level, the highest level since 1990.”

“Another byproduct of the rally by wheat and other grains is that food is becoming more politicized as countries dependent on food imports fear they will be left at the mercy of volatile markets and shrinking supplies. Such a development could exacerbate hunger while generating food riots or political problems at home…[F]ive of the world’s wheat-producing nations — Russia, Kazakhstan, Ukraine, Argentina and China — have taken some wheat off the world market to address supply shortfalls at home,” the article said.

Mark Thirlwell noted in a comment item at The Financial Times Online yesterday that, “This rise in prices is a consequence of both demand and supply trends. On the demand side, the key factor has been the strong consumption growth in emerging markets, which in turn has been powered by those countries’ impressive income gains. China, for example, has accounted for up to 40 per cent of the increase in global consumption of soyabeans and meat over the past decade. At the same time, a series of supply-side disruptions in key commodity markets ranging from drought to disease have been at work.

“Perhaps the most important drivers of price gains over the past year are developments in world energy markets. High oil prices have encouraged a policy focus on biofuels, including lashings of generous financial support. Production has responded quickly to these incentives: the World Bank reports that the US has used 20 per cent of its maize production for biofuels and the European Union 68 per cent of its vegetable oil production. This change in usage has boosted prices, reduced the supply of these crops available for food and encouraged the substitution of other agricultural land from food to biofuel production.”

The FT item noted that, “Most important, a period of protracted higher food prices will be bad news for many of the world’s poorest peopleand its poorest economies. While the share of food in the consumption basket of a rich country such as the US is relatively low, at about 10 per cent, it averages about 30 per cent in China and more than 60 per cent in sub-Saharan Africa. Those countries that are most vulnerable are the low-income net food importers. Higher food prices add more strain to import bills that have often already been stretched by higher energy prices. Several of the poorest economies fall into this category and are heavily dependent on food aid to meet their needs. But the worldwide volume of such aid has stagnated for the past two decades and, what is worse, the quantity of aid delivered tends to fall as prices rise, given that a large proportion comprises a fixed annual dollar amount.”

Fleming Meeks, writing yesterday at Barron’s Online, indicated that, “Corn prices are up 134% over the past two years, and soybeans are up 145%.

“That’s good news for farmers, who are raking in the biggest profits in a generation. But you don’t have to own a tractor to cash in on this boom, as shareholders in agribiotech giants like Monsanto and Syngenta know well. Shares of seed producer Monsanto have grown 174% over the past 24 months, and the American depositary receipts of Syngenta have sprouted 91% over the same period.”

The article added that, “Growing demand is driving corn and soybean prices higher. One reason: Emerging economies eat more meat, and it takes eight pounds of corn to produce one pound of beef. For pork, the ratio is five to one, and for chicken, it’s three to one.

“Ethanol, too, is driving up demand for corn, and Syngenta is seeking the U.S. Department of Agriculture’s approval for a new ‘amylase-enriched’ cord that can be processed more quickly by biorefiners and would produce higher volumes of ethanol per bushel.”

A more tempered assessment of the food inflation and commodity value relationship was noted in an AFP article from yesterday.

The article stated that, “Some of the food price rises seen in supermarkets in the European Union cannot be justified by increases in farm production costs, the European Commission said Tuesday.

“‘We have seen price increases in supermarkets,’ said E.U. spokesman on agriculture Michael Mann. ‘But if you see the price of a loaf of bread, you also have to see that the price of the cereal only adds up to about five per cent of the total price.

“‘Some of the price hikes we have seen are not justified by the price hike in the raw materials,’ he said.”

Also on this issue, Maggie Urry reported yesterday at The Financial Times Online that, “Sharp rises in commodity prices have been passed to customers by Associated British Foods, the large grocery and agribusiness group that owns Kingsmill bread, Silver Spoon sugar and Ovaltine and Twinings beverages.”

Closer Look at Ethanol

Several articles highlight the fact that biofuels production has been a variable in the run-up in the market price of some program crops, particularly corn.

Dow Jones news writer Bill Tomson reported last week that, “Rising corn yields and improved ethanol technology will, in the long-run, push U.S. production capacity for the fuel up above a commonly perceived ceiling of 15 billion gallons per year, National Corn Growers Association Chief Executive Rick Tolman said Friday.

“Tolman, in an interview with Dow Jones Newswires, said the commonly cited ceiling doesn’t really exist. By the year 2020, farmers could be getting corn yields of as much as 300 bushels per acre — about double what they are now –and refiners could be getting as much as 1,000 gallons of ethanol from an acre of corn — about double what is being taken now.

“With all that corn, Tolman said, refiners could push production to more than 20 billion gallons a year without depriving the livestock feed and food industries of the corn they need.”

Meanwhile, Economists at the Center for Agricultural and Rural Development (CARD) at Iowa State University recently published a paper entitled, “Crop-Based Biofuel Production under Acreage Constraints and Uncertainty,” which was written by Mindy L. Baker, Dermot J. Hayes and Bruce A. Babcock.

The Abstract of the paper stated that, “A myriad of policy issues and questions revolve around understanding the bioeconomy. To gain insight, we develop a stochastic and dynamic general equilibrium model and capture the uncertain nature of key variables such as crude oil prices and commodity yields. We also incorporate acreage limitations on key feedstocks such as corn, soybeans, and switchgrass. We make standard assumptions that investors are rational and engage in biofuel production only if returns exceed what they can expect to earn from alternative investments. The Energy Independence and Security Act of 2007 mandates the use of 36 billion gallons of biofuels by 2022, with significant requirements for cellulosic biofuel and biodiesel production. We calculate the level of tax credits required to stimulate this level of production. Subsidies of nearly $2.50 per gallon to biodiesel and $1.86 per gallon to cellulosic biofuel were required, and long-run equilibrium commodity prices were high, with corn at $4.76 per bushel and soybeans at $13.01 per bushel. High commodity prices are due to intense competition for planted acres among the commodities.”

Stu Ellis, writing yesterday at The Farm Gate Blog (University of Illinois Extension), pointed to the CARD paper and provided this brief summary: “In one of the Iowa State theories, the corn ethanol industry expands until 18 billion gallons per year are produced, but only from corn and not from biomass products. That theory also suggests the soy biodiesel industry never gets off the ground without substantial subsidies. Their research also finds an equilibrium corn price of $4.76, soybeans at $13.01, and hay or switchgrass at $164.62 per ton, with 61% of acres dedicated to corn, 19% to beans, and 20% to hay or switchgrass.

“The researchers conclude that competition for land ensures that providing an incentive to just one crop will increase equilibrium prices of all. They also determine that neither biodiesel nor switchgrass ethanol is commercially viable in the long run, and for it to be viable, it must be subsidized at a $1.55 to $2.11 per gallon rate, compared to $0.22 to $0.78 per gallon for corn ethanol. They contend the result will be more pressure for corn-based ethanol because of the requirement for a lower subsidy and corn takes less land to produce than switchgrass.”

Meanwhile, DTN writer Todd Neeley reported yesterday (link requires subscription) that, “Renewable Fuels Association President and CEO Bob Dinneen challenged ethanol producers Tuesday to fight through the criticism of what has become a 7.9-billion-gallon industry in a few short years.

“Speaking at the RFA’s annual convention in Orlando, Fla., Dinneen said the state of the U.S. ethanol industry is sound, but faces new challenges.

“‘Change is hard,’ Dinneen said. ‘Change forces people to rethink, re-adjust. This past year we saw the emergence of the food-versus-fuel debate. The chattering class of naysayers avoids the fact that we produce food and fuel. Some seem to overlook the impact of energy costs on food costs.’”

The DTN item added that, “While the future is bright, Dineen said the industry had an impressive year in 2007 that included adding some $47 billion to the gross domestic product, employing 238,000 workers and cutting USDA subsidies by some $8 billion that otherwise would have been given to corn producers.”

To listen to an audio replay of Mr. Dineen’s comments yesterday, or to view a transcript of his remarks, see this update, which was posted yesterday at The Ethanol Report.

In other opinion regarding biofuels, the editorial board at The Washington Post opined today that, “As the United States searches for alternative ways to feed its addiction to petroleum, ethanol and other biofuels derived from organic material have been considered a miracle motor vehicle elixir. The energy bill signed by President Bush in December mandates that at least 36 billion gallons of biofuels a year be used by 2020. Yet separate studies released this month by Princeton University and the Nature Conservancy reveal that biofuels are not a silver bullet in the battle against global warming. In fact, they could make things worse.

“Corn and sugar cane are common sources of ethanol. Aside from emitting fewer greenhouse gases than coal or oil when burned as fuel, these biofuel crops remove carbon from the atmosphere while they are growing — thus making them nearly carbon-neutral. But the studies show that ethanol may be even more dangerous for the environment than fossil fuels are. As the Princeton study points out, clearing previously untouched land to grow biofuel crops releases long-sequestered carbon into the atmosphere. While planting corn and sugar cane in already tilled land is fine, a problem arises when farmers churn up new land to grow more fuel or the food and feed displaced bybiofuel crops.”

Concluding, the Post stated that, “An essay in the May-June 2007 issue of Foreign Affairs by two professors from the University of Minnesota highlighted still another problem: The biofuels craze could starve people. ‘By putting pressure on global supplies of edible crops, the surge in ethanol production will translate into higher prices for both processed and staple foods around the world,’ they wrote. ‘If oil prices remain high — which is likely — the people most vulnerable to the price hikes brought on by the biofuel boom will be those in countries that both suffer food deficits and import petroleum.’

“The problems with corn-based ethanol, long regarded as a transitional fuel source, have been debated for years. One alternative is to squeeze ethanol out of cellulose from switch grass, cornhusks and other biomass sources. But because cellulosic ethanol remains experimental, it might be years before it makes it from the laboratory to the gas tank. It all adds up to another example that there is no quick, cheap and easy way to confront the menace of global warming.”

Farm Bill

DTN writer Chris Clayton reported yesterday (link requires subscription) that, “Congressional tax-writing committees will work to come to terms by the end of the week on provisions to add about $10 billion in spending to the farm bill, House Agriculture Committee Chairman Collin Peterson, D-Minn., said Tuesday evening.

“An agreement to bring this farm bill to conclusion was one of the main goals of a meeting between agriculture and tax-writing committee leaders and top Democratic Congressional leaders Tuesday night. Besides finding a cost figure that members of Congress could agree upon, lawmakers have to find a way to pay for added expense which appeals to the House and Senate, and then can be sold to the White House.

“‘The biggest thing that happened was a general agreement to try to have the offset done by Friday,’ said House Agriculture Committee Chairman Collin Peterson, D-Minn., in a phone interview Tuesday evening ‘The White House is getting involved in trying to define what the offset should be.’”

Mr. Clayton indicated that, “Right now, Peterson said he is confident negotiations will complete a farm bill with enough additional funding in conservation and nutrition to satisfy members of the House, while also keeping a permanent disaster program that was created in the Senate farm bill.

“Peterson and Harkin [Sen. Ag Committee Chairman Tom Harkin (D-Iowa)] said after the meeting that the general agreement would establish about $10 billion in additional spending over 10 years to the bill, which has a baseline of $597 billion in costs over that decade of spending. Peterson said he spoke with Deputy Agriculture Secretary Chuck Conner, who has led the Bush administration team on the farm bill, after the meeting.

“‘We have a number we are looking at and the White House knows what it is,’ Peterson said. ‘I wouldn’t say they are totally there yet, but they haven’t stormed off, so that’s a good sign.’”

Keith Good