Ethanol’s trickle-down effects may be more helpful than you think

Robert Gallant Globe and Mail Update July 22, 2007 at 11:31 PM EDT

In recent weeks, ethanol has been accused of driving up the price of everything from chicken to ice cream. While this may make for eye-grabbing headlines, these accusations are overly simplistic and ignore the real economic factors affecting rising food prices.

The fact is that energy prices are the main cause. This should come as no surprise, since energy is the cornerstone of our economy. Oil prices have risen more than 30 per cent this year alone and this increase is driving all commodity prices up. Much of what we eat travels hundreds or thousands of kilometres to our dinner tables. The diesel-driven tractors in the field, the container ships on the ocean and the transport trucks that deliver food to your local grocery store all require expensive energy.

Recent reports indicate that we could soon see $100 a barrel for oil as supplies tighten due to global demand and dwindling reserves. A large component of this global demand can be attributed to unprecedented economic growth in China and India. In fact, many commodity prices, including copper, aluminum and palm oil have been rising steadily given the demand from these two countries. So why would food be immune to this global demand phenomenon?

The North American ethanol boom has certainly had some effect on grain prices, but to suggest that it’s unilaterally driving up food prices is the epitome of sensationalist reporting. After all, corn (the primary feedstock for ethanol in North America) accounts for less than 5 per cent of the retail cost of a box of Corn Flakes. My local store sells Corn Flakes for about $3.69 for a 525-gram box, with corn accounting for less than 20 cents of the cost. Surely Canadian farmers deserve more than 20 cents from a box of Corn Flakes? Perhaps Canadian farmers can finally make a living growing the food we eat if they can get a little more for their grain.

What is most troubling about this debate is that it ignores the overwhelming benefits created by ethanol and other biofuels.

Canadian farmers have long recognized the importance of creating a value-added market for their grain and have pushed hard for an industry in Canada. Geri Kamenz, president of the Ontario Federation of Agriculture, said recently: “Ethanol is becoming a recognized fuel source for society’s engines and farmers want to produce crops for more ethanol production.”

Ethanol production also benefits rural economies. Production plants are typically built in rural areas where corn is grown. An average plant employs about 50 people with well-paying, high-skilled jobs and provides hundreds of spinoff jobs through local providers of goods and services.

More than 70 per cent of the revenue from an ethanol plant is spent within a 150-kilometre radius of its site. This is precisely why more than 35 rural communities across Canada, according to the Canadian Renewable Fuels Association (CRFA), are currently looking at ethanol production as a way to rejuvenating their economies. One only has to look at booming Iowa to see what ethanol production has done for its rural economy.

Ethanol production in Canada is expected to rise from 650 million litres in 2007 to more than two billion by 2010, according to the CRFA. It says this newly created production will create a market for more than 200 million bushels of grains and oilseeds annually and create more than 9,000 new jobs in rural Canada.

When it comes to the environment, ethanol will play a big role in helping Canadians reduce harmful greenhouse gas emissions as the biofuel industry grows. According to GHGenius, a climate-change model used by the federal government, the greenhouse-gas reductions from corn ethanol are more than 55 per cent. The U.S. Department of Energy’s life-cycle analysis says ethanol from cellulose — the next generation of biofuels to be commercialized in the near future — reduces greenhouse gases by 90 per cent over gasoline.

So, the next time you see a sensational headline that tells you ethanol is to blame for hiking food prices, think twice.

Robert Gallant is president and chief executive officer of GreenField Ethanol, Canada’s largest ethanol producer.

Saying that Gallant is not totally objective is like saying Forest Gump is a genius. Anyway, his comment about the cost of corn in a box of corn flakes is an interesting diversion. I don’t care how much a box of corn flakes cost, corn flakes are beside the point and he knows it. You can’t use the North American consumer as the baseline for the argument, if the cost of corn flakes goes up its not going to hurt us.

His estimate of increase in oil prices is interesting. 30% over a one year period indicates the highest high and the lowest low, not the true average. Think about it, what was the lowest gas price you’ve had in the past year? $0.95/L? What is it now? $1.16? that’s twenty cents or about 20% and that’s just a very rough indicator. Have a look at this graph, arguably, the price of oil has gone down over the past year.

If you take May 2005 and August 2006, wow there’s a 50% increase. If you consider August 2006 and May 2007, there’s a 15% decrease. Smoke and mirrors, he’s just playing with numbers.

His comment about how close to home the money is spent is also questionable. He should have said “for now.” Experience from the oil-patch shows that start-ups have direct positive effect on local economies. However, once the exploration and development phase is over, 95% of the money ends up in Calgary. You can expect that to happen in the ethanol industry as time goes by.

Gallant does not talk about the subsidies that the moonshine fuel industry gets from governments, but then I wouldn’t either in his position.

Until the boffins can master cellulosic ethanol, using the corn stalks instead of the grain, the whole concept of using food for fuel is folly at best and disastrous at worst. There are options for bio-diesel using non-food producing shrubs native to Africa that can be grown in soil that is not suitable for food crops. But it seems that we are bent on the move to ethanol biofuels. Just wait until food prices shoot up over the next 6 to 24 months as this insanity escalates.

None of the proponents of the biofuels solution really care or have even thought of the billions of people who will really suffer from their obsession. All that matters is for the more affluent countries, including our moral superiors in the EU, to have enough fuel to maintain our current lifestyles. The real solution to all of this is, in my opinion, raising the standard of living for the poor people in the 3rd world. They need wealth and we need them to have it. Wealth has allowed us to care more for our local environments, putting land aside to protect wildlife, cleaning the air of most real pollutants, etc. Remember, CO2 is not a pollutant, it’s a necessary component in the photosynthetic process that we all rely on.