The Washington Post (pg. A1)  [Printer-friendly version]
April 30, 2008

SIPHONING OFF CORN TO FUEL OUR CARS

As farmers feed ethanol plants, a costly link is forged between food
and oil.

By Steven Mufson; Washington Post Staff Writer

DATELINE: CHARLES CITY, Iowa

Erwin Johnson picks up a clump of the dark, rich soil that he has
farmed for 35 years, like his father and grandfather before him. In a
few months, this flat expanse of northern Iowa will be crowded with
corn ready to be trucked to market.

A year ago, that market got a little closer -- and a lot better.
Instead of sending his corn to a barge company to be shipped down the
Mississippi River for export, Johnson now loads it into an open truck
and sends it two miles up the gravel road to a hulking new ethanol
distillery that he can see from his field. The plant is paying him
$5.50 or more a bushel, more than twice as much as Johnson could get
just a couple of years ago.

"This is a fantastic time to be farming," Johnson says. "I'm 65, but I
can't quit now."

Across the country, ethanol plants are swallowing more and more of the
nation's corn crop. This year, about a quarter of U.S. corn will go to
feeding ethanol plants instead of poultry or livestock. That has
helped farmers like Johnson, but it has boosted demand -- and prices
-- for corn at the same time global grain demand is growing.

And it has linked food and fuel prices just as oil is rising to new
records, pulling up the price of anything that can be poured into a
gasoline tank. "The price of grain is now directly tied to the price
of oil," says Lester Brown, president of Earth Policy Institute, a
Washington research group. "We used to have a grain economy and a fuel
economy. But now they're beginning to fuse."

Not everyone thinks it's fantastic. People who use corn to feed
cattle, hogs and chickens are being squeezed by high corn prices. On
Monday, Tyson Foods reported its first loss in six quarters and said
that its corn and soybean costs would increase by $600 million this
year. Those who are able, such as egg producers, are passing those
high corn costs along to consumers. The wholesale price of eggs in the
first quarter soared 40 percent from a year earlier, according to the
Agriculture Department. Meanwhile, retail prices of countless food
items, from cereal to sodas to salad dressing, are being nudged upward
by more expensive ingredients such as corn syrup and cornstarch.

Rising food prices have given Congress and the White House a sudden
case of legislative indigestion. In 2005, the Republican-led Congress
and President Bush backed a bill that required widespread ethanol use
in motor fuels. Just four months ago, the Democratic-led Congress
passed and Bush signed energy legislation that boosted the mandate for
minimum corn-based ethanol use to 15 billion gallons, about 10 percent
of motor fuel, by 2015. It was one of the most popular parts of the
bill, appealing to farm-state lawmakers and to those worried about
energy security and eager to substitute a home-grown energy source for
a portion of U.S. petroleum imports. To help things along, motor-fuel
blenders receive a 51 cent subsidy for every gallon of corn-based
ethanol used through the end of 2010; this year, production could
reach 8 billion gallons.

Now, however, the legislation is being criticized for making food more
expensive while gasoline prices continue to climb. Rick Perry, a
Republican who succeeded Bush as Texas governor, has asked the
Environmental Protection Agency to waive half of the "misguided"
ethanol requirements because of rising food costs; every penny
increase in per-bushel corn prices costs his state's livestock
industry $6 million a year, he said.

Although ethanol was once promoted as a way to slow climate change, a
study published in Science magazine Feb. 29 concluded that greenhouse-
gas emissions from corn and even cellulosic ethanol "exceed or match
those from fossil fuels and therefore produce no greenhouse benefits."
By encouraging an expansion of acreage, the study added, the use of
U.S. cropland for ethanol could make climate conditions dramatically
worse. And the runoff from increased use of fertilizers on expanded
acreage would compound damage to waterways all the way to the Gulf of
Mexico.

Development specialists have also joined the fray. "While many are
worrying about filling their gas tanks, many others around the world
are struggling to fill their stomachs, and it is getting more and more
difficult every day," World Bank President Robert B. Zoellick said in
a recent speech.

No place demonstrates the competing demands on corn better than Iowa,
one of the two biggest corn-exporting states. Iowa is home to 28
ethanol plants, which consume more than a quarter of its corn crop;
two dozen others are under construction or in planning stages.

Two leading oil pipeline companies are exploring the feasibility of
building a $3 billion ethanol pipeline, the first of its kind, to link
Iowa and other parts of the Midwest with motor-fuel markets in the
East. It would carry 3.65 billion gallons a year and give another
industry a vested interest in maintaining high ethanol output. Because
of this domestic demand, Iowa's exports of corn are expected to shrink
to less than half of current levels in the next couple of years.
Nationwide, corn stockpiles are dwindling.

All that could make this cycle of corn prices different from previous
ones, when prices eventually fell back. "As long as you keep that
ethanol industry running, grain prices will be high," says Bruce
Babcock, professor of economics and the director of the Center for
Agricultural and Rural Development at Iowa State University. "If you
didn't have this large growth in ethanol corn, prices would be nowhere
near where they are today."

Corn as Fuel

As consumer prices climb, more and more people are pointing fingers at
ethanol plants, like the one VeraSun Energy built here just outside
Charles City. VeraSun is riding the crest of the ethanol boom. Thanks
to internal expansion and the purchase of a rival, VeraSun will become
the nation's biggest producer of ethanol by the end of the year, with
about four times as much capacity as it had in 2005.

The plant is hard to miss. Its two massive concrete silos reach 150
feet into the air; each one holds half a million bushels of corn,
delivered by an average of 110 brimming trucks every day. The silos
are connected to a distillery with giant shiny steel vats for milling
the corn, then fermenting and distilling it into 200-proof, fuel-grade
ethanol. The ethanol is shipped out by train, 84 black tanker cars at
a time.

The VeraSun facility is buying up almost all the corn produced in
Floyd County and much of the corn produced in the four surrounding
counties. While that might seem anathema to East Coast grocery
shoppers, around here it makes VeraSun pretty popular.

"From Washington where Lester Brown is sitting, agriculture can't do
enough to satisfy the nation's energy needs and meet all the demands
put on it for food and feed," says Matt Liebman, an agronomist at Iowa
State University. "But from agriculture's point of view, [ethanol]
enhances market opportunities. So it really depends on your
perspective."

Some folks around here get defensive when talking about corn prices.
Johnson, the corn farmer, points out that the share of household
income that goes to buying food has dropped steadily over the past 50
years; U.S. government statistics say that the portion is half of what
it was in the 1950s. And of that portion, farmers get about a fifth;
the rest goes to middlemen, food manufacturers, transportation,
packaging and advertising. Indeed, farm groups say that energy costs
in transportation and packaging have boosted food prices more than the
price of corn has.

"There's no doubt that food prices are going to increase, but I
suggest to you that food is still reasonable," Johnson says.

Don Endres, the chief executive of VeraSun and owner of 20 percent of
its shares, grew up on a farm in Watertown, S.D., where his father and
grandfather raised corn. His brothers are still farmers.

Endres says ethanol plants aren't to blame for high corn or food
prices. He notes that the corn used to make ethanol isn't the kind
that people eat anyway. Moreover, he says, ethanol plants like
VeraSun's extract the starch in corn for fermentation while producing
a dry feed that contains protein and nutrients. Piles of it are
collected from industrial dryers at the plant. VeraSun then sells that
feed, known as dried distillers grain, back to farmers who raise
animals. Much of it goes to Texas, Mexico and China; it accounts for
about 15 percent of VeraSun's revenue. When the grain is mixed with
inexpensive starch, such as alfalfa, farmers can save money, Endres
says.

Finally, he says, yields on corn will continue to increase so that the
current acreage will be able to meet both food and fuel demands. His
grandfather got 40 bushels to an acre, his father got 80, and his
brothers get 160. Someday, Endres says, farms will get 300 bushels an
acre.

"I think we'll see this thing come back into balance," he says.
"There's an ability to produce so much more at these price levels."

The Feed Price Shock

About 20 minutes' drive from Johnson's farm and the VeraSun plant, two
neighbors, Bill Huebsch and Ray Avila, are raising about 15 percent of
the nation's capons, castrated roosters that are popular fare on
Easter, Thanksgiving and Christmas. In a shed longer than a football
field, 13,000 of the birds scurry about, nibbling at a corn mixture
fed through automated pipes. In a matter of weeks, each tiny bird will
eat about 40 pounds of feed.

The cost of that feed, three-quarters of which is corn, has risen
sharply, and as a result, Huebsch and Avila are asking to be paid more
for their capons -- a premium of 10 cents a pound last year and maybe
another 15 or 20 cents this year -- to cover the added cost.

"Ultimately, you know where that price has to go," Huebsch says.
"Ultimately, it's the consumer that's got to take the brunt of it."

He doesn't buy Endres's argument. He says that capons, like egg-
producing chickens, can digest only limited quantities of the dried
distillers grain. And the price of that protein-rich feed is also
rising. (Cattle, which have four-chambered stomachs, can digest the
distillers' grain more easily.) Some studies have also linked dried
distillers grains with the bacterium E. coli in feedlot cattle.

"I think the ethanol is hurting us," Huebsch says. "It hasn't lowered
our fuel prices at all, and it has increased feed costs."

The sharp rise in corn prices has confounded Avila's buying plans.
Ordinarily in the fall, he buys all the corn he needs for the next
season. But with prices around $4 a bushel last fall, he decided to
wait. Now they're even higher, and he's buying only four days' supply,
hoping that the price will go down.

"I'm just going day to day," Avila says. He says that a corn farmer
friend of his bought a boat, and Avila asked whether he would name it
Four Dollar Corn. Now, Avila jokes wryly, his friend would have to
name it Six Dollar Corn.

Capons are a niche product, but high corn-feed prices are also giving
poultry and egg producers a lot to cluck about. Iowa produces more
eggs, 13.5 billion, than any other state. And chickens, like capons,
mostly eat corn feed. The Charles City ethanol plant alone consumes
three-quarters as much corn as the entire Iowa egg industry.

"Corn has gone up dramatically since the ethanol plants went in," says
Deb Wolf, a small egg producer in Osage. "They're buying millions of
bushels. That's got to come from somewhere." She and her husband,
Keith, have a sign reading "Eggs 4 Sale" outside their home on Route
9, and customers often get the eggs while they're still warm. The
Wolfs have tripled the price they charge for a dozen.

"We don't have to make fuel out of corn and soybeans, but we do have
to feed animals," says Kevin Vinchattle, executive director of the
Iowa Egg Council. "We're going to be right there bidding for
feedstocks and making sure that we have the highest-quality feed
available. We just don't have an alternative."

'Maxed Out'

Back in Charles City, farmer Johnson is reaping the benefits of high
corn prices. He knows what the other extreme is like. His grandparents
arrived from Germany in 1913 and, dirt poor, worked as farmhands
before buying this land. Johnson took it over in the early 1970s, when
prices, which hadn't changed much since the end of World War II,
doubled and then leveled off again for most of the next three decades.

Two hundred years ago, he says, this was prairie covered with six-
foot-high switchgrass. Winnebago Indians lived here, and then white
settlers came in the mid-1800s.

But now the ethanol plant and 50 wind turbines that were erected over
the winter have brought new energy to a town that Johnson says long
lived off "the ground God created with glaciers and laid down here."

VeraSun built its plant in this area to be close to corn farms;
Johnson says that he keeps part of the money that once went to
trucking his corn to the barge company. "That money stays in my pocket
now, and I like that."

Johnson is a one-person summary of how high corn prices are washing
through the world of agriculture and climate change. Normally, he
plants half of his 900 acres with corn and half with soybeans. He
alternates crops on each field because it is better for the soil.

But last year he planted 500 acres of corn and 400 of soybeans, and
this year he will do the same. "The market was screaming, 'Farmer
Johnson, plant more corn, plant more corn,' " Johnson says.

Farmers across the country joined him. In 2007, U.S. acreage devoted
to corn hit a record 93.6 million acres, up 20 percent from the year
before. Farmers are expected to plant a little less than that this
year.

That market response would ordinarily bring nothing but cheers, but
the growing alarm about climate change casts it in a different light.
In the United States last year, corn edged out some soybeans, which as
a result are being grown in greater numbers on previously unplowed
areas in other countries. And that releases carbon dioxide that had
previously been stored in the soil as organic matter.

Johnson, along with about two dozen other people in the area, has
invested in 25,000 acres of cattle-ranching and savanna land in
Roraima state in northern Brazil, where they have planted 750 acres of
soybeans and plan to expand. He says U.S. agriculture is a mature
market. "We're maxed out," he says.

Meanwhile in Iowa, he is tilling his own soil more often, a farming
trend that dismays climate experts. Usually Johnson doesn't till his
soil in the fall; he points to short remnants of cornstalks that still
stand in rows where soybeans will be inserted. But Johnson plans to
till a piece of land where he will plant corn for a second year in a
row.

Johnson also owns a small piece of land that is part of the federal
government's conservation reserve program, which pays farmers for
leaving land vacant. Millions of acres are in the program. The CRP
parcels tend to have lower-quality soil, and they attract birds and
other wildlife. In the climate-conscious era, they have the added
virtue of storing carbon in the soil.

Johnson put a 10-acre parcel aside years ago and signed a 10-year
contract with the government to leave it undisturbed. But the contract
is running out, and he's thinking about planting corn. The CRP
contract pays him $170 an acre. Johnson says, "I'm making a lot more
than that now."