Mark:
They also have environmental concerns. Recently, projects in Southeast Asia (often backed by Chinese investment) to build massive palm oil plantaions have fallen through. The problem was tropical rain forests were to be cut down in order to construct these farms.
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___Corn is not the most efficient way for the US to make ethanol. If the farmers now growing corn for ethanol shift over to sweet sorghum, the yields would double. Their water usagewould also be lower, and energy balance would be better. It would be a stopgap measure until cellulose ethanol or algae come online.

Does anyone know how much this stuff is a gallon?

While turning food into fuel has a faintly silly ring to it, and while the U.S. does not produce nearly enough corn to supply ethanol for the entire automotive segment, fears that increased ethanol demand will take serious amounts of food away from American plates is highly overblown. If increasing ethanol demand puts upward pressure on corn prices, then higher corn prices will raise the price of ethanol faster and more critically than it will raise the price of food. At that point, consumers would switch back to conventional gasoline, shop for other alternative fuels (or alternative ethanol feedstocks), or go for greater fuel economy -- halting the increase in ethanol demand -- before anything remotely like a food crisis sets in.

The numbers work out this way: Corn futures have traded at around $2.25-$3.25 per bushel over the past few years. (FN1) Conventional ethanol production techniques yield 2.7 gallons of ethanol per bushel of corn. (FN2) Ethanol spot prices have recently hit levels of around $4 per gallon, but that seems to be due to supply contraints related to the demand run-up caused by the switchover from MTBE. Without demand-supply imbalances, ethanol seems to price out at around $2.50 per gallon. (FN3) All CBOT prices are before taxes/credits.

Taking corn at $2.70 per bushel and ethanol at $2.50 per gallon, corn contributes $1 to the price of each gallon of ethanol. The other $1.50 comes from other costs, such as processing, fermenting, distilling, transporting, etc. Thus, if corn were to double in price to $5.40 per bushel, and the other costs of production were to remain relatively constant, corn would contribute $2 to the price of each gallon, and the price of ethanol would be $3.50 before taxes/credits. If corn were to reach $8.10 per bushel, ethanol would cost $4.50 per gallon.

Gasoline futures, in these high price days, trade at around $2.20 per gallon, before taxes. (FN4) With ethanol at $2.50, it can compete with gasoline if given a relatively sane amount of preferential tax treatment -- which can be justified by the lower net CO2 emissions that tend to go with ethanol, decrease in specific urbans pollutants that go with ethanol as a motor fuel, decreased dependance on hostile or foreign energy sources, etc. But at $3.50 per gallon, ethanol would not compete with gasoline unless its tax treatment were to become even more preferential than it is today. At $4.50 there would be an exodous away from the fuel. It is only used now because pollution control regulations require oxygenates to be added to gasoline in certain areas.

On the other hand, the cost of bulk corn is a very small factor in the cost of finished corn products. A pound of corn flour or corn chips purchased at the grocery store can cost $1-$3 -- nearly the cost of an entire bushel of raw corn, which typically weighs around 56 lbs. Thus, raw corn contributes less than $0.10 to the cost of each pound of finished product. If that cost doubled or tripled, a $3.00 bag of corn chips would suddenly cost $3.10 or $3.20. Drivers would be shying away from ethanol long before consumers would be going without their Tostidos.

The effect of increased corn costs on the price of beef and chicken would be greater than the impact on vegetable products -- though it would seem dairy products (which come from cows that have to be fed) would be effected less, as dairy farmers prefer to feed their cows alfalfa, not corn. Beef feedlots use corn more. But ethanol production would cut into animal feeding less that one might think. When a bushel of corn is turned into ethanol, oils and proteins are left over, which make a nutritious animal feed. Each bushel of corn devoted to ethanol is not a dead loss to the cattle industry.

As a rule of thumb, about ten bushels of corn are need to produce a hundred pounds of beef (10 bu-corn : 100 lbs-beef). (FN5) At current prices, corn contributes $27 to the cost of each hundred pounds of beef, or $0.27 per pound. Beef prices at American supermarkets recently averaged at around $3.56 per pound. (FN6) Doubling corn prices would raise that to $3.83 per pound, while tripling corn prices would force beef to around $4.10 per pound. If someone consumed a pound of beef every day, the total yearly impact on his wallet would amount to something like $100 to $200.

The point is, if increased ethanol demand drove up corn prices, those corn prices would drive both the price of ethanol and the price of food. But it would drive up the price of ethanol a lot more than it would drive up the price of food. It would probably drive up the cost of ethanol so much that motorists would curb their appetite for ethanol fuel long before food prices would remotely become an issue.

This is not to say that we should sit back and consider our problems solved. Eventually, mineral fuels will become too costly (on a price or environmental basis) to continue selling at $2.20 a gallon, and $4.50 ethanol might look good. If all our gasoline disappeared tomorrow, we would not have enough corn to fuel our cars and feed our beef cattle at the same time. But as long as transitions are somewhat gradual and somewhat predictable, market incentives (like high prices for fuel) will spur the innovations we need, and consumer acceptance of those innovations. There's plently to be worried about, but the prospect of improvidently turning all of our food into fuel so we can drive around in circles is not one of them.

(FN1) http://www.cbot.com/cbot/pub/page/0,3181,1213,00.html
(FN2) http://www.cbot.com/cbot/pub/page/0,3181,414,00.html
(FN3) http://www.iowacorn.org/ethanol/ethanol_3a.html
(FN4) http://www.wtrg.com/daily/gasolineprice.html
(FN5) http://www.beeftechnologies.com/environImpact/impact-resources-land.html
(FN6) http://www.beefretail.org/reseNaturalOrganicBeef.aspx

NBK-Boston,
Thanks for your dissertation on the "economics of corn." Very educational. For a Bostonian and a "Harvard man" (no intended reference to the movie starring Sarah Michelle Gellar ;) you seems to know a lot about corn farming. NBK-Omaha would be another apt pen name.

Anyway, rain forrest and free grazing land for wild life would be threatened if more intensive farming crops for fuel. Water-table depletion, fertilizer run-off, chemical pollution such as cancer-causing insecticides and fungicides etc would be areas of grave environmental concerns besides the incresing commodity prices of food crops. It would be difficult to put a price on the long-term viability of our environment, our health and well-being, and the viability of the future generations of human, plants and animals.