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Sharp Decline Forecast for World Cereal Stocks; Ethanol Demand a Contributor

Global cereal production and consumption. Click to enlarge.

World cereal end-of-season stocks are expected to decline 10% in 2006, due to a slight 1% decrease in global cereal output and growth in utilization, according to the latest forecast of the UN Food and Agriculture Organization (FAO).

Increased demand is expected to be driven by a recovery in feed use due to a rebound in poultry consumption. In addition, the growing demand for ethanol is likely to boost industrial use of coarse grains, particularly maize, especially in the United States and in China.

Course grain production is expected to drop 1.3% while utilization increases 2.8%. Coarse grain stocks are projected to decrease 20.3%.

While down about 1% from 2005 levels, world cereal production for 2006, forecast at 2,020 million tonnes, would still be the third highest on record and above the five-year average, the report said.

International prices of most cereals remained firm or rose further in recent months, supported by strong demand and tighter supply prospects, FAO said in its latest Crop Prospects and Food Situation report.

Many countries are experiencing severe food difficulties and require external assistance, however, despite what the report called a ”generally satisfactory global food outlook.”




1. The countries experiencing problems with food distribution are not those which are producing a lot of ethanol. Food distribution problems are generally associated with war, domestic strife, political instability, or massively senseless economic policies. Even a severe local drought or a bad harvest will not usually lead to famine, in the absence of one of the contributing factors noted above, because modern transporation allows replacement food to be imported fairly cheaply. Food aid organizations help foot the bill for the worst off, and real problems only set in when endemic violence pushes out the aid organizations.

Many of the emergencies noted in the cited report are disruptions in local production in poor African countries. In the stable ones (where disruptions are caused by natural disasters), this call of "emergency" will bring in the aid needed to stabilize the situation. In others, the disruptions are caused by civil strife and armed conflict, and the ability to bring in aid varies due to the circumstances. Ethanol isn't killing African babies. To a small extent natural disasters do, and to a larger extent political instability does. While global stockpiles have been drawn down a bit, they are still very large.

2. As grain prices firm up, the production costs of conventional ethanol will firm up as well, and could easily climb to $2.50 per gallon or more. Gasoline is still plentiful enough to substitute back in for ethanol if prices climb much above this point, which should squelch further major increases in grain-ethanol production, beyond what is needed for "unsubstitutable" uses -- namely oxygenate, now that MTBE is out of the picture. Current production levels are about enough for oxygenate requirements, so if the market sends the signal to level off, things will level off, and the "voluntary" substitution of ethanol for gasoline will stop.

3. Firming up cereal prices without making them exorbitant (pushing corn up to $3.50 / bu on a sustained basis) is probably not a bad thing. It will allow farmers to collect an income similar to what they collect now without having to turn to subsidies and handouts as much. Though we like to carp on agriculture programs, in theory they work as a backstop or income floor, meaning that if a farmer earns enough on the open market, the government starts to cut back on his handout.

Moreover, increased demand causing firmer prices and greater market-driven farm income may provide the impetus needed for the U.S. and EU to agree to structural changes (read: rollbacks) in their farm policy and subsidy programs, enough to satisfy the demands of developing countries within the WTO forum, and enough to end the dumping of exceedingly cheap first-world grain on their import markets, which tends to depress local agriculture and associated economic activity. Developing countries don't want endless supplies of cheap grain -- they want the chance for their own farmers to make a living in the local market, along with the ability to tap reasonably priced stockpiles on the world market in case of a bad year.

While I am no libertarian, I have said in the past that the market will provide a natural brake on the expansion of grain ethanol production, and will almost certainly do so before the retail price of food climbs enough to really make a big difference. We may reach that point within the next growing season or two, and soon alternatives to this alternative fuel will become the needed next step. The exact point where we can level off will depend on the reaction of farming communities in other "breadbasket" regions across the world. If grain output can be increased by putting land back into production, we might squeeze a few more seasons of expansion out of this technology. But if not, then so be it.

Jens Riege

NPK - Boston: While I agree with many of your points, you make the statement that suggests inflation is a good idea:
"Firming up cereal prices without making them exorbitant (pushing corn up to $3.50 / bu on a sustained basis) is probably not a bad thing."
In addition to the extremely higher prices for fuel which translate into higher prices for transporation and products made from petroleum, consumers will now need to pay higher prices for food so that the supply can be used to support transportation needs. Its just like making arguement: Lets just raise the global temperature 1 degree, what difference can that make?....

Instead of trying to find alternate fuels that consume resources and make every one on the planet pay for higher food costs whether or not they use the fuel it supports, how about finding alternate fuels that use renewable energy?
The ripple effect of higher cereal costs will lead to higher food costs for everyone with increased malnutrition. The people that will be hurt most will be the poor in every country.
I would like to ask: Aside from the cereal industry and farmers who do you think will agree that higher cereal costs are good for this or any other country?


The whole corn/soy based industrial food system is fundamentally flawed and is headed for disaster regardless of whether we do ethano -- although Ethanol is and will make it worse. It might make more sense to convert half of the corn/soy based animal feed system into a more sustainable, integrated grass based system which would be much less dependent upon fossil fuels for fertilizer,pesticides, farm machinery, and herbicides. This might do more good with respect to conserving fossil fuels than ethanol which exists primarily because it starts with a subsidized system to begin with.


Same dispersing agents helping prevent separation of ethanol from gasoline blends work on methanol too. As I am aware of, in most cases refineries add to gasoline/ethanol blends some amounts of cheaper (1$/gal) methanol, produced almost universally from natural gas. What happened with surplus of methanol production when MTBE production, which used methanol as primary building blocks, collapsed? Wasn’t this methanol ended up in gasoline anyway?

Harvey D.

The time has come for farmers to get a decent price for the cereals they produce. Subsidies should no longer be needed... Considering the change in price for fossil fuel, $6+/bushel for cereals would only be fair. Even $10/bushel within 3 to 5 years would not be exagerated.

Those of us who want to drive Hummer type gas/ethanol guzzlers should be prepaired to pay the full price ($5 to $8/gal.)

Ajusting to much higher fuel prices may be chocking to many of us but the end of cheap gas is near. Hybrids, PHEVs and EVS will have a great future. In the mid to long term we will all be better off.


Andrey- I hope straight methanol did NOT end up in any of my gasoline. I like the aluminum used in my vehicle.



Considering how fast the biodiesel industry is growing here, I imagine that the excess methanol has found a ready market there.



You may be right that existing large-scale agricultural methods may be unsustainable on a long-term basis. Determining the exact nature and cure for that unsustainability is a large project, and beyond my abilities at this junction. On a medium-term basis (10-20 years) there is little reason to expect a radical breakdown of conventional agriculture, with global warming being something of a wildcard. By the 20 year mark, I am confident that newer technologies will mature to the point where corn ethanol is mainly obsolete -- be it cellulostic ethanol, improved batteries, syngas processes, etc. Within the current regime, corn based ethanol has found its niche, and my point is mainly that it looks like it's production will reach a temporary equillibrium soon. Saying that corn "begins with a subsidized system to begin with" either overshoots or undershoots the point entirely. If the entire American economy is distorted by "wrongful" interventions and subsidies (farm subsidies, investment subsidies, petroleum "subsidies" in the form of taxes lower than externalities, etc.), then your choice is either to sit on your hands and do nothing because any action will take place in a warped environment, or to take advantage of conditions as they exist and risk being labeled a "special interest" hog at the proverbial trough. If, on the other hand, your point is simply that corn is artifically cheap because of farm support programs, then you miss the point that, in theory and in general, farm support payments go down as demand and price goes up. As ethanol becomes big, it does not benefit from farm subidies, it replaces them.


Again -- ethanol does not kill African babies. You claim that moderately higher cereal prices will hurt the poor in every country and lead to increased malnutrition, but this argument is not very strong. First, the price of raw cereals is a small fraction of the final cost of food in most retail settings. Compare the cost of a bushel of corn on the Chicago Board of Trade to the price of a bag of corn chips in supermarket, considering how many retail size corn chip bags can be made from a raw bushel. An doubling in corn prices will result in retail price increases of a few percent at most.

Moreover, poor people in rich countries do not suffer from malnutrition caused by a lack of affordable cereal products. In fact, they tend to suffer from obesity caused by an overabundance of cheap cereal products. Discouraging somewhat the consumption of corn products, or cheap red meat, through slightly higher prices would likely be beneficial. More precisely, increasing the prices of starchy processed food relative to healthy alternatives, or red meat relative to vegetable protein and fish, will decrease the price incentive to choose the wrong food.

Finally, modern malnutrition, as I've said before, results not from a lack of food in the world or a lack of money to pay for the food, but a lack of ability to physically distribute the food to needy regions, almost always due to violence and political unrest. In the neediest cases, developed countries alomst always donate free food to aid agencies. It's a form of farm support -- the U.S. Government buys domestic grain at high price and gives it to starving people. It's a farm subsidy which nobody can criticize. There is no indication that we will stop doing this.

Your other point concerns inflation. An increase in retail price of even a few percent is indeed a component of inflation. But this component is largely offset by the other results of ethanol production. Reducing the amount government spends on farm subsidies saves fiscal resources, which reduces the federal deficit, which reduces borrowing, which has a positive effect on the value of the dollar and inflationary pressures. Reducing imports in this era of large trade imbalances also has a positive macroeconomic effect. Substituting cheaper ethanol for more expensive gasoline (cheaper on a cents per mile basis) reduces transport costs -- it does not increase them. As demand pushes the price of ethanol up, this last element becomes neutral, but it is never negative, as petroleum can always be substituted back in if biofuels become too expensive.


"Substituting cheaper ethanol for more expensive gasoline (cheaper on a cents per mile basis) reduces transport costs -- it does not increase them."

Check this out.



The current situation where there is no clear best energy strategy is exactly what free markets deal with best. Granted we have distorted markets now, but change and crises prompt change, and that will happen in this case. If the price of corn rises too far, competing crops or energy sources will emerge. This is not a smooth, or easy process, and Government meddling will only make it messier, but it works in the long run. Governments can distort markets only as long as the status quo can remain. Look what happened to Alabama Football in the 60's after USC whipped their white butts with some great black players -- change.

As for the poor -- they will always be with us. The issue now is not just corn, but disruptions due to declining energy resources. That will cause competition for all things and bring on famines, wars, oppression, and yes -- opportunity. Perhaps in the long run we will make renewable energy happen, and it will be distributed. Won't that be good for the poor? Also, if corn prices rise enough, those poor farmers in Africa may actually find markets for their output. We cannot possibly predict what will result from change, only that change will happen.


Finally something positive from rising fuel prices. Hard working farmers will get fair pay for grain, grain will be used by advanced countries where it was produced in the first place instead of supporting the self perpetuating circle of Africa in reproduction, may be starvation and AIDS will clean overpopulated Mother Earth with Humanoid species expeling other animals from their habitat and putting them into extinction.


Who cares about developing countries, care about ourselves and our own people. The good things come from femines - it brings great changes. Developed countries made up 50% of global population 100 years ago, now they make up less than 20% and support the rest of less viable world with our TAX money.
United states revolted and had independence war against Britain for 5% tea tax, now we are paing almost 50% of what we make to support what? - parasitic societies, countries...
I personally don't want my taxes to go to Africa, may be Bil Gates wants, it's his persnal decision, but then don't rip your fellow Americans from selling monopolized crappy windows OS.


Sorry Bajoras, rising price for cereal and grains will not hurt Africans and their "self perpetuating circle of Africa in reproduction".

I know from personal experience than it will help African farmers to get a increase in income from the sale of there corn etc. Since 60% to 80% of African live on farms or at least in rural areas, an increase in the price of grains will help them.

Cheap grains for the North are the problem.


How come so hard working African farmers (those are subsacharan, since Egypt and other mediteranian countries have better work ethics and have advanced enough agriculture) depend on Candian and American grain. Lack of work ethics and technologies put them in premedieval may be iron age of agriculture with minimal crop output (even they can have 2-3 harvests a year), but land without fertilizers or changing the crops (rotation) has limited output ability.
What hppened to Zimbabve when European farmers were either killed or had to leave ... femine



All that graph proves is something we already know -- ethanol spot-prices ran up considerably after the more rapid than expected phase-out of MTBE. Those high prices don't reflect the underlying production costs of ethanol. They reflect the combination of constrained supply due to limited production capacity butting up against considerable demand caused by EPA pollution mandates. As such, ethanol producers are raking in fat profits at the moment, selling a liquid that costs them $2 per gallon to make at for something like $4 per gallon.

These profit margins are attracting new investments, and a considerable amount of new distilling capacity is under construction. As production capacity beings to match the magnitude of demand, the long term price floor on ethanol becomes the cost of inputs plus depreciation and a modest return on capital, while the long-term ceiling is the price of substitute gasoline, or if the ethanol is not being used as a bulk fuel but as a pollution-control additive, the cost of a substitute additive. At present, since there is basically no substitute additive, there is basically no ceiling on the price of ethanol, other than that caused by demand elasticity itself.

Right now, virtually nobody is substituting ethanol for gasoline for use as a bulk fuel (think E85, or even E10 when not needed for pollution control reasons) if they have to pay spot prices for it. A few E85 stations are still pumping product at $1.99 per gallon, because they locked in long-term price contracts when ethanol was cheap, and the managers of the service stations or supply chains find it acceptable (for some reason) to make the expected small profit margin on $1.99 E85 instead of larger profits on flipping their current deliveries on the spot market. Perhaps there are practical reasons why they can't, or perhaps they are just trying to "inveset" in customer goodwill. Ask them. Right now, people are pumping ethanol-blended fuel mainly because they have to, because pollution control during the hazy summer months requires oxygenate. When winter comes, oxygenate will no longer be needed for pollution control in most markets, and demand should slacken considerably. I'd wager that the spot price will come down to the "substitution" price, after accounting for the tax credit. Whether it runs up again next summer is a function of whether there will be another bottleneck tightening supplies, and if not, where input prices are at.

In the hypothetical universe where ethanol is cheaper than gasoline on a cents per mile basis -- let's call that universe California during April 2005 (conventional gasoline at LA harbor bounced between $1.65/gal and $1.75/gal while ethanol at SFO bounced around the $1.30s per gallon -- all before taxes and credits), then burning ethanol entirely for the purposes of transportation saves money. An any other point, with emphasis on the past few months, we are admittedly not burning ethanol to save money -- directly -- on fuel. We're instead spending extra for the sake of air quality, which we feel is worth it in the long-term. During winter, we might burn ethanol it to save money.

I was making my point about "burning cheaper ethanol" in an abstract mode. Perhaps I should have added "burning ethanol when cheaper than gasoline" saves money on fuel, and burning it even when it is more expensive saves money on bad-air-quality complications. Given current input prices (crude oil, coal, natural gas, corn), ethanol is cheaper to create than gasoline is. If oil prices slacken, the ceiling might crash through the floor, leaving us with no reason to burn ethnaol except for the air quality issues. If new technologies come on line, the floor might lowered considerably, making it difficult for the ceiling to drop below it. We shall see.

JM is right in that change will happen, and that nobody has a crystal ball to predict the future. But I am slightly less pessimistic about the ability of government (in abstract) to fill an essential role in creating, regulating and running markets, and in the ability of well-resourced analysts to examine the options on the horizon and make some halfway reasonably contingency plans based on them. Government, for one thing, can create the standards and information flows necessary for classically free and efficient markets to emerge, and can measure and price in externalities, so that market mechanisms take full account of the costs associated with any particular behavior. Anyone who thinks that classically free and efficient markets simply "emerge," without government help, from a stinking pit of lassiez-faire dog-eat-dog all-out commercial warfare has never taken a good long look at a free and efficient market!


P.S. That last line was not directed at you, JM. It was actually directed at Samuel P. Huntington, the well known political scientist (and fellow Bostonian), who pretty much said a whole bunch of things about how free markets simply "emerge" in a recent book of his.


Bajoras, we are paying almost 50% of what we make to support parasitic defense contractors, pay for healthcare, social security, interest on the national debt and a few other things. Less than 1% of our budget goes to foreign aid. The largest recipient of your foreign aid tax dollars is Israel.



Pure methanol does require special means to protect aluminium from corrosion, and other metals for that matter too. In quantities about couple of percent, with proper corrosion inhibitors methanol is harmless to aluminium components. See, for example:

I do know that it was used some time ago as gasoline additive, but do not know current status.


And most of *that* foreign aid got spent on... our parasitic defense contractors! Most of the aid we have given to Israel (admittedly not all of it) has been military support aid (a legacy of the Cold War when Russia was arming all the Arab states), which carried the proviso that Israel had to spend it on military hardware... that was made in the U.S.A.!



There is no such thing as “wrong food”, as it is no such thing as “healthy food”. There is only such thing as “healthy diet”, which in turn is very individual.

Appealing to popular urban legends does not contribute much to your high-regarded opinion on this forum

Mark A

"SHARP DECLINE FORCAST FOR WORLD CEREAL STOCKS" says alot to me. It means that even our current, startup, low level of production of ethanol, it is having an effect on all of our food stocks! This is exactly what I am worried about, and its just beginning. Food stocks will go down, driving prices up. We may have fuel to drive wherever we want, but have nothing to eat once we get there!



I agree fully with your last paragraph (other comments as well). I believe free and efficient markets cannot function without government guidance. That was my point about GE and Toyota calling for regulation. They also recognize this.

Unfortunately, while governments are capable of all you suggest, they do not always do a very good job of it. Currently, the US government (Republicans and Democrats alike) seems to think unfettered natural selection works best in economics whether it exists in nature or not.



Taken in a vacuum, very few foods are inherently "right" or "wrong." Rather, it is the total diet and lifestyle profile of an individual which contributes to his health or disease (genetics contributing the other, perhaps larger, part). For instance, "carb loading" makes sense for a long distance runner (I used to run cross country in school), but makes very little sense for a low-activity, somewhat overweight nearly-diabetic 50 year old (which I could well become). On this you are correct.

However, taken on average, the sensible diet profiles of most Americans (taking their occupations and activity levels as givens) tend to overlap a lot. These profiles *do* have more room for certain food and less room for others. There is a lot of room for fresh fruits and vegetables, whole grain carbohydrates, lean protein such as fish -- and comparatively less room for things like processed grains rich in starch but poor in fiber, or snacks rich in sodium and fat but poor in vitamins.

The problem starts when you walk into your average supermarket. Beef costs half as much as salmon, soda half as much as milk, chips half as much as apples. So, ignoring all the noise about "marketing" and "brainwashing" and "influencing small children by advertising junk during their cartoon shows," and just focusing just on the stimulus presented by price, you still have a problem. A consumer who is price sensitive will buy more of certain foods than others, and he will usually get it backwards: He will consume more of things he should be having less of, and take less of the things he should eat more, if you consulted a nutritionist and figured out what his ideal diet looked like. The proportions will be out of alignment with what is ideal. The point is, ice cream won't kill you, but a diet consisting entirely of ice cream will.

Selectively raising the prices of starchy foods and red meat will get the price signals back in alignment with a healthy diet. And, to keep this tangent relevant to the original post, I will reiterate that a moderate run-up in corn prices due to increased ethanol production would do just that. One is of course free to ignore those price signals if he feels strongly about it. Sitting here talking about market mechanisms and incentive effects, I'm hardly out to coerce people. But I will recognize that current conditions -- brought about by positive policies enacted by the government -- send certain signals and encourage certain behaviors. I an not averse to discussing the need for changing certain policies in order to send different signals, which we think may well lead to better social outcomes.

To look out at a population with high -- and rising -- rates of obesity and obesity-related complications, and then to retreat into platitudes about how no single food is inherently "good" or "bad" in abstract, is to engage in a stunning act of denial. By the looks of things, something is probably wrong, and there is a good chance that one of the problems lies in our collective diet.

Global warming critics make this same stunning conceptual leap from time to time -- "CO2 isn't bad; it is a natural byproduct of life! We release it each time we breathe!" This is one reason I've started to take them less seriously over the years. People who make that argument of course miss the entire point, which is that CO2 when released in certain quantities and at certain rates is a potential hazard to the global environment. Everyone breathing (releasing a small amount of CO2) isn't a problem. Everyone driving around in a Hummer (releasing a large amount of CO2) probably is. This is similar the notion that having a scoop of ice cream for dessert from time to time will not cause one problems, but eating a carton a day will.


You made yourself perfectly clear. I would like to add three points. As having a mathematical education, I know that it is not correct to apply broad statistical finding to individual. Simply put, statistically US population is overweight, but you can not recommend weight-reducing diet to individual you do not know.

I believe then price-regulating of people’s diet is utopical idea. Nothing else but knowledge and self-control will work.

Third. Antropogenic carbon emission represents only 2-3% of global carbon cycle. Cattle farming and rice cultivation produce more GHG emissions then transportation. Ocean fertilization and other biological methods offer way more massive, cheap, and immediate carbon sequestration results then anything else. Looks like Climate Change lobby does not interested to offset antropogenic GHG emission. They just trying to tax whatever is easier to tax and live happily ever after, distributing and re-distributing collected taxes, partially among their buddies.



1. While there are limits to applying statistical truths to individuals within a population (who all exhibit their own idiosyncracies), it is specious to argue that it cannot be done at all. Animal husbandry, modern pharmaceuticals and clothing retailers are only three random examples of areas where aggregate statistics are used guide the mass treatment of individuals, and demonstrate good results obtained from employing rather standardized templates or processes. If you are mathematically inclined, read some good books on population biology to get a better sense of this.

2. Price-regulation of people's behavior is hardly utopian. It is pedestrian. It is inherent in nearly every action every person takes in our society; ask any economist. Examples: Disproportionate gas taxes in Europe push 50% of consumers to buy diesel, while in countries with more even taxation the proportion is lower. Caviar costs a lot, so people don't eat much of it. Speeding tickets cost money and put points on your driving record, which costs more money on insurance. That changes behavior: People speed less, they fight tickets in court, and they attend "traffic school" in order to avoid the points. Do you think anyone would attend traffic school without the monetary stimulus?

Knowledge and self-control can achieve results, but so does prodding from external stimuli. To ignore the latter fact is to miss out on what keeps the world spinning most of the time.

3. Anthropogenic carbon emissions may only represent 2%-3% of total global carbon cycling. But that also misses the point. If you have a finely balanced see-saw, with a hundred pounds of lead ingots resting on each side, adding three pounds to one side will tip the balance and send one side inevitably down and the other side inevitably up, suprisingly quickly at that. Try it. Thus, being responsible for 3% of the total carbon cycling of the earth does not exclude the possibility that we are also responsible for putting the system dangerously out of balance.

You may be correct in that there are other, cheaper or better ways to re-adjust the carbon balance. It may be that local air quality, economic efficiency and resource conservation (having oil left for the future) are better reasons to regulate the transport and power industries. However, I'm not sure of that. I'm not yet sure that ocean seeding or other potential routes for sequestration are efficient enough and side-effect-free enough to achieve the desired ends. That's why I'm open to them, but I am equally open to attempts to fix the carbon balance on the "supply side," if you will. I therefore take a keen interest in the kinds of things discussed on this website. Which, by the way, includes the discussion of sequestration and "offset" technologies as well as efficiency technologies and tax proposals.

By the way, by increasing the price of corn, you increase the cost of raising beef. That decreases demand for beef, which lowers the number of cows being raised. Since cows produce a lot of methane (a very power greenhouse gas, as you allude to), reducing the number of cows has a very positive GHG effect. Everyone should consider sticking *that* little tidbit into their carbon-balance calculations for conventional ethanol.

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