Detroit Free Press
06-24-07
Cost of milk kicked up by demand for ethanol
Turning corn into fuel could push price to $4.50 a gallon
BY ALEJANDRO BODIPO-MEMBA
FREE PRESS BUSINESS WRITER
Get ready to pay $4.50 a gallon this summer -- for milk.
Gasoline prices over $3 a gallon have grabbed consumers' attention, but dairy
products and other corn-dependent foods are expected to rise at an even faster
rate.
This is happening because of an explosion in the production of ethanol, a
gasoline additive touted by the president, automakers and farmers as a way to
reduce America's dependence on foreign oil.
Up to 20% of the nation's corn crop -- 18% in Michigan -- is now being channeled
to ethanol production. That increased demand means the price of corn used to
feed cattle and pigs and to make cereals and sweeteners is going up -- 61%
between September and May.
Together with the rising costs of wheat and other commodities, corn demand is
pushing overall food prices up 4% this year, compared with 2% a year ago, and
driving up the costs of breakfast foods -- eggs, bacon, cereal, milk and potatoes - as much as 10%, according to the U.S. Bureau of Labor Statistics.
Chris Galen, a spokesman for the Arlington, Va.-based National Milk Producers
Federation, predicts that the price of a gallon of reduced (2%) fat milk in metro
Detroit, which started the year at $2.97 and is now around $3.08, could spike
another $1.50 a gallon by the fall.
"Wow! Are you serious?" asked Danielle Conway, a 33-year-old nail technician
from Detroit who said her four children go through milk pretty quickly. "That's
ridiculous."
Veronica Leonard, a 36-year-old attorney and Southfield resident who paid $1.79
for a half-gallon of milk last week, has noticed food prices creeping up.
"In the past, you expected meat to be high, but now the staples like bread, milk
and juice are increasing, too," she said.
Galen said several factors are pushing prices higher.
"When you have high petroleum costs, you have high fertilizer costs, but the
more predominant factor has been the run-up in the cost of corn," he said. "That
is due almost exclusively by the competition of the ethanol industry with livestock
producers for a finite amount of corn."
Ethanol production jumps
Nationally, ethanol production rose from 2.14 billion gallons in 2002 to nearly 6
billion gallons in 2006. Corn to produce ethanol grew from 996 million bushels in
2002 to 2.2 billion bushels in 2006.
Michigan farmers, who produce 280 million bushels of corn a year, mirror the
nation by committing 18% of their crops to make 213 million gallons of ethanol a
year. The proportion of Michigan corn going to ethanol is expected to reach 35%
by 2010.
A study released in May by Iowa State University, paid for by several foodproduction groups including beef, pork and poultry producers, said ethanol
production has added $14 billion a year to U.S. food costs, and predicted the
total could reach $20 billion annually. It said putting more land into corn
production -- which some groups consider environmentally risky -- would provide
only modest help.
Ethanol, an alcohol-based fuel that is produced from corn, soybeans and other
agricultural products, has been around for 100 years, and is being blended with
gasoline in ratios from 10% to 85%. It was the first fuel to power Henry Ford's
Model T prototype.
Midwestern farm interests began lobbying in the 1970s for incentives to produce
ethanol as a way to reduce U.S. dependence on oil -- and to create a new market
for corn. Persistence and political muscle have paid off as production has
boomed.
Today, ethanol, along with other biofuels, is a key element of President George
W. Bush's plan to reduce U.S. dependence on foreign petroleum. He came to
metro Detroit in February 2006 to reiterate his agenda of breaking what he called
America's addiction to foreign oil by developing more alternative energy sources
such as biofuels in Michigan.
Last week, the U.S. Senate passed an energy package that would require
automakers to build cars and trucks that average 35 m.p.g. by 2020. The bill,
which was passed by a vote of 65-27, provides incentives for producing 36 billion
gallons of ethanol and other biofuels by 2022.
Ethanol already has a 51 cents-per-gallon federal subsidy, so corn producers in
Michigan and across the country are clamoring to get into the game.
Michigan's opportunity
Corn belt states such as Iowa, Nebraska, Illinois and Minnesota have led the way
in ethanol production. But in the past five years, four ethanol refineries have been
built in Michigan, with another seven in construction or being proposed. The state
has created 20 agriculture renaissance zones, which offer tax incentives for
companies to build ethanol and other renewable energy facilities.
Michigan's automakers also have joined the push.
General Motors Corp., Ford Motor Co. and the Chrysler Group have been touting
the environmental virtues of flexible fuel vehicles that can run on an 85% ethanol
fuel blend called E85. The automakers get credit for making such vehicles under
the government's current fuel-economy standards. Ethanol burns cleaner than
gasoline and reduces auto emissions, although it produces less energy and
reduces gas mileage.
Farmers hard hit
While it appears that dairy farmers are also doing well as prices escalate, they
insist that they are being hit with higher energy costs that eat away at their
bottom line.
"Farmers are not price makers, they are price takers, and a farmer doesn't have
a storefront where he sets a price," said Bob Boehm, a spokesman for the
Michigan Farm Bureau. "Farmers buy pretty much retail and sell wholesale."
In the end, consumers at the end of the food and fuel continuum will end up
paying more for milk, beef, pork and gasoline as the summer rolls along.
"Ultimately it comes down to supply and demand," said John Dilland, general
manager of the Michigan Milk Producers Association in Novi. "When corn prices
double, that increases the production costs of milk, because a major portion of
dairy farmers' expenses is feed."
Contact ALEJANDRO BODIPO-MEMBA at 313-222-5008 or
abodipo@freepress.com.