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Green Fuel Revolution a Challenge for Grain Sector
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USA: October 10, 2005


CHICAGO - The multibillion-dollar US grain sector faces a major challenge as
soaring oil prices boost demand for 'green' fuels, setting up a competitive
tussle between energy refiners and traditional users of grain as food.


More and more, crops like corn and soybeans -- now primarily used as animal
feed and ingredients in hundreds of food products -- will be used to make
ethanol and biodiesel in coming years, in what could have a ripple effect in
the form of higher food prices, some economists say.
"There are already some asking questions -- should we be using basic foods
when you have a hungry world?" said economist Chris Hurt at Purdue
University. "When you start using food for fuel, it has some implications
for food prices over time."

"There's going to be winners and losers out there. It's a pretty dramatic
event for the grain industry," he added.

For 2005, the US Agriculture Department estimates that 1.3 billion bushels
of corn -- 11 percent of this year's US crop -- will be used to produce
ethanol, an alcohol distilled from corn and used as a gasoline additive or
substitute.

Interest in biofuels like ethanol, which is also made from sugar, and
biodiesel, now made mostly from soybeans, got a big boost in the United
States after gasoline prices topped $3 a gallon in many parts of the country
last month.

Oil prices, already high due in large part to China's growing demand for
energy, spiked even higher as hurricanes Katrina and Rita shuttered US
refineries on the Gulf Coast.

Such home-grown fuels carry the benefits of being renewable, running cleaner
than petroleum fuels, and potentially reducing US dependence on foreign oil.


BOOST FOR GREEN FUELS

Boosted by the latest US government energy bill, US production of ethanol
and biodiesel is projected to climb to 7.5 billion gallons by 2012. Midwest
economists estimate that would equate to between 5 and 7 percent of total
gasoline consumption by then, about double the 2005 projected level.

Part of the jump is tied to a $1-per-gallon government rebate on biodiesel
that went into effect this year.

But US cities and states are also rushing to boost green fuel use. City
buses from San Francisco to Cincinnati now fill up with biodiesel, which
runs in any diesel engine -- and emit exhaust fumes that smell like popcorn.

Last week, Minnesota became the first state to require that all diesel fuel
sold contain at least 2 percent biodiesel.

The big winners in the home-grown fuel market will be US grain farmers who
stand to cash in on the run for their crops.

But it will be a different story for US livestock producers who are likely
to see higher prices for smaller available supplies of grain for feed. This
would affect every producer in the billion-dollar livestock markets, from
the beef producers on the Plains to the hog producers of the Midwest, the
poultry farms of the Southeast and the dairy factory farms of California.

Grain analysts also foresee smaller corn and soybean export volume -- and
income -- in the coming years. Right now 11 percent of the US corn crop is
used for ethanol production, compared with 15 percent that is exported to
livestock producers as far away as Japan and South Korea.

"We are using increasing amounts of corn for ethanol ... by 2009, we have
corn exports marginally lower than corn use for ethanol," said Pat Westhoff,
economist with the Food and Agricultural Policy Institute (FAPRI).


EXPORT OR PROCESS?

That demand outlook has sparked global agribusiness firms and top US
exporters, like Cargill and Archer Daniels Midland Co., to take an active
development role in biofuels.

Both are already top suppliers of renewable fuels, and they are expanding
with new ethanol and biodiesel plants dotted across the Midwest. This summer
Cargill announced a joint venture to build ethanol plants in Indiana,
Nebraska and Ohio.

ADM said Tuesday it will construct its first wholly owned US biodiesel
facility in North Dakota.

But even with a demand spike in renewable fuels, they are a very small slice
of the energy pie: still just 3 percent of the total US gasoline market. But
some backers say 'green' fuels could make up 25 percent of the total
gasoline market by 2025.

For the food sector, part of the void left by energy producers siphoning off
corn and soybeans could be filled by higher-yielding crops or varieties bred
for higher energy value.

Research laboratories across the country are looking at other sources of
feedstock -- everything from wood pulp and exotic grasses to potatoes -- to
turn into green fuels.

"There are a lot of 'ifs' in the equation, but with the up-and-coming
technology ... the advances in conservation and efficiency on the vehicles,
they could potentially play a very significant role in our fuel mix," said
Suzanne Hunt, biofuel manager with Worldwatch, an environmental think tank
in Washington, D.C.

"There is a broad spectrum of people in this country that are starting to
realize that it's in all of our best interest to transition away from fossil
fuel dependence toward these renewable energy sources," she said.



Story by Christine Stebbins


REUTERS NEWS SERVICE