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The Rising Tide of Corn
Ethanol-Driven Demand Felt Across the Market

By Michael S. Rosenwald
Washington Post Staff Writer
Friday, June 15, 2007

The nation's unquenchable thirst for gasoline -- and finding an alternative to what's been called our addiction to oil -- has produced an unintended consequence: The cost of the foods that fuel our bodies has jumped.

Beef prices are up. So are the costs of milk, cereal, eggs, chicken and pork.

And corn is getting the blame. President Bush's call for the nation to cure its addiction to oil stoked a growing demand for ethanol, which is mostly made from corn. Greater demand for corn has inflated prices from a historically stable $2 per bushel to about $4.

That means cattle ranchers have to pay more for animal feed that contains corn. Those costs are reflected in cattle prices, which have gone from about $82.50 per 100 pounds a year ago to $91.15 today.

The corn price increases flow like gravy down the food chain, to grocery stores and menus. The cost of rounded cubed steak at local Harris Teeters is up from $4.59 last year to $5.29 this year, according to TheGroceryGame.com, which tracks prices. The Palm restaurant chain recently raised prices as much as $2 for a New York strip. And so on.

"Anybody that knows anything about the marketing of corn knows that when you raise the price of corn you are going to create problems in all of the markets that use corn," said Ronald W. Cotterill, director of the Food Marketing Policy Center at the University of Connecticut.

The increases have not gone unnoticed by John and Irene Lobuts, retired teachers who live in Rockville and were finishing up their weekly visit to Giant yesterday. John noted that while gas price increases have been obvious, "food is right behind it." His wife quickly offered the observation that "milk is going crazy."

Though the increases may seem hard to swallow, Americans have been relatively fortunate when it comes to food prices, spending only about 10 percent of disposable personal income on food. That expense was more than 20 percent in 1951, according to the U.S. Department of Agriculture.

But now some economists and analysts say the corn price increase could combine with other factors -- poor weather and soaring energy costs -- to unsettle the food industry, since corn products are used not just to feed animals but also in high-fructose corn syrup, the sweetener of choice for such products as soft drinks and cookies.

Hershey, the chocolate maker, recently lowered earnings projections because of higher milk costs. So did Dean Foods, a major milk processor. General Mills and Kellogg's have bumped up cereal prices. Marriott International, which typically sees price increases of 2 to 3 percent a year for its purchases of protein items, now expects that to at least reach 6 percent next year and perhaps go as high as 8 percent. The company buys 10 million tons of beef a year.

"It's a risk we are really paying attention to now," said Brad Nelson, Marriott's corporate chef, though the company is not increasing prices in its restaurants.

The heightened demand for corn has decreased the supply of other grains, including soybeans, because farmers are shifting fields to make room for corn. Soybeans are a key ingredient in trans-fat-free cooking oils now in high demand as cities and counties ban fatty oils in restaurants and bakeries. New York was the first city to do so, and other municipalities have followed, including Montgomery County. Now Sysco, a Houston food company that is a major supplier of trans-fat-free oils, says it is seeing pricing pressure on the product.

To be sure, the higher grain prices are not the only factor causing increases in food prices. In the case of milk, Chris Galen, a spokesman for the National Milk Producers Federation, said prices are up -- locally they have jumped 30 cents from January to May -- partly because of an increased demand for exports to Asia because of the rapid economic expansion there. Also, Americans are eating cheese with zeal. About 45 percent of the nation's milk is used for cheese, up from 29 percent in 1980.

Even though other factors help increase food prices, the industry seems to be particularly concerned about ethanol. A number of key players -- ranging from H.J. Heinz to PepsiCo to the United Egg Association -- have responded to the recent energy debate by sending a long letter to Senate Majority Leader Harry M. Reid (D-Nev.).

"Rapid development of the corn-based ethanol industry is already having adverse impacts on food supplies and prices, a major concern for many consumers," the letter said. "In addition, the continued aggressive expansion of corn ethanol production diminishes the availability of soybeans and other crops that provide healthier oils."

The question now is: Are the new corn prices here to stay? Rick Tolman, chief executive of the National Corn Growers Association, predicts corn prices will level off, particularly because of a glut expected to hit the market this fall. Farmers have planted 90.5 million acres of corn, the most since 1945, according to the USDA.

Tolman said, "Farmers have a way of, every time prices go high, they almost always overproduce until they drive down the price to the marginal level where they can't make any money anymore." He said corn farmers are "price takers. You have to take what the market offers you. The market bids the price up or down depending on what it thinks the supply is."

Ergo, if buyers think the supplies are high, they can offer less per bushel.

But Darin Newsom, a commodities analyst for DTN, an agriculture and energy research firm based in Omaha, isn't so sure that supply increases will lead to lower prices.

"That's an old economic rule," he said, "but it's only true if we are in a supply-driven market. Right now we seem to be in a demand-driven market," meaning the sustained focus on ethanol could keep prices up.

"A demand-driven market will create a long-term change in price," he said.

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