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A Small Slice from an Extra Large (And Getting Larger) Pizza

March 8, 2011


We knew it was coming. The minute grain futures started their speculation-fueled increase last summer, we knew it was just a matter of time before the pundits would start blaming biofuels for dramatically higher grain prices and rising consumer food prices. Like Pavlov’s dogs, the critics are at it again, blaming biofuels for everything from the unrest in Egypt to “burning dinner” in third world nations. In an attempt to inject some sanity and facts into the recently rekindled “food versus fuel” fervor, RFA has repeatedly highlighted the fact that in 2010/11, the U.S. ethanol industry will use just 3 percent of the global grain supply on a net basis. It just isn’t reasonable to suggest that using such a small slice of the global grain supply could be solely responsible for the recent surge in food prices—especially when the U.S. industry uses nary a bushel of food grains like rice or wheat. Nevertheless, some opponents of biofuels have challenged our use of the 3 percent figure. They contend that it just can’t be that low—somehow they got the idea that the U.S. ethanol industry is gobbling up a substantial fraction of the world’s grain. It’s even been suggested that we are somehow using “smoke and mirrors” to derive the 3 percent number. But we have nothing to hide. It’s really a straightforward calculation, replicable by anyone with access to USDA data, a pencil and the back of an envelope. USDA estimates the total 2010/11 global grain supply at 2.67 billion metric tons (incidentally, that’s less than 1 percent than last year’s record supply). The total supply includes both coarse grains used primarily for livestock feed (corn, barley, oats, etc.), as well as food grains (wheat and rice) primarily consumed by humans. So, how much of that total does the U.S. ethanol industry use? USDA estimates the industry will process 4.95 billion bushels of corn (or 126 million metric tons) into ethanol in 2010/11. Thus, on a gross basis, American ethanol producers will use 4.7 percent of the global grain supply this year. But there’s one more important step in the calculation that biofuels opponents often “forget” to do. In addition to 13.7 billion gallons of ethanol, the 4.95 billion bushels of corn processed by the industry in 2010/11 will also generate some 38 million metric tons of livestock and poultry feed. That’s because one-third of every bushel of corn that goes in the front end of an ethanol plant comes out the back end in the form of animal feed (primarily distillers grains and corn gluten feed). Only the starch portion of the corn (representing roughly two-thirds of the mass of the kernel) is used to produce ethanol. The kernel’s remaining protein, fat and other nutrients are preserved and remain available to the animal feed market. Thus, to determine the net impact of U.S. ethanol demand on global grain supplies, the 38 million metric tons of feed produced by the industry must be subtracted from the gross corn use figure of 126 million metric tons. That leaves net total usage at 88 million metric tons, or 3.3 percent of global supplies. (The impact likely is even lower than that because there is a wealth of evidence showing that distillers grains are a more efficient feed source for cattle than corn; thus, 1 metric ton of distillers grains may replace more than 1 metric ton of corn and soybean meal in the feed market). So, there you have it. That’s how we come up with the 3 percent figure. But looking at the U.S. ethanol industry’s use of grain in terms of percentages only tells part of the story. Just because U.S. ethanol producers are using an increasing percentage of the global grain supply does not mean that less grain is available for food and feed uses. Here’s why: the global grain supply has been growing rapidly over the last several decades. Larger supplies have allowed for increases in the amount of grain used for biofuels, while still ensuring that rising food and feed demands are adequately met. Here’s a simple analogy. You and a group of friends go to your favorite pizza joint for lunch. You order a 12-inch pizza to share and you take one slice. That means there is a fixed amount of pizza left for your friends. You and your friends go back for lunch the next day and order a 15-inch pizza. Again, you take one slice, but it’s a little bigger this time. But because the whole pizza is bigger, there’s more pizza left for your friends than there was yesterday. That’s exactly what’s happening with the world grain market—the pie is bigger today than it was yesterday. So, a slightly larger slice going to U.S. ethanol doesn’t mean there’s less for everyone else. In fact, the amount of grain available for non-ethanol uses continues to grow. The chart below clearly demonstrates this point. After using 11.5 million metric tons of grain (net) for U.S. ethanol in 2000/01, there were 2.4 billion metric tons of grain available for other uses. Ten years later in 2010/11, there are nearly 2.6 billion metric tons of grain available for other uses after the U.S. ethanol industry’s consumption of 88 million metric tons (net) is taken into account. So go ahead—order the Extra Large. There’s plenty for everyone.