Surviving in the business world today means embracing sustainability on all levels--economically, socially and environmentally. Maintaining sustainable operations is necessary to ensure that the resources needed to ensure long-term profits are not eliminated.
This ideal will only be amplified as we continue into the emerging Age of Accountability, where corporations are increasingly being held responsible not only for their actions, but also for how the unintended effects of these actions change the world around them.
What would happen, however, if sustainability in one industry began directly competing with the sustainability of another? The burgeoning ethanol industry reveals competing interests between the development of alternative fuels and agriculture.
Imagine being forced to choose between filling your gas tank and feeding your family. It seems like an unrealistic ultimatum. But according to many analysts and economists, this might soon prove to be more of a reality than you would think.
With the rapidly growing demand for alternative fuels, corn-based ethanol has emerged as the top substitute to alleviate the nation's dependence on foreign oil and create a more renewable source of energy. The rush for new ethanol plants has been spurred by the government's call for increased production on renewable fuels. Everyone from farmers to Wall Street investors have been pouring billions of dollars into the new industry and hurriedly building more ethanol plants.
But the rapid rise in ethanol production has led to concern about the possibility of major food shortages. According to reports, these plants could use as much as half of America's corn crop next year as the growing demand for corn needed to produce ethanol may be much greater than the government realizes. The Renewable Fuels Association (RFA), the national trade association for the U.S. ethanol industry, says that in order to meet the growing demand for ethanol production, the industry will require about 60 million tons of corn from the 2008 harvest.
The Earth Policy Institute (EPI), a Washington think tank, believes this estimate is too low, however, claiming 139 million tons of corn as more realistic--a figure that would require over half of the projected 2008 harvest.
Bob Dinneen, RFA president, claims that his organization's estimates show that there will be enough corn available to satisfy the demands for both fuel and food, and that all estimates are as accurate as possible. He believes that the EPI failed to take into account as much as 10 million more acres of farmland that may be put into production next year. Dinneen, however, admits that "there are limitations to how much ethanol you can produce from grain" and explains that almost all ethanol producers are looking at making it from other feedstocks.
The chief economist at the U.S. Department of Agriculture, Keith Collins, has acknowledged that the industry has produced lagging estimates of the production needs for the ethanol plants but remains wary of the EPI estimates, claiming that they strike him as high. "The point they're making is a valid point. The expansion in the industry has been outstripping everybody's expectations," Collins said to the Associated Press.
The USDA Baseline Projections suggest that the share of ethanol in total corn usage will rise from 12% to 23% by 2015. The problem is not the increasing demand for ethanol, however, as the energy industry could use more than the current level of production. The problem, according to EPI president Lester Brown, is that the diversion of corn usage from food to fuel will have adverse effects on society, leading to higher food costs and widespread food shortages.
Rising Food Prices
Though ethanol plants have been breathing new life into rural communities and raising the income of grain farmers across the country, not everyone is benefiting from this alternative fuel boom. The increased demand for corn is likely to drive up the cost for food in the long run, as the higher corn prices have made it more expensive for ranchers to use feed corn for cows, chickens and pigs.
The rising prices not only affect food products made directly from corn but also those coming from livestock that rely on corn as a food source. Prices of corn have already climbed to $3 a bushel, but the strong returns that have been seen in the ethanol industry suggest that this price could rise to as much as $5 a bushel.
Agricultural economist Ron Plain claims that hog producers, expecting to find corn prices in 2007 similar to those of 2006, would need to receive $50 per hundred pounds of meat to break even but will likely receive only $46. "The big thing is much, much bigger feed costs, and that will give us red ink, I'm afraid, in 2007 and 2008," Plain said to the Associated Press.
Earnings for meat producers such as Smithfield Foods and Tyson Foods have been falling due to the increased costs involved in livestock production.
Government subsidies for corn production have also contributed to the losses felt by ranchers and meat production companies. According to Cal Dooley, the head of the Food Products Association, "We wouldn't have a concern with this if it was strictly the result of market forces, but what is driving a lot of this use of corn for ethanol is a fairly generous subsidy for the production of ethanol."
The 51-cent-per-gallon tax credit created by Congress to encourage growth in the ethanol industry has created such a great competition for corn that prices have been driven to record highs. Farmers have been racing for croplands and the prices have prompted them to replace other crops such as wheat for corn, which in turn creates a shortage of wheat and an increase in the price of wheat flour.
Cattle ranchers across the country have been expressing the feeling that all the subsidies directed towards supporting ethanol production have, in reality, hurt livestock production. There is an interest in tying the subsidy to market forces, according to Dooley, by raising it when prices are low and lowering it when prices are high. Though the subsidy is set to expire in 2010, lawmakers recently introduced a bill in hopes of making it permanent.
The EPI says that the drive to corn-based fuel will result in increased prices of livestock as well as the retail prices of meat, poultry and dairy products. For example, the U.S. Department of Agriculture reported that raising the price of corn by $1 a bushel could actually end up causing the price of pork to rise anywhere from 3% to 3.5% within a couple years. So the effects of an increased demand for corn will be felt directly by food consumers, and some fear higher food prices could create a backlash by society against the usage of alternative fuels. "What happens to corn prices will very much affect the prices at the supermarket checkout counter," said Brown.
Rising food prices is not even the most pressing effect of the rising production of ethanol, according to Brown. The U.S. corn crop currently accounts for 40% of the global harvest but also makes up 70% of all the world's corn exports. Increasing corn prices could lead to a reduction in exports to low-income grain-importing countries. Food shortages may occur in countries around the world such as Indonesia, Egypt, Algeria, Nigeria and Mexico. This could lead to political instability, causing food riots and even greater anti-Western sentiment. "If the current scenario continues to unfold as we've projected here, it could create chaos in world grain markets, and we should think through whether we want to do that or not," according to an EPI report.
The most recent USDA Baseline Projections also suggest that much of the corn needed to maintain ethanol production would be diverted from exports, predicting higher ethanol usage and lower exports than last year. Though the corn industry ended the 2005 marketing year with stocks of 2.1 billion bushels, any sustained increases in ethanol production would require serious adjustments in the corn market, causing ethanol producers to compete with other buyers in the market, which will lead to a sharp rise in price. The USDA continues to speculate that if ethanol reduces the amount of corn available for export, Canada, Egypt, Central America and the Caribbean are likely to respond the most to rising corn prices.
"We need to make sure that in trying to solve one problem--our dependence on imported oil--we do not create a far more serious one: chaos in the world food economy," says Brown. "What we are beginning to see is the unfolding of an epic competition between 800 million people who own automobiles and want to maintain their mobility, and the 2 billion poorest people in the world, many of whom are spending more than half of their income on food already."
With an increase in corn prices, exports will undoubtedly decrease and countries will discourage its use because of higher production costs. In fact, China, the world's third largest producer of ethanol, has already limited the production of corn-based ethanol plants due to high grain prices.
Though the prospect of world hunger due to ethanol's potential domination of the corn market seems far-fetched, it does illustrate the negative ripple effect that corporations can be held accountable for regardless of whether or not they are perceived as sustainable. However, there are options to reduce the potentially harmful results that could be created by the ethanol industry.
Another issue facing the ethanol industry is the fact that corn-based ethanol is not considered an effective substitute for gas, since it only provides 70% of the energy of an equivalent amount of gas and requires huge federal subsidies to even compete with oil. In response to predictions of high food prices and massive food shortages, Brown has proposed some solutions to this problem. He is currently pushing for the United States to declare a moratorium on the construction of new ethanol plants until the impact of increased corn usage can be determined. To cut fuel demand, he is also calling for a mandated 20% increase in the fuel efficiency standard for cars and proposes a long-term solution of increased reliance on gas-electric hybrids as well as the development and widespread use of cellulosic ethanol.
Cellulosic ethanol is different from corn-based ethanol in that it is produced from the cellulose of plant material derived from agricultural waste such as corn stalks and wood chips. While it is still under development, it is anticipated that cellulosic ethanol will require less energy to produce than corn-based ethanol, and as a fuel, will result in far less carbon dioxide emissions with levels 85% less than gasoline and 25% less than traditional ethanol. The reduced emissions make it less susceptible to high pollution taxes as 37 governors are prepared to impose measures to cut the carbon content of fuels. And since cellulose is not edible, there is little to no effect on food prices.
The U.S. Energy Information Administration says that U.S. corn-based ethanol demand will rise to 8% by 2030, but because U.S. fuel demand will also rise, ethanol will not be able to replace foreign oil. However, Richard Newell, from the Washington think tank Resources for the Future, says that with the development of cellulosic ethanol, biofuels could make up to 10% to 20% of global gasoline demand by 2050.
Since producing ethanol from corn was found to actually lead to one of the lowest yields per acre of crop, producing only 354 gallons, corn-based biofuels might not be the most efficient after all. For instance, France has been able to yield 714 gallons of ethanol per acre of sugar beet. Brazil, using sugarcane, produces 662 gallons per acre.
Traditional corn-based ethanol, however, seems to be winning in the race towards finding a viable alternative fuel regardless of its adverse effects on the food industry. It may be produced only as a transition fuel until more efficient fuels can be developed and the infrastructure can be created to handle such a venture. As more corn is taken from food usage in order to maintain ethanol production, however, people may be faced with the problems resulting from the decreased availability of corn products and livestock. If the EPI's estimates are correct and nothing is changed, drastic consequences might be seen in the future.
Though the ethanol industry is based on the ideals of creating a sustainable energy source allowing for a renewable fuel, one cannot overlook the potential negative effects due to its high consumption of corn. The competition between the food and fuel industries will continue until more effective forms of fuels are developed and perfected. In the meantime, an industry that was seen as being on the forefront of sustainability may not be so sustainable alter all.
Youmna Sakr is a contributing writer from Pittsford, New York.…