After years of cheap corn, American farmers arefinally seeing the fruits of their investment in thedevelopment of the ethanol industry as corn priceshave surged of late. How would you like to workfor 25 years and not get a raise? That’s whatAmerican corn farmers have experienced until now.

While the increase in corn prices pales in comparisonto that of energy costs, there are concerns aboutthe effect of corn demand on food supplies andfood prices.

As the ethanol industry grows, increased demandfor corn will create challenges and opportunitiesfor consumers, livestock producers, policy makersand refiners. Legitimate concerns about the impactof increased demand for corn and other grains can be addressed without inciting emotional anddistorted rhetoric.

The process of producing ethanol and high-proteinco-products from grain has been practiced for centuries. Using ethanol as a fuel was first advocatedmore than 100 years ago. The first extensive use ofethanol in gasoline was adopted as part of a domesticenergy strategy in the 1970s. Ethanol was used asan octane replacement in the 1980s and as a toolin the battle against air pollution in the 1990s.Today, ethanol meets a host of energy, agricultural,rural development and economic policy objectives.

The increasing demand for cleaner transportationfuels creates great opportunities for biofuels—agri-culture-derived renewable fuels such as ethanoland biodiesel. Production of ethanol in the UnitedStates reached an historic high level in 2006—atrend that is expected to continue. While sorghum,sugar crops and waste materials are used to produceethanol, corn will continue to be the primary sourceof U.S.-produced ethanol for at least another decade.

The implementation of a national Renewable Fuels Standard (RFS) is a key factor in expansion of ethanol use nationally. The removal of MTBE as an oxygenate, the use of ethanol as an octaneenhancer and continued public policy initiativesfocused on renewable energy continue to drivedemand for ethanol and other biofuels.

Inside

For more than three decades, critics have tried to cast ethanol as a “food versus fuel”

argument. The marketplace is a better indicator of grain supply and demand—and

statistics simply don’t bear out the dire predictions of those who say we must choose

between fueling our cars and feeding people. We can do both—and we are.

The Impact of Ethanol Production on Food, Feed and FuelIssue Brief:

Summer 2007 A Publication of Ethanol Across America

Welcome by Senator Ben Nelson .................................. 2

The truth about food prices ..........................................4

Meeting the demand for corn ........................................5

Making more ethanol from the same kernel of corn ......6

Ethanol production is not about food vs. fuel.It’s about food and fuel.The conversion of grain to ethanol and other co-products is relatively simple. The starch and fiberare converted to ethanol and a variety of other products, depending on the process used.

A “dry mill” process is the most common technologyand is used in about 80% of U.S. ethanol plants.This is a basic but technologically innovativeprocess that converts a bushel of corn intothree products that differ in volume, but arenearly equal in weight.

Basically, one bushel of corn yields one-thirdits weight in ethanol, one-third in high proteinlivestock feed (called “distillers grains”) andone-third in carbon dioxide, which can be used for food and beverage processing andindustrial applications.

“Wet mill” plants are basically corn refineriesthat convert various components of the corn kernelinto food, feed, fuel and industrial products.Representing about 20% of ethanol plants in the U.S.,these wet mill facilities tend to be larger and moreexpensive than dry mill plants due to the complexityand diversity of products. (See chart top right.)

2

Feed/Residual50.3%

Exports19.3%

Ethanol18.5%

Food Uses11.7%

Seed0.2%

High FructoseCorn Syrup

Starch 2.4%

Sweeteners (not HFCS) 2.1%

Cereal/Other 1.6%

Beverage Alcohol 1.2%

4.4%

U.S. Corn Use, 2006

Dear Friends:

On behalf of my fellow Ethanol Across America boardmembers, I am pleased to bring to your attention thisIssue Brief on the production of ethanol from grainand reality about its impact on food prices.

At a time of record gasoline prices and increasing U.S.dependence on foreign, unstable sources of energy,the continued development of alternative transportationfuels like ethanol is more important than ever. But,like all resources, we need to make sound decisions onhow we use the grain we produce so that we balancethe demands for the grain from food production andanimal feeding with our goals for producing biofuel.This is a misunderstood issue that can sometimes be emotional as well. As the information presented inthis brief illustrates, however, we can meet the needsof both the energy and food sectors. As a Senatorfrom the “Cornhusker” state, I am acutely aware ofthe needs of our cattle and pork producers as well asour grain farmers. We have a vibrant and productivecorn industry that is producing more than everbefore, and doing so using less energy, less land and more conservation practices. It is important toremember that the better corn prices received byfarmers help revitalize rural communities while, asthis brief shows, having very little effect on theprices consumers pay for food.

To complement the continued increase in the production of ethanol, we are working hard to createopportunities for diversifying our biofuel productionby utilizing new feedstocks that range from specialtyenergy crops to waste materials.Corn ethanol is abridge to many other sources, and this bridge isbeing built in a responsible manner.

We welcome the thoughtful questions that have beenraised regarding ethanol’s impact on food and feed.As this brief demonstrates, ample supplies are availableto meet the needs of our ethanol producers, animalfeeders and consumers. We appreciate your interestin this important subject and I am confident that byworking together we can continue to support Americanagriculture’s ability to supply us with food and fuel.

Sincerely,

E. Benjamin NelsonU.S. Senate

3

How much corn is in a box of corn flakes?Ethanol critics have focused attention on the effectthat increased corn use may have on food prices. It’s a legitimate issue, but must be put in context.

The raw material in many products is a very small portion of the cost paid by the consumer—and this is especially true in food processing. This is particularly the case in food products using grain, in which an abundant supply is converted into value-added products such as cereal, bread or meat.

Farmers and livestock producers seldom own the processing factory and typically have little to do withpackaging and marketing the product. Costs for these

functions are added as the product moves to market.For example, 68% of the retail price of beef and porkgoes to the “middle men” involved in the food processing and distribution chain.

Ethanol critics routinely overstate how much corn isactually consumed as human food. Less than 12% ofthe nation’s field corn crop is processed directly intohuman food products in the United States. Cornsyrup, sweeteners, starches and cereals are examples.Corn demand for the human food market has beenflat over recent years. The majority of field corn is fed to livestock, exported or processed into ethanol andits co-products.

The truth about food prices.Despite extensive media coverage about the potentialfor a significant increase in food prices due to corndemand for ethanol, statistics simply do not supportthis claim.

The Chicago Tribune claimed that using corn forethanol would raise the price of corn to such anextent that consumer meat prices would rise drastically, adding “the conversion of corn intoethanol would destroy our meat industry.”

That was in 1995.

More than 10 years later, U.S. consumers continue toenjoy the most affordable and abundant food supplyin the world—in spite of a surge in corn demand for ethanol production.

There is no question that corn prices have risen dramatically in recent months, but the effect on consumer prices has, by all accounts, been negligible—or non-existent. The U.S. Commerce DepartmentConsumer Price Index (CPI) released in April 2007

shows that from January 2006 to March 2007, atimeframe when corn prices nearly doubled, consumerfood costs increased by less than average: 2.1% compared to the 25-year average of 2.9%. Accordingto the National Corn Growers Association, historyshows that farm-gate corn prices and retail meatprices are unrelated.

An increase in corn prices will have nominal effecton total household spending. But consider how thecost of gasoline impacts consumer costs. When crudeoil moved from $40 per barrel to $70 per barrel,consumers faced a 75% increase in fuel prices. Thathits the pocketbook hard—making it more expensiveto get to the grocery store in the first place.

Higher energy prices drive food prices up—affectingnot only raw material production (grain, etc.), but the cost of processing and transporting products tothe marketplace.

There are some who say that years of cheap corn haveactually fueled consolidation in the food processingindustry, which can in turn lead to a less-competitivemarketplace. According to syndicated ag columnistAlan Guebert: “The flood of institutionalized, cheapfeed lifted the biggest boats the highest…The cheapfeed caused a chain reaction: huge profits fundedthe continued integration of the meat industry.”

4

The U.S. Commerce Department ConsumerPrice Index (CPI) released in April 2007 shows that from January 2006 to March

2007, a timeframe when corn prices nearlydoubled, consumer food costs increased

by less than average: 2.1% compared to the 25-year average of 2.9%.

A 14 ounce box of corn flakes costs about $2.97 to$3.50. When corn is $2 per bushel, a box of cornflakes includes about 2.2¢ worth of corn. At $4 perbushel, the amount of corn in that cereal costs 4.4¢.Illinois Corn Marketing Board

Between March 2006 and March 2007, fresh chickenprices were up 1.6 percent per pound. The averageprice of one dozen eggs was one penny more inMarch 2007 than in March 2004. U.S. Bureau of Labor Statistics

“A doubling of feed grain and oilseed prices wouldincrease average food prices by less than four percent.” Bruce Babcock, Iowa State University

By the Numbers

5

Increases in energy prices exert a greater impacton food prices than does the price of corn. A33 percent increase in crude oil prices—whichtranslates into a $1.00 per gallon increase inthe price of conventional regular gasoline—

results in a 0.6 percent to 0.9 percent increasein the CPI for food while an equivalent increasein corn prices ($1.00 per bushel) would causethe CPI for food to increase only 0.3 percent.

John Urbanchuk, LECG, LLC, June 2007

Meeting the demand for more corn.The corn supply is not static—and ethanol is just onefactor in the corn demand equation.

America’s farmers are the most efficient and productive inthe world. In 2006, U.S. corn farmers produced a nearrecord 10.74 billion bushels of corn. Of that, 1.8 billionbushels went to the production of ethanol and co-products. (It’s important to note that ethanol production also consumed about 26 percent of thenation’s grain sorghum crop in 2006.)

In 2007, farmers responded to market signals (as they always have) and geared up to fulfill thedemand for more corn. In June 2007, the USDANational Agricultural Statistics Service reported thatfarmers planted 92.9 million acres of corn—anincrease of 14.5 million acres over the previous year.Much of this came from the conversion of cotton and soybean acres to corn.

This increase will easily absorb the demand from newethanol plants coming on line in 2008 and beyond,with more than one billion new bushels available.

The ongoing innovation in crop genetics and technology continues to help farmers produce morebushels on the same acres. Based on recent estimates,U.S. corn farmers have the potential to produce 15 billion to 16 billion bushels annually by 2015—perhaps as much as 18 billion bushels. Of this crop,one-third could be used in ethanol production—providing enough corn for 15 billion to 20 billion gallons of ethanol. That would leave a minimum of 12 billion bushels for feed, food and export markets—up from 9.5 billion bushels in 2006.

How is this possible? Because agronomic productivity(corn yield per acre) and process efficiency (ethanolyield per bushel) continue to improve. The potential for increased corn-to-ethanol production is based on a progression of commercial results that have alreadybeen demonstrated and thus have a high degree of certainty.

More ethanol production means more livestock feed.The important role of a co-product of ethanol productionis often overlooked by ethanol critics. About one thirdof each corn kernel is converted to distillers grains—ahigh-protein feed for livestock. As the production ofethanol increases, so does the supply of this valuablefeed source.

Livestock nutritionists have documented that, whenfed as part of a balanced ration, distillers grains often outperform a corn-dominated diet. Distillers grains havebecome an important nutritional resource for livestockproducers, especially in beef and dairy production.

Distillers grains displace a portion of the corn used inswine and poultry rations. Research and technologyinnovations are underway to increase distillers grainsvalue for these species.

The displacement of corn with distillers grains allowscorn to be used for other purposes. Additionally,improvements in processing and application of corn and other grains used in ethanol production will serve as a hedge against higher food prices.

The study projects that even if ethanol productionexperiences a 150% increase over current levels, “yieldgains ultimately would provide sufficient additionalcorn stocks to moderate grain price increases... .”

The dire predictions of ethanol opponents and othersonly surface when the usage scenarios go beyond currentethanol projections and often incorporate extremes suchas droughts, low oil prices and other factors that supporttheir claims. Studies based on rational assumptionsconclude that ethanol production would have littleimpact on grain prices under projected growth levels.

Lastly, the study predicts corn prices will level off at$3.16 per bushel—an amount unlikely to appreciablyimpact grain or food prices.

Making more ethanol from the same kernel of corn.Corn will continue to be the domestic feedstock of choicefor ethanol production in the near term. A number ofadvancements in corn and ethanol production areleading to greater efficiency—squeezing more ethanolout of each kernel.

Ethanol yield has already improved from 2.4 gallons perbushel in the 1980s to 2.8 gallons in modern plants. Cornhybrids developed specifically for ethanol productionhave demonstrated ethanol yield increases of 2.7 percent—and using the cellulose (fiber) in the corn kernel(in addition to the starch) could increase yield by 10 to13 percent. Enzymes are already available that assist inthe breakdown and conversion of corn kernel cellulose.

Agronomic productivity reflects the combination ofoptimized planting rates, nutrient management andbiotechnology that has helped producers reduce the impact of insects, disease and pressure from competitive vegetation. This leads to increased yieldand reduced variability in yields from year to year.

Since 1961, yields have increased 1.8% annually—indicating that yields of 180 bushels per acre are possible by 2015. Even more telling, yield increasessince 2001 have averaged 2.8% annually, thanks inlarge part to the broad adoption of transgenichybrids. Using these trends, a 200 bushel per acreaverage is possible by 2015.

It would be false to assume these dramatic yieldincreases are the result of over-fertilization. Accordingto the ProExporter Network, the yield per acreincreased 27 percent from 1988 to 2004; yet theaverage application of nitrogen fertilizer increasedjust 10 percent during the same period.

Even some of ethanol’s most vocal critics on the use ofcorn concede this important point about the constantincreases in yield. In a 2007 study funded in part bythe American Meat Institute, National Cattlemen’s BeefAssociation, National Pork Producers Council and severalother groups with an interest in seeing grain pricesremain low, one of the scenarios for ethanol growth was determined to have little impact on grain price increases.

6

Higher corn prices aren’t the only force behindhigher food prices. Blizzards that swept theMidwest this past winter left many rancherswith fewer cattle than normal. Ice storms hitCalifornia fruit and vegetable growers…andfood companies…are also being buffeted by rising costs for other commodities as well ashigher transportation, labor and energy costs.

Wall Street Journal, April 16, 2007

100

95-9

696

-97

97-9

898

-99

99-0

000

-01

01-0

202

-03

03-0

404

-05

05-0

606

-07

07-0

808

-09

09-1

010

-11

11-1

212

-13

13-1

414

-15

15-1

6

110

120

130

140

150

160

170

180

190

200

bush

els/

acre

Source: Historical Yields – USDA, ERS; Future Trend – NCGA

Corn Yield

7

The U.S. currently consumes 140 billion gallons of

gasoline annually. So a $1.00 increase in the price of

gas (such as we have recently experienced!) represents

a $140 billion impact on consumer spending—with

many of those dollars flowing to foreign oil producers.

In contrast, about 7 billion bushels of corn are used

for food and feed each year. Even a $2.00 increase

in corn prices would have one-tenth the impact of

gasoline price swings—if all costs were passed along

to consumers. But they are not.

According to a 2007 analysis by the Food and

Agricultural Policy Research Institute (FAPRI), the

largest drivers of food price inflation in the U.S. would

be fruits and vegetables, not corn-based foods (even

as ethanol production expands.) In fact, FAPRI suggests

that consumer food spending will increase only marginally

over the next decade in inflation-adjusted terms.

Increased ethanol production adds volume to the

nation’s fuel supply, helping soften the impact of

gasoline price increases. In fact, the nominal increase

projected for food prices over the next ten years

should be more than offset by the effect that ethanol

will have on the price at the pump.

Moreover, increases in corn prices flow to American

farmers—benefiting rural communities and reducing

other agricultural subsidies, while reducing

expenditures on foreign oil. It has been said that

the ethanol industry is the most significant rural

development initiative since the Rural Electric

Administration brought electricity to the farm

more than 50 years ago. Increased farm income,

investment in rural communities and the economic

vitality that result will allow rural areas of our nation

to contribute not only food and fuel for America’s

future—but economic growth as well.

The Impact of Food Pricesvs. Fuel Prices

With this combination of hybrid and plant process optimization, theoretical yields of 3.51 gallons ofethanol per bushel are within reason—with no negativeimpact on protein or oil content for animal feed uses of the co-product.

Ethanol production from other renewable feedstocks.Corn and other grains will remain the primary source ofU.S. ethanol production during the next decade. However,American farmers will eventually become vital suppliersof cellulosic material for ethanol production as well.

Biomass materials such as corn stalks, wheat straw,switchgrass and other renewable feedstocks will contribute to the resource base available for energy use.It is estimated that America can supply a sustainable volume of biomass materials in excess of 1.3 billiontons per year—enough to produce approximately 60 billion gallons of ethanol each year.

As cellulose-to-ethanol technologies build on grain-to-ethanol capabilities, America will remain a world leader in ethanol production. From forestry wastes to agricultureresidues, from municipal waste to new energy crops, technology innovations will transform renewable resourcesinto ethanol across the nation and around the world.

This geographic expansion of ethanol production willserve to strengthen America’s economy and energysecurity without jeopardizing our abundant food supplies.The ethanol industry will continue to be a strategic supplier of both food and fuel for the future.

This "Food, Feed and Fuel" Issue Brief was produced and is distributed as part of the Ethanol Across

America education campaign.

This project is part of a continuing series and was sponsored by the American Coalition for Ethanol, the CleanFuels Development Coalition, the Maryland Grain Producers Utilization Board, the Nebraska Ethanol Boardand the Nebraska Public Power District.

Produced in cooperation with the

Special thanks to the U.S. Department of Agriculture, Office of Rural Development and Office of Energy Policy and New Uses.

Technical Writers: Todd Sneller and Douglas DuranteEditing, Design and Production Coordination: David & Associates (www.teamdavid.com)

Ethanol Across America is a non-profit, non-partisan education campaign of the Clean Fuels Foundation and is sponsored by industry, government, and private interests; U.S. Senators Ben Nelson (D-NE) andRichard Lugar (R-IN), Co-Chairmen. For more information, log on to www.ethanolacrossamerica.net.

Maryland Grain ProducersUtilization Board

www.ne-ethanol.org www.nppd.com

www.ethanol.org

www.marylandgrain.com

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www.cleanfuelsdc.org