From: Reuters
Published March 20, 2008 01:02 PM

Grumbling over ethanol mounts among food execs

By Ben Klayman - Analysis

CHICAGO (Reuters) - Prices for commodities are steadily rising and top food industry executives are grumbling that costs will not fall as long as the U.S. government continues to subsidize corn growers for making ethanol.

The ethanol industry has been blamed for everything from rising food prices to environmental damage, and its heavy use of corn has even divided the farm community. Grain farmers celebrate record prices while livestock producers and bakers complain about rising costs.

The subject should be revisited by lawmakers, according to top executives at the Reuters Food Summit in Chicago this week. Some said production of renewable fuels should be capped or other benefits stripped away, or consumers' wallets will continue to feel the pinch.

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"We would love to have that acreage focused on wheat and products that are going into food, but it is what it is at this point," Sara Lee Corp North American Chief Operating Officer CJ Fraleigh said of the corn being used for ethanol.

"The pure economics of ethanol do not support that as being a good economic decision," he added. "In the short term, the use of corn for ethanol is not a good decision for the American consumer."

Ethanol has been touted as a way to reduce America's dependence on foreign oil. Corn use for ethanol tripled from 2001 to 2006, and the government estimates that one of every four bushels of corn produced this year will be used for ethanol.

Policy makers are pushing that surge. An energy bill signed into law in December calls for production of 9 billion gallons of renewable fuel this year, up from 5 billion in 2005, and rising to 36 billion gallons in 14 years.

The government also provides fuel makers a tax credit for blending ethanol into auto fuel and has a tariff on imported ethanol.

GOOD IDEA. BUT...

While the executives at the summit lauded the goals of such a push, they said consumers may not like the consequences. Executives have been lobbying lawmakers, either directly or through trade groups, to take a second look.

"We certainly as a society want to decrease our dependence on foreign oil," said Rick Searer, president of Kraft Foods Inc's North American operations. "Unfortunately, the biofuels mandate is having unintended consequences in terms of its impact on the price of food."

He pointed to more farm land used for corn and less for soybeans and wheat, resulting in higher prices on the latter two commodities even as corn prices continue to spike on the heavier demand.

Suggested options vary.

ConAgra Foods Inc CEO Gary Rodkin wants the government to offer incentives for biofuel producers to use more nonfood alternatives and cap the amount of renewable fuels produced. He also would like to see regulators shift more land from conservation programs to use for food crops.

General Mills Inc CEO Kendall Powell agreed nonfood options for biofuel would be a good step.

"It would be good if we could develop a really efficient and economic biofuels industry based on switchgrass or cellulose waste products," he said.

Other executives at the summit suggested changes in the tax credit or import tariff should be discussed.

However, P.F. Chang's China Bistro Inc CEO Richard Federico is less worried about commodity prices than his ever-rising labor costs.

"This spike will run its course and commodities will go back to some level of normality," the head of the Asian-themed restaurant chain said.

Joe Sanderson, CEO of No. 4 U.S. chicken producer Sanderson Farms Inc, has a more pragmatic view, saying things are unlikely to change.

"I wouldn't waste a lot of energy on it," he said of lobbying efforts. "There are 40 to ... 50 chicken processors. Do you know how many corn growers there are? There are more ethanol plants than there are chicken processors.

"The infrastructure for ethanol is built," he added. "The ethanol plants are there and done. I don't think the price of chicken is as sensitive to consumers as the price of gas, and that is the calculation that the congressmen made."

(For summit blog: http://summitnotebook.reuters.com/)

(Reporting by Ben Klayman; editing by John Wallace)

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