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Article from Fresno Bee News Paper

Cash crop, literally
Demand for ethanol bumps up the price of corn, an ethanol ingredient, creating a ripple effect straight to local consumers' wallets.
By Joan Obra / The Fresno Bee
02/28/07 03:51:28

No, it's not your imagination. Your grocery bill is likely higher than it was a year ago, especially if you buy lots of processed foods, tortillas, corn chips, meat and poultry.

All of these foods have one ingredient in common: corn.

Corn is in the feed of livestock and poultry. Likewise, processed foods contain ingredients such as corn syrup or cornstarch. And the price of corn is rising, since it's a key ingredient of ethanol -- the alternative fuel with the most buzz lately.

Just how expensive is corn? A year ago, a bushel of corn was priced at about $2 on the Chicago Board of Trade. Tuesday, it was priced at about $4.11 a bushel.

"It's huge," says Bob Frye, a commodity broker at Access Futures Options Trading Co. in Woodlake. "It's a perception out there that the ethanol bandwagon is growing, and people are jumping on that bandwagon because they think there's going to be an extra-high need for corn later on."

Government policies and subsidies have helped turn domestic ethanol production into big business. The 2005 energy bill forces oil refiners to buy at least 7.5 billion gallons of ethanol by 2012. The federal government offers a rebate to sweeten the deal: For every gallon of ethanol a refiner blends into gasoline, it receives 51 cents on the federal fuel tax.

In addition, most imports of ethanol are subject to a tariff of 54 cents per gallon. It's not high enough to prevent other countries from sending fuel to the United States, but it's definitely a measure designed to boost U.S. ethanol creation.

President Bush's State of the Union address in late January fueled the industry. He called for 35 billion gallons of alternative fuels by 2017. (Ethanol made from corn and other materials, biodiesel and methanol are all part of the mix.)

Last week's release of the January consumer price index reflected ethanol's impact on food. Food prices were up 0.7%, the highest jump since April 2005.

Businesses in the central San Joaquin Valley and elsewhere have felt the effect. Because of ethanol and frigid Midwest weather that's hurting cattle, Gus' Food Locker in Madera is paying its wholesalers about 20 to 30 cents more per pound of beef and pork, says Derek Sambueso, a meat manager at Gus'. As a result, Gus' has increased its retail prices by about 10 to 15 cents a pound, he says.

Poultry farmers haven't escaped the rising costs, either. Pitman Farms of Fresno, known for its organic, free-range and heritage turkeys under the Mary's brand, is facing much higher feed expenditures than last year.

Those costs still are rising, says Rick Pitman, who expects corn prices to hit $5 to $5.50 a bushel. In response, Pitman has tried to stock up on feed. He's also reopening Western Grain and Milling, the feed mill started by his father.

"Producers are doing whatever they can to keep their costs down," Pitman says. "Having our own feed mill will help us to lower our feed costs a little bit. ... We're still buying from our regular suppliers."

Pitman expects to increase prices for his products by about seven to 10 cents a pound. The prices could rise by an additional five cents a pound, depending on the cost of feed later this year, he says.

The price increases in foods containing corn syrup are comparable. Saroni Total Food Ingredients, a distributor in Oakland that sells products to some Valley companies, has seen prices for corn syrup rise about 15% since October, company president Dan Brooking says. Saroni is passing on part of that cost to its customers.

"We're absorbing a little bit," he says.

Otherwise, the rise in corn prices hasn't hurt his business. "The thing about food is that people have to eat," Brooking says.

Rising prices for corn syrup have prompted Fresno-headquartered Producers Dairy to increase prices for its fruit drinks and punches, says Richie Shehadey, Producers' director of sales and marketing.

"Everything is passed along to the consumer," he says. Depending on the product, prices have risen by 5% to 10%.

Of course, products made of corn are feeling a similar hit. La Tapatia Tortilleria at Belmont and Harrison avenues has raised prices by 5% to 10% since the beginning of the year, partly because of the rising cost of corn, says John Hansen, La Tapatia's senior vice president.

The company makes corn and flour tortillas and tor- tilla chips, as well as wraps.

Hansen is watching supply and demand for wheat and soybeans as well as corn. He's waiting for the next Prospective Plantings reports, which will be released by the U.S. Department of Agriculture at the end of March. The reports will reveal how much corn farmers intend to plant this growing season, a figure that will influence the price per bushel.

An increase in the supply of corn could drop prices, Hansen says. But if farmers pull out soybeans and wheat to plant more corn, that would still affect La Tapatia.

"We buy soybean oil for tortilla chips, and wheat for wheat flour tortillas," Hansen says.

Prices for soybeans also are changing, he adds. Soybeans are an ingredient in biodiesel -- another alternative fuel. "You can't subsidize ethanol without having an effect on food prices," Hansen says.

There's no telling when the run-up in corn prices will end, but Frye of Access Futures thinks that it might top off at $4.50 a bushel.

Corn prices now are like "the dot-com mania," Frye says. "Part of this is public perception."