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If there was any doubt about the impact of energy markets on global agriculture, it was dispelled by US president George Bush's, January 23, 2007, "State of the Union Address" to the US Congress in Washington.(470 words).

As part of proposals for reducing US dependency on oil imports from areas of the world hostile to the US, president Bush suggested the US

"... must increase the supply of alternative fuels, by setting a mandatory fuels standard to require 35 billion gallons of renewable and alternative fuels in 2017 -- and that is nearly five times the current target."

The US Department of Agriculture (USDA) currently projects 55M tonnes of US corn will be used this year to produce about 5 billion gallons of fuel ethanol. Before the State of the Union address the target was 7.5 billion gallons by 2012 which was a target that seemed well within reach. US production of fuel ethanol has increased almost five-fold over the last ten years.

But this growth was from a relatively modest base. This year fuel ethanol will consume about 20 percent of US corn production. To achieve a five-fold increase in ethanol production, while meeting the needs of other corn consumers, particularly the livestock industry which is still the largest consumer of US corn, will either require an unrealistic increase in feed grain production or the use of other energy sources. And, while fibre/cellulose, including wood waste, is an option, it is still an expensive one, even at recent oil prices. But that was also true of ethanol from corn five years ago.

As has been the case in the past, the immediate future for bio-fuels rests on US relations with the oil producing Arab world. The politics here are, of course, as positive for grain markets, and as negative for almost everything else, as they have ever been. US relations with the Arab world do not show any signs of warming. And the chances of any immediate and significant alternative source of energy for fuel ethanol appear remote. It seems, therefore, that there will be a quantum increase in demand for grain with no immediate prospect for of it being matched by an consummate adjustment in output.

Spending money on reducing dependence on imported oil makes great political sense for the Americans at this time, particularly when there are the added dividends of support of grain markets and rural development. And further as this is being done in a way that is unlikely to alienate others in a WTO context, it is likely to receive the necessary support of US Congress.

For grain farmers around the world it will surely result in a windfall. For livestock producers it will mean added costs, with the hope that these will, sooner rather than later, be handed on to consumers.

470 words

January 24, 2007