Cargill CEO questions whether ethanol should be priority

MINNEAPOLIS (MarketWatch) -- At a time when the U.S. government is promoting ethanol and several companies are investing heavily in the product, the head of one of the world's largest agribusiness companies is skeptical that certain biofuels are the answer to the country's reliance on foreign oil.
Warren Staley, chief executive of Cargill Inc. (CRG.XX), says that ethanol and biodiesel will be good, profitable businesses, but that the Minnesota company's first priority is to be the leading global food provider. Promotion of ethanol, he said Monday, runs contrary to that goal at a time when the need for increased food production is critical.
"If it's ethanol and biodiesel, we have to look at the hierarchy of value for agriculture land use: food first, then feed and last fuel," Staley said during a presentation at the annual meeting of the Society of American Business Editors and Writers. "Today, we are providing subsidies to fuel uses while often erecting barriers to new food and feed technologies."
The energy bill Congress passed last year mandates that ethanol account for an increased proportion of total motor fuel used in the U.S. President George W. Bush last week reiterated his commitment to alternative fuels, as pressure mounts on the government to take steps to contain energy costs as oil once again has topped $70 a barrel.
Several companies, notably Archer Daniels Midland Co. (ADM) and leading car companies such as General Motors Corp. (GM) and Ford Motor Co. (F), have ramped up their ethanol-related activities.
"We need to be clear about what interests are driving renewable fuels - is it farm policy? Energy policy? Environmental policy? Rural development policy?," Staley said. "How do we get a thoughtful discussion of these choices, so that we end up both with the right policy choices and investor confidence in those choices?"
Staley told reporters after the speech that Cargill is investing about 5% to 6% of its capital in ethanol and biodiesel operations, up from about 2% to 3% just a few years ago. He wouldn't specify how much the privately held company is spending on such programs, saying only that it's "well over $1 billion" a year. He also said that Cargill is involved in joint ventures to provide small companies with the expertise to develop their own ethanol businesses.
Cargill's financial commitment to biofuels pales in comparison to that of ADM, which has seen its stock price soar in recent months in part because of investor optimism about the expansion of its ethanol business. Last week, ADM named former Chevron Corp. (CVX) refining and marketing head Patricia Woertz as its new chief executive.
Staley said that the decision to name a new CEO from the energy business "said a lot about ADM" and its future strategy. Cargill, for its part, has no intention of pursuing a similar strategy.
"I have to be a prudent investor of my shareholders' money," Staley said, noting that Cargill's status as a private company gives it a relatively small pool of capital to deploy.
The bottom line for Staley, however, is that using scarce land to increase ethanol production is out of step with the need for increased global food production in the coming years, especially given the limited impact that ethanol could ultimately have in driving down dependence on foreign oil.
According to Staley, even if 100% of the U.S. corn crop were used to produce ethanol, it would only replace about 20% of motor fuel. In the U.S., ethanol is made primarily from corn, while other countries use sugarcane as the main input.
"You would have to do a lot more to solve the problem of reliance on motor fuel," Staley said. He noted that the Bush-touted policies of using biomass, or agricultural waste products, to produce fuel are likely two decades away from having a big impact.
The ethanol bet that many companies are making now could also go astray if the price of petroleum drops significantly, Staley said.
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