Gas savings from biofuel offset food price hikes but livestock operators feeling ethanol pinch

Considering the divisive nature of the issue — fuel versus food and feed — the level of respect for diverse views remained surprisingly high during the recent Texas Ag Forum in Austin.

Disagreements were expressed, sometimes strongly, but without rancor as participants appeared to subscribe to moderator Dee Vaughan's (a director of the Corn Producers of Texas) admonishment to “get beyond the emotion. This is a divisive issue when we can't afford for agriculture to be divisive. I am a feedgrains producer,” he said, “and it's in my best interest to understand my best customer, the livestock producer.”

The forum, sponsored by the Agricultural and Food Policy Center at Texas A&M, with the Farm Credit System and Texas AgriLife Extension, is an annual seminar that brings agricultural leaders together to discuss relevant issues affecting Texas farmers and ranchers.

Texas Comptroller Susan Combs (former commissioner of agriculture) said solutions to the food, feed and fuel dilemma “should not be a policy that's win/lose. We can't have losers. Agriculture must come together. If someone can pick off one segment of agriculture it hurts all of agriculture.”

She said a reliable food supply is crucial. “But Texas also needs reliable and affordable energy.”

She said Texas leads in U.S. energy production and also in energy consumption. “We are second in population and have a strong industrial base.”

Combs and others pointed out the effect of high grain prices on other segments of the agriculture industry, including higher feed costs for livestock producers.

“We see no silver bullets,” Combs said, “but we all must work together. If agriculture acts in a unified way, it will be better for Texas.”

Toby Baker, advisor for budget, planning and policy for Gov. Rick Perry, discussed the governor's recent petition asking USDA to waive the renewable fuel standards that mandate corn-based ethanol use. The proposal would cut the mandate in half.

That decision, Baker said, came because of the effects high corn prices have on Texas livestock producers. “Cattle feeders have been in the red since June of 2007 and have faced the largest losses ever.” He said losses as high a $168 a head “are projected to continue.”

Baker said a 50 percent reduction in the RFS would mean a decline of $.50 to $.60 per bushel in the price of corn. “That represents a $300 million to $400 million savings to the livestock industry.”

A decision from USDA on the waiver is expected in late July.

That waiver would hurt consumers, said John Urbanchuk, LECG LLC, a global expert services firm. “Critics have had a field day with the ethanol and food cost issue. But consumers would be hurt by sharply higher gas prices if refineries were forced to produce an additional 3.1 billion gallons of gasoline, quickly.” He said granting the waiver would take 4.5 billion gallons of fuel out of the system.

Some analysts suggest gas prices would be as much as $.42 a gallon higher today without ethanol used as a substitute. “That does not count ethanol used as additives,” said Henry Bryant, with the Agricultural and Food Policy Center, Texas A&M.

“The waiver is not the answer to high corn prices. Strong global demand and weather,” Urbanchuk said, play much more important roles in higher food costs than conversion of corn to ethanol.

He said only 19 cents of every dollar spent on food goes back to the farm. “The other 81 cents go to labor, energy, packaging, etc. The increased energy costs account for two times the impact of corn on retail food prices.”

On the other hand, no one disputes that livestock producers are struggling with higher production costs. “The problem is simple,” said Gregg Doud, National Cattlemen's Beef Association. “We don't have enough corn.”

Cattlemen are not “anti-ethanol,” he said, but the association is “anti ethanol subsidy. We don't get subsidies and we don't believe in ethanol subsidies. We also want the blender credit and the tariff eliminated over time.”

Doud said cattlemen were rebuffed before the passage of the energy bill when they asked for concessions in case of a corn shortfall. “We were told no when we asked for an off-ramp in case of short corn crop.”

Livestock feeders can't look to export stocks to tide them over, either. “The United States has 70 percent of the world corn trade,” Doud said. That market amounts to an estimated 92 million metric tons, according to USDA figures.

“We may have to ration corn for livestock,” Doud said. He said corn prices could reach $8 to $10 a bushel.

Those high corn price increases have resulted in declining cow herd numbers. “It's never been this bad before and we can't do this much longer,” Doud said.

Higher prices for fed cattle may result, but Urbanchuk said consumers reach a point at which they will switch to other food items. When meat gets too high, he said, “remember two words ‘peanut butter.’”

Thomas Elam, FarmEcon LLC, said tax credits, renewable fuels mandates and tariffs result in “market interference. Subsidies do not create new economic activity. They redistribute income.”

He said subsidies improve the welfare of those who receive them and “reduce the welfare of everyone else. Losses usually outweigh the gains.”

He said the RFS creates a large price incentive and feedstock demand at an enormous price risk. Tax credits, he said, make biofuels more affordable to blenders and increase demand for those fuels with little regard for market forces.

Tariffs keep “more efficiently-produced ethanol out.”

Elam said corn at $7 to $8 a bushel “is not out of the question. The incentives raise demand and the tax credit adds to the value of ethanol and to the feedstock (corn). With a small corn crop I don't know what will be the upper limit of corn prices. The crop is much smaller than last year. Rationing starts now.”

He said the combination of incentives for ethanol production offer “no net benefits to society.”

Bob Young, chief economist, American Farm Bureau, disagrees. For one thing, he pointed out that ethanol production has created a “lower demand for foreign oil. We're now getting from 6 percent to 7 percent of our gasoline supply from ethanol.”

He admitted that cattle feeders, including those in Texas, are “under negative pressure. But corn prices should not be $2.50 a bushel. The market says it should be $6.50.”

He said production cash costs are close to $3.50 a bushel with increases in fertilizer, fuel and pesticide, among other expenses. He said corn for $3 a bushel “is not happening.”

Young said, based on the BTU value of corn and oil, corn price should be $6.92 per bushel with oil at $100 a barrel. “I have not yet figured out what oil at $130 a barrel will do to us as a country.”

He said beef, pork and poultry prices “probably should be higher.”

He also encourages aggressive energy policies. “It's Farm Bureau policy to invest in every source of energy we can — nuclear, drilling, solar, etc. We want every erg we can get our hands on in the next 15 years.”

Young said Farm Bureau also recommends more investment in agricultural research to stimulate crop yield increases. “We have not made (adequate) investments in public research in the last 20 years.”

Commercial efforts have replaced public research and those “tend to go to corn, soybeans and cotton,” Young said. “Other public research has languished and if we don't invest money in crop yields, we'll get hurt. We've got to make the investment.”

Max Starbuck, director of production, stewardship and livestock for the National Corn Growers Association, said the yield trend is already upward.

He said corn yield potential has risen steadily for 30 years. “Average yield in 2006 was 149 bushels per acre,” he said. “Extending the 30-year trend, we could average 200 bushels per acre by 2030. If we add molecular breeding and biotechnology, we could see 300 bushel averages by 2030.”

He said the annual corn yield contest consistently includes entries that top 300 bushels per acre. “We know we have the genetics.”

He also said contest winners consistently produce top yields with less nitrogen per bushel than the national average.

He's more optimistic than some about the 2008 corn crop potential even though reduced acreage, along with planting delays and ongoing weather problems across much of the Corn Belt, could affect supplies and price. USDA estimates U.S. corn acreage will be 86 million acres, down from more than 93 million last year.

Even with reduced acreage and early planting problems, Starbuck suggests that the 2008 corn crop could be “the second highest on record. Planting was a little behind and some areas have been as wet as they have ever been.”

But early crop ratings were strong, he said. “We still have a good opportunity to produce a good crop and final planted-acreage is still a question.”

TAGS: Corn
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