Jun 12, 2009
COMMENTS Distorted markets

Last week, the USDA supply demand report for grains suggested that the ethanol industry is estimated to consume another billion bushels, creating more pressure on the market and creating more pressure for cattle prices as well. In a report released last week by the Food Manufacturer Association and the National Turkey Federation, “Implications for U.S. Corn Availability Under a Higher Blending Rate for Ethanol, How Much Corn Will be Needed?” they suggest that increasing the blending rate of ethanol and gasoline to include 15 percent ethanol will pose serious economic problems for the food industry. At current production levels, it would leave the U.S. with a corn shortfall of perhaps 500 million bushels.

Ethanol production has surpassed the mandated levels required under The Energy Independence Security Act of 2007. There are several reasons for these higher production levels: a $4 billion per year tax credit for gasoline refiners who blend corn ethanol into gasoline; a tariff that limits the importation of sugar-based ethanol; the slow development of advanced biofuels such as cellulosic ethanol; and, of course, rising crude oil prices.

The study concludes that corn prices will be much higher and the market more volatile if ethanol usage increases to 17.7 billion gallons for a 12 percent blend rate in gasoline, or 22.1 billion gallons if a 15 percent blend rate is adopted. In order to meet the overall demand, corn acres will have to increase from the 80 million acres we now have to 110 million acres.

The authors of the report said that existing ethanol mandates have already had a dramatic impact upon numerous markets. Corn prices remain 60 percent above historic norms, dramatic acreage shifts have occurred in recent years, livestock producers are incurring the largest losses in at least 25 years, and food inflation during 2008 rose to its highest level since 1982. They also suggest that if corn acres don’t expand with ethanol production, it will account for 56 percent of the current crop production, which would have a dramatic effect on meat production and other corn users.

Currently, roughly half of the corn produced in the U.S. is used for livestock feed and with the developing scenario, livestock producers will be forced to pass along the additional production costs to consumers.

However, we all know it doesn’t necessarily work that way. The meat industry has had a difficult time passing those costs on to consumers, which has put all meat producers into negative margins. Food prices have gone up and will continue to rise with current ethanol policy.

The Congressional Budget Office (CBO) has claimed that increased use of ethanol accounted for about 10-15 percent of the rise in food costs between April 2007 and April 2008. Overall food prices rose 2.5 percent in 2006, another 4 percent in 2007, and 5 percent in 2008, as measured by the Consumer Price Index (CPI). CBO says higher corn prices caused by the expanding ethanol market contributed one-half of 1 percent to eight-tenths of 1 percent to the 5.1 percent rise in food prices as measured by the CPI. They say that overall energy costs had a greater effect on food prices than did the increased production of ethanol.

There’s no doubt that if the U.S. biofuel policy is continued, commodity prices will continue to rise. Expanding the volume of farm ground appears to be a must, but at what cost? To farm an additional 30 million acres requires a huge capitol investment, which may be a little hard to come by at this point in time. This debate will undoubtedly continue. The irony is that the biofuels industry has been growing at a 25 percent rate the past few years and the blending subsidy has a great deal to do with that growth. I don’t understand why an industry with that type of growth rate would even need a subsidy which, at this point, is wreaking havoc on other segments of agriculture such as meat production.

This is another example of government distorting a market. But, I suppose when it comes to corn, the market has been distorted for decades. Despite great debate on the value of ethanol, it is here to stay, and if we are to find any equilibrium between food production and ethanol production, the subsidies and tariffs will have to go in order to level the playing field for corn users. — PETE CROW