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Under the Microscope
Thu August 30, 2012
Livestock producers want less corn in your gas
Livestock producers are watching their feed costs rise with corn prices and taking their concerns to Washington D.C. The Environmental Protection Agency is under pressure from livestock groups and some rural lawmakers to curb corn prices and ease livestock producer worries by suspending the federal ethanol mandate.
The Renewable Fuel Standard (RFS) requires that oil refiners mix a certain amount of ethanol with gasoline each year – 13.2 billion gallons in 2012. Governors from Arkansas and North Carolina requested that the EPA suspend that requirement.
Livestock supporters argue that a waiver of the RFS would bring down corn prices. The EPA is reviewing the idea and taking public comments, but it is not entirely clear whether suspending the law would actually work the way livestock producers hope.
According to ag economists, a waiver would at least make a small difference over the next year. Babcock said it would save around 58 cents per bushel. A group from Purdue University estimated anywhere from 44 cents to $1.34.
The issue is largely an effect of the drought hammering much of the Midwest, which has been especially cruel along the Corn Belt states.
This month, the USDA reduced its estimate for the size of the U.S. corn crop down to just under 11 billion bushels. Ten years ago, 11 billion bushels of corn would have been a record. This year, it’s a disaster.
“Even though an 11 billion bushel corn crop is high by historical standards, it sure doesn’t come close to meeting the need of 13 billion bushels that’s out there,” said Bruce Babcock, an ag economist at Iowa State University. “So clearly something has to give.”
Livestock groups like the National Cattlemen’s Beef Association and the National Pork Producers Council have suggested that if something has to give, it should be the ethanol industry.
“If you’re a livestock producer you want as low feed costs as you can get,” Babcock said. “The problem is, the only tool the government has to lower feed costs is a waiver (of the RFS.)”
Culling the herd
At the Beatrice 77 livestock sale barn near Beatrice, Neb., co-manager Dennis Henrichs has been noticing the impact of the drought and corn prices. Auctions are usually held every other week in August. This year, however, cattle producers are downsizing their herds to save money and Henrichs has had a sale every week.
“(The sales) are going to be three to four times larger than last August, and again it goes back to drought,” Henrichs said.
Inside the sale barn, wooden bleachers lead down to a white corral. A small crowd watched a recent sale from the back as a few cattle entered the ring and the auctioneer started his chant.
Deven Scherkinau left his calves at home, but the last of his 90 cows came in to be sold.
“Our pasture’s grazed down to – I mean, there’s just nothing out there,” said Schernikau who grows seed corn and raises cattle near Beaver Crossing, Neb.
The price Scherkinau pays for the corn syrup he mixes into cattle feed has more than doubled.
“We weaned our calves and sold our cows,” Scherkinau said. “What little grass we do have left we’re saving it for them to munch on for a couple months.”
Schernikau said if it rains and prices come down, maybe he can rebuild his herd.
That is the appeal being made by livestock groups. If a waiver would bring down corn prices, maybe more cattle, poultry, dairy and pork producers can hold on until the drought is finally over.
A complex market
U.S. Agriculture Secretary Tom Vilsack is standing by the RFS. Vilsack told the American Coalition for Ethanol at a meeting in Omaha that demand for corn can adjust to the supply.
“When ethanol production is going to use 500 million bushels (of corn) less than they anticipated two months ago, that’s obviously the market responding,” Vilsack said. “If livestock is going to use less, if exports are going to be less, that seems to me like the market is responding.”
Vilsack also said there is flexibility in the design of the RFS. Ethanol companies can scale back and use less corn. Oil companies have enough credits from using excess ethanol in past years to make up the difference.
But flexibility may only go so far. It is possible demand for ethanol would be the same with or without a government mandate. If that is true, Babcock said a waiver would have no impact on corn prices.
Oil companies, Babcock said, have re-worked their refineries to incorporate the use of more ethanol over the last few years. Refining oil to a lower octane and finishing with ethanol saves money. Changing that would take months. Plus, corn growers don’t want a permanent change to the burgeoning ethanol industry.
“The last thing corn growers want is for (oil refiners) to divest themselves of the ability to use ethanol,” Babcock said. “So it’s really going to be interesting to see, if a waiver is granted, the extent to which they back off ethanol. No one except oil companies know that.”
The EPA has until Nov. 13 to judge whether keeping the RFS in place would cause severe economic harm. By then the corn harvest will be over, and it will be more clear what kind of disaster the drought has caused and how flexible the system can be.
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