Nearly 40% of the nation’s 12.5-billion-bushel corn crop this season will make its way to ethanol production.
What's the biofuel doing to your feed costs?
No matter how Jim Boyle pencils out his feed costs, he can’t find a way to escape the impact of high corn prices on his three Arizona dairies.
Flaked corn to feed his milking string has risen to $280 per ton, up sharply from $180 in 2007. Dried distillers’ grains with solubles (DDGS), which account for about 10% of his herd’s rations, have jumped to $240 per ton, more than double what they were five years ago. Even local barley, which he sometimes substitutes for corn, isn’t a great deal at only $7 to $8 per ton less than flaked corn.
"Corn sets the price of everything," says Boyle, who milks 5,500 cows near Mesa and Casa Grande. "It’s had a massive impact on our feed prices. Before, even when there was a bad corn crop, we could expect the corn price to be $2.50 per bushel."
But those days are long gone, now that corn has hit $7 per bushel. Like many dairy producers, Boyle and California’s Peter de Jong blame their escalating feed costs not just on corn’s upward price leap but more specifically on the influence of corn-based ethanol.
|Peter de Jong has cut his corn purchases by half for the 15,000 cows he milks near Hanford, Calif. (Photo: Catherine Merlo)
"Corn prices have been artificially inflated by ethanol’s subsidies, tariffs and mandates, and the help the government gave to build ethanol plants," says de Jong, whose family business, Hollandia Farms, operates three dairies near Hanford, Calif.
"Our costs are up $2.50 per cwt. this year, and that’s largely due to ethanol," he says.
Hollandia Farms, which milks 15,000 cows, has increased its DDGS amounts from 4 lb. to 7 lb. per cow per day. But the ethanol byproduct isn’t the ideal feed, de Jong says, since DDGS provide no starch and their high sulfur, nitrogen and phosphorus levels limit their use.
While de Jong’s feed costs are up 60%, his fuel, land, water, fertilizer and labor expenses have also risen. "That can all be traced to corn, oil and the weaker dollar," he says.
Nearly 40% of the nation’s 12.5-billion-bushel corn crop this season will make its way to ethanol production, up from just 14% in 2005. Nearly 5 billion bushels of corn will be used to produce about 15 billion gallons of ethanol. Ethanol demand for gasoline use is dramatically boosting competition for the yellow-eared crop, affecting costs for food, livestock feed, land and more.
"There is a cause and effect of high corn prices and feed costs, and it’s coming from ethanol," says Normand St-Pierre, a professor and Extension dairy specialist at The Ohio State University. "Ethanol demand has a significant impact on corn prices and everything else. You cannot yank 40% of the corn production in a country that produces about 40% of the total world corn supply without having a substantial impact on the grain and feed markets."
Dairy feed costs spiked 60% from August 2006—not long after the ethanol boom hit—to December 2010, St-Pierre says. Total feed cost in that four-year span averaged $7.35 per cwt., compared to $4.60 per cwt. from January 2005 to July 2006. (These figures are for lactating cows only.)
|Since 2007, flaked corn (right) has jumped $100 per ton, and dried distillers' grain prices have more than doubled. (Photo: Catherine Merlo)
"The difference is even greater when the additional cost of feeding dry cows and replacement heifers is accounted for," St-Pierre says. "Producers used to say that feed costs represented 35% of their milk checks," he adds. "Now they would be happy if those were even at 50%."
The break-even cost of production for dairies nationwide has risen from $13 per cwt. to $17 per cwt., he adds.
Five years ago, Arizona’s Boyle would have been "terrifically happy" with the milk prices he’s recently received: $17 per cwt. in December; $16.50 per cwt. in January. "Now, we’re not even breaking even," he says. "Ethanol has added $2 per bushel to corn prices."
Ethanol’s impact has radiated beyond corn costs, St-Pierre says. As more land goes into corn production, competition builds for other acreage, driving up prices for soybeans, wheat, alfalfa hay and other forages. Cotton’s dramatic price increase makes it another rival for farm plantings.
"The cost of renting and leasing land has gone up because of that competition," St-Pierre says. "Lease rates have almost doubled in the last five years."
Ten years ago, Ohio farmland was priced at $2,000 to $2,200 an acre, he says. The same land now costs $3,500 an acre.
With corn reserves at their lowest levels in 15 years and demand expected to remain strong, St-Pierre says the nation will be "scraping the bottom of the barrel" for supplies this year.
"We’ll need a record crop to balance supply and demand for corn and soybeans," he says. "The U.S. produces 40% of the world’s corn. If anything goes wrong—rain, drought, heat—brace yourself. We could see $10 corn."
What’s the answer to the ethanol-feed cost problem?
De Jong and Boyle believe that ethanol incentives, which Congress extended in December, favor the nation’s corn growers at the expense of livestock producers. Those incentives include tax credits for blenders; tariffs on ethanol imports from most countries; and the Renewable Fuels Standard, which mandates minimum levels of biofuels use.
"The entire package of subsidies that ethanol and corn growers receive is ridiculous," Boyle says. "You can’t find a more subsidized industry in the U.S. I’m not in favor of subsidies for dairies either. All that needs to be thrown out the window."
Legislative amendments that seek to block the expanded use of E15 (gasoline that uses up to 15% ethanol) and to limit the amount of ethanol incentives have been offered by Republicans, who are looking hard at budget cuts. Whether these amendments pass remains to be seen.
De Jong says more drilling for oil would help lessen the need for fuel alternatives like ethanol.
Ohio State’s St-Pierre believes margin protection is the best cure for dairies for now. "Try to lock in a margin," he advises, "and don’t look at milk as separate from feed."
Unpeeling Ethanol’s Influence
Back in 2009, Scott Brown, associate director of the Food and Agricultural Policy Research Institute (FAPRI), could say with some certainty that eliminating all of ethanol’s biofuels policies would lower corn’s price by 53¢ per bushel.
But calculating ethanol’s role in the price of corn isn’t so clear in 2011. Several changes have occurred to alter Brown’s analysis, starting with corn’s dramatic price jump.
In 2009, he calculated that if corn was at $4.04 per bushel, you could subtract 53¢ per bushel as ethanol’s portion if there were no Renewable Fuels Standard, credits or tariffs.
But today, Brown says an across-the-board assumption based on his 2009 research would not be valid, even with the knowledge that ethanol’s incentives were recently extended and corn has leaped to $7 per bushel.
"Getting rid of the ethanol policies wouldn’t lower corn prices to levels we would have seen before the run-up around 2005 when ethanol became a major corn user," Brown says.
In 2005, corn averaged $2 per bushel and U.S. ethanol production consumed 1.6 billion bushels. In 2011, with corn expected to average $5.32 per bushel for the season, ethanol use will reach 4.9 billion bushels.
"Yes, ethanol has had an effect on corn prices," Brown says. "The biofuels infrastructure would likely be different today had we not had these policies. But energy and demand for corn outside the U.S. are also factors in driving corn prices higher."
In 2005, national corn prices averaged $2 per bushel and the U.S. exported 2.1 billion bushels, Brown says. For the 2010/11 crop year, with a seasonal average of $5.32 per bushel, U.S. corn exports are projected at 1.95 billion bushels. "So we’ve more than doubled corn prices and exports have barely fallen," Brown says. "Something is shifting the demand for exports."
While Japan is the largest customer for U.S. corn, China could emerge as a major U.S. corn buyer as it channels purchases to its rapidly growing livestock sector. Drought in other parts of the world, including Russia and Eastern
Europe, has bolstered grain prices. Moreover, oil prices are key.
"Tell me where crude oil is going," Brown says. "If it gets to $100 per barrel, that’s certainly an incentive to turn more corn into ethanol, regardless of biofuel policy. If you believe crude oil will go lower, then the ethanol policies matter a lot more."
Brown, who has taken heat from people on both sides of the ethanol issue, says pinpointing the biofuel’s true impact on corn prices isn’t easy. "You can’t say that corn prices are where they are because of ethanol," he says. "But you can’t say that ethanol hasn’t had an impact either. The answer lies somewhere in between."
- March 2011