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August 2012 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Ethanol Mandates Need to Be Waived

Aug 24, 2012

For dairy and livestock producers, it's a no-brainer. EPA administrators, however, will be under intense pressure from waiver opponents. But there is middle ground.


There’s been an awful lot of cyber-ink flowing the past couple of weeks over whether the U.S. Environmental Protection Agency (EPA) should waive its Renewable Fuels Standards (RFS) mandates due to the drought-shriveled corn crop.

Last week, EPA issued a statement that it is seeking comments on the waiver.

Mandate proponents, of course, are in full-throat support. And a study by Purdue University ag economists suggests that if corn prices remain in the $8/bu. range and oil jumps to $120/barrel, waiving the mandates won’t matter. Market forces would then incentivize ethanol plants to keep on fermenting the stuff.

But that same study suggests that if oil remains below $100/barrel and the EPA waives the mandates, corn prices could fall modestly—perhaps as much as $1.30/bu. That would be a 16% decrease on $8 corn.

I ran some of these feed prices through a University of Nebraska Extension spreadsheet used to estimate Midwest cost of production and breakeven milk prices. Even then, when corn was $5.25/bu., soybean meal $300/ton and dairy quality hay $150/ton, feed costs were running $11.40/cwt. of milk produced for a herd averaging 20,000 lb./cow. Feed costs dropped to $10.44 if the herd average was 24,000 lb./cow.

If I use the Purdue corn price estimates, feed costs jump 70%. In Purdue’s worst case scenario—severe drought with no RFS waiver—corn prices jump to $8.57/bu. When I plug that in with current soybean meal and hay prices, feed costs per cwt. of milk sold jump to $19.62 for the 20,000 lb./cow herd and $17.74 for the 24,000 lb. cow herd.

If, on the other hand, ethanol blenders carry forward their RFIN credits (ethanol they’ve already blended above and beyond requirements in previous years) and EPA waives the remaining mandates, corn prices could drop back to $6.58/bu. When I plug that number into the spreadsheet, feed costs drop to $17.79/cwt. for the 20,000 lb./cow herd and $16.14/cwt. for 24,000 lb./cow herd. The reason they don’t drop further is that soybean meal and alfalfa prices will likely remain high because of drought shortages.

Dairy and livestock producers see waiver of the mandates as a no-brainer. To them, continuing to mandate ethanol production and blending in the face of the worst drought in 50 years is nonsensical. But EPA administrators will be under intense pressure from the other side not to waiver, so to speak.

The middle ground would be for EPA to waive the “other advanced” RFS mandate, which is 750 million gallons of ethanol in 2013. Sugarcane is included in this category, and could then be credited to the conventional RFS category (and sugarcane ethanol imports would likely increase as well). “The sum of the other advanced mandate plus carry-forward RINS could potentially be about 1.2 billion bushels of corn,” say the Purdue economists. “That represents about 24% of the effective corn mandate which is roughly the size of the projected corn crop shortfall.”

Let’s hope EPA at least takes this middle ground. With $8.57/bu. corn, the breakeven milk price is approaching $27/cwt. for 20,000 lb./cow herds and just over $24/cwt. for 24,000 lb./cow herds. Getting the corn price back down to $6.50/bu. means those break-evens drop to $25 and $22.50, respectively. Even that’s not pretty. But it’s sure less ugly. 

Why the Farm Bill Flounders

Aug 10, 2012

The division in Congress and among dairy interests mirrors the American people. The result is failure to solve problems. This must stop.

Here’s the hard truth: The reason the farm bill has failed to pass is that the U.S. Congress is made up of people like you and me and our cousins in Chicago and New York and Los Angeles.

“Congress is a mirror of the American people,” says Charlie Stenholm, a former 13-term congressman from Texas. “I don’t think this coming election will change anything. The country is divided 50/50.”

He and Barry Flinchbaugh, the renowned ag economist from Kansas State, participated in a “great debate” about ag policy at the Ag Media Summit (AMS) in Albuquerque last week. AMS attracts about 600 agricultural journalists, public relations professionals and aspiring student ag communicators each year to our annual gathering.

The “great debate” between the “Blue Dog” Democrat Stenholm and your father’s brand of moderate Republicanism Flinchbaugh was a highlight of the conference, with a standing-room-only crowd filling a Hyatt meeting room.

Flinchbaugh was no less frank than Stenholm: “The U.S. Congress is doing to the American farmer what it has done to the U.S. economy since 2007. Congress is doing to the farmer what it has done to small businessmen—failing to act to solve our budget and deficit problems.”

The Stenholm/Flinchbaugh debate did not get into the minutiae of dairy policy. But the debate’s main theme—the refusal to compromise—is the dairy debate writ large. A refusal by the National Milk Producers Federation (NMPF) and the International Dairy Foods Association (IDFA) to compromise makes passing the farm bill all that much tougher.

When NMPF originally proposed Foundation for the Future, it had these components: Elimination of dairy price supports and Milk Income Loss Contract payments, Federal Order reform, margin insurance and market stabilization. It also came with this caveat: Eliminate any one of these components, NMPF said, and the package implodes.

And then NMPF did just that. After months of wrangling, NMPF’s own membership could not agree on Federal Order reforms (or make allowances or a replacement for component pricing), so they were dropped from the package.

Federal Order reform was the one carrot that could have enticed processor support. Left with no incentive, IDFA attacked. It unleashed outlandish charges that Federal Order Class I premiums were pricing milk out of the mouths of babes. And that the market stabilization program will curtail dairy exports and kills thousands of American jobs.

Make no mistake. The market stabilization program is a sticking point, not only between producers and processors, but in Congress as well. Speaker of the House John Boehner (R., Ohio) has flatly said it will not stand.

Rep. Bob Goodlatte’s (R., Va.) amendment—which provides margin insurance on 80% of a producer’s yearly production, annual sign-up for supplemental insurance, and no market stabilization program—is a potential grand compromise. It should be considered.

National Milk would get most of what it wants. IDFA wouldn’t get most of what it doesn’t want. And it would remove one more sticking point in getting the farm bill passed. The clock is ticking.

“Congress has 13 working days between now and the Nov. 6 election to pass a Farm Bill,” says Stenholm. “Can you get a bill through the House and through the Senate/House Conference committee in that time?”

Dairy producers and processors need to do their part. The divisiveness has to stop. We are better than this.

 

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