Dairy Talk: The fume over ethanol

March 1, 2011 11:39 PM

Call me naive. I asked Catherine Merlo, our Western dairy editor, to talk to economists about the impact ethanol is having on corn and feed costs. The math looks pretty simple: Each bushel of corn produces 2.75 gal. of ethanol. The blender’s credit subsidizes ethanol production at 45¢ per gallon. Thus, the ethanol subsidy is $1.25 per bushel.

Bonus Content

FAPRI's ethanol impact report

But when you get economists involved, they point out that higher corn prices will be mitigated by lower demand and will also pull up alternative feed prices. And if livestock producers can’t find cheaper feed sources, they’ll cut back production, lowering demand.

In 2009, the Food and Agricultural Policy Research Institute (FAPRI) estimated that ethanol subsidies added 53¢ per bushel, or 13% on $4 per bushel corn. A similar percentage on today’s $7 corn is a buck a bushel.

But the world has changed since 2009. Ethanol now consumes nearly 40% of the nation’s corn crop—about 5 billion bushels. (In 2009, it consumed roughly one-third.) A recovering global economy, droughts in Russia and China and floods in Australia drive export corn demand, pushing prices up—we just don’t know how much.

What we do know is that far fewer U.S. ethanol plants would have been built without the subsidies. And that dairy operations outside the Midwest are paying the biggest price because they pay cash plus transportation for every bushel they buy.

Government-subsidized grain from the Midwest in the 1980s and ’90s fed the growth of cow numbers in the West. Weaned on cheap corn, Western producers are now feeling the brunt of government ethanol subsidies in reverse. Even in the Midwest, high grain prices are bid into land prices, cash rents and crop inputs. No one is immune.

The dairy industry has been here before. When President Reagan ended automatic, semiannual dairy price support increases, he left a trail of bankruptcies and worse.

What the government gives, the government can take away. Corn growers never learned that. They will. For dairy producers, that day can’t come too soon.

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