From Corn, to Soybeans, to Livestock Disaster to RFS

July 19, 2012 05:25 AM
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via a special arrangement with Informa Economics, Inc.

TOPICS: How high corn and soybean prices, how low yields? | Farm-state Democrats' amnesia | RFS battle heats up along with weather

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

$10 corn, $20 soybeans? That is NOT a prediction. But I heard one long-time analyst mention the possibility.

Perspective: Everyone is trying to pick how low corn and soybean yields will go, and how high futures prices will surge. Answer: Too soon to tell. Until there is a yield that the market can agree on, and it stays around that level, then we will know the prices it will take to take a sledgehammer to demand – perhaps to get to minimal carryover, which some put at 5 percent of total use for corn, and 4.5 percent for soybeans.

Another topic being discussed: How many million acres to shave off USDA's harvested corn acreage estimate. Based on calls to veteran analysts, there is a wide range of just over 1 million acres, to up to 4 million acres.

Short memories about the 2008 Farm Bill budget game that is now negatively impacting livestock sector. Democratic lawmakers who are using the drought to pressure House GOP leaders to get the farm bill voted on have short memories. Some farm-state Democratic lawmakers are citing the reason that livestock disaster programs have expired and via the new farm bill, they will be retroactively funded. But let's go back to the 2008 Farm Bill to see what that is the case. During the 2008 Farm Bill, Democratic farm bill leaders, who controlled the bill, let three livestock disaster and the Supplemental Revenue Assistance Payments Program (SURE) program expire for the 2012 season in order to meet budget/spending goals. Some of the same Democratic members, and the Obama administration, are now putting pressure on Republican House leaders to get the farm bill completed and include livestock disaster funding – but not SURE funding.

South Korean group asks US to slow corn, soybean biofuels use. South Korea's largest feed buyer is urging the US the consider reducing the use of corn and soybeans in biofuels production amid tight supplies and rising prices. “Purchases from South America and Eastern Europe aren’t a solution and substitution is also not possible as most grain and oilseed prices are surging,” Kim Chi Young, director for purchasing at the Korea Feed Association told Bloomberg News. “The impact on domestic livestock and food industries will come later this year or early next year as we’ve covered most of our corn requirements,” Kim said. “For feed wheat and soybean meal, buyers have covered their needs through November.”

Perspective: This will not happen. Besides, what is the difference between this group and the US livestock sector and others asking for the same thing?

Livestock/Meat Groups Call for Reform of RFS; Groups cite study which said RFS has raised costs without providing lower gas prices. A coalition of livestock and poultry groups is urging Congress to reform the federal Renewable Fuels Standard (RFS), which mandates the amount of ethanol that must be produced annually, citing a study which labels the RFS mandate as a “lose-lose” situation as it has meant higher food prices but not lower prices at the gas pump.

The study (link), conducted by Thomas Elam, Ph.D., president of FarmEcon LLC, an Indiana agricultural and food industry consulting firm, found that federal ethanol policy has increased and destabilized corn, soybean and wheat prices to the detriment of food and fuel producers and consumers, according to a release on the report which was unveiled today by several livestock and meat industry organizations – funded by the American Meat Institute, California Dairy Inc., the Milk Producers Cooperative, the National Cattlemen’s Beef Association, the National Chicken Council, the National Pork Producers Council and the National Turkey Federation.

 “The increases we’ve seen in commodity prices are strongly associated with the RFS mandate,” said Elam. “At the same time, we haven’t seen the promised benefits on oil imports or gasoline prices. This means that while Americans are forced to pay more for food, they’re also not seeing lower prices at the pump; it’s a lose-lose situation.”

As a Senate Biofuels Investment and Renewable Fuels Standard Market Congressional Study Group examines several aspects of the RFS, the study will provide critical facts needed to reform the current standard. Among other results, the study found that because of the RFS:

  • Ethanol, because its energy cost is higher than gasoline and because of its negative effect on fuel mileage, added about $14.5 billion, or 10 cents a gallon, to motorists’ fuel costs in 2011.

  • Increased ethanol production since 2007 has had no effect on gasoline production or oil imports, contrary to supporters’ claims.

  • Corn used for ethanol production rose 300 percent from 2005 to 2011, increasing from 1.6 billion bushels to 5 billion. (Ethanol production now uses more than 40 percent of the U.S. annual corn supply.)

  • Corn now represents about 80 percent of the cost of producing ethanol compared with 40-50 percent before implementation of the mandate.

  • Corn prices jumped to more than $6 a bushel in 2011 from $2 in 2005.

  • The rate of change for the Consumer Price Index for meats, poultry, fish and eggs increased by 79 percent while it decreased by 41 percent for non-food items since the RFS was revised in 2007.

  • Ethanol production costs and ethanol prices have all but eliminated a market for ethanol blends higher than 10 percent.

  • The United States exported 1.2 billion gallons of ethanol in 2011.

In addition to the effects of the RFS, the study pointed out that on an energy basis, ethanol, which has only 67 percent of the net energy per gallon of gasoline, never has been priced competitively with gasoline. It also found that, contrary to supporters of the RFS, oil imports have declined not because of increased ethanol production but because of increased domestic crude oil production and higher gasoline and distillate fuel oil yields.

In urging reform of the RFS, the coalition cited the Elam study’s conclusion that the mandate should be revised to allow automatic adjustments to reduce incentives for ethanol production when corn stocks are forecast to reach critically low levels.

The coalition supports legislation – the “Renewable Fuels Standard Flexibility Act” (HR 3097), sponsored by Reps. Bob Goodlatte (R-Va.) and Jim Costa (D-Calif.) – that would require a biannual review of ending corn stocks relative to their total use. If the ratio falls below 10 percent, the RFS could be reduced by 10 percent. If it falls below 7.5 percent, the mandate could shrink by 15 percent; below 6 percent, it could be reduced by 25 percent; and if the ratio falls below 5 percent, the ethanol mandate could be cut by 50 percent.

Such relief is extremely urgent, the coalition pointed out, because the recent spike in corn prices prompted by drought conditions in much of the Corn Belt has analysts predicting the United States will run short of corn this summer. Another short corn crop would be extremely devastating to the animal agriculture industry, food makers and foodservice providers, as well as consumers, according to the groups.

The groups said that the mandates mean that “corn-based ethanol manufacturers are protected from sharing the burden of a corn harvest shortfall.” 

NCGA Statement on the Drought and the Renewable Fuel Standard. National Corn Growers Association President Garry Niemeyer released the following statement in response to media coverage and Capitol briefings on the drought, food prices and the Renewable Fuel Standard (RFS):

“This is a time when farmers and ranchers are suffering the nation’s worst drought in years, covering nearly two-thirds of our country’s land mass. Like any crisis, it has led to numerous inaccuracies and exaggerations, especially when it comes to the impact on food supply and retail food prices.

“Yesterday at the White House, USDA Secretary Tom Vilsack noted that farmers only receive a fraction – about 14 cents – of every dollar spent on food at the grocery store. Look at corn, for example, which even at its current price is an inexpensive food ingredient. The corn in a box of Corn Flakes only costs about a dime, and there’s just over a quarter’s worth of corn in a pound of beef.

“When it comes to the Renewable Fuel Standard for ethanol and other biofuels, now is not the time for changes. It’s working. The RFS is revitalizing rural America, reducing our dependence on foreign fuel and reducing the cost of gasoline. Making changes to the RFS now would only ensure that consumers suffer due to significantly higher fuel prices.

“And while it is true that our corn crop is suffering, it’s still in the field.  We won’t know the actual size of the 2012 corn crop until months from now. In the meantime, the market is working. All corn users are responding to market signals. Ethanol production and exports are down. In addition, there is currently an ethanol surplus in the United States that will further reduce demand on the 2012 corn crop.

“Given the challenges of the drought and suffering of all farmers, now more than ever, U.S. agriculture needs to pull together.  NCGA will continue to help lead the way in trying to unite, rather than divide, American agriculture.”

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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