Supplies tight | U.S. livestock and poultry groups seek price relief
Corn and other grain prices could be heading down if a coalition of 19 U.S. livestock and poultry groups gets its way.
The coalition has submitted a petition to the U.S. Environmental Protection Agency requesting a one-year waiver of the federal ethanol mandate.
The group claims corn supplies will be so tight due to drought that it will force livestock and poultry producers out of business unless there is immediate relief in the form of a waiver.
Ethanol manufacturers are projected to consume about 40 percent of the 2012 U.S. corn crop. More corn is used to make fuel than is being consumed as feed grain.
Ethanol demand is helping bolster corn prices, which have increased by nearly 40 percent since June based on projections for sharply reduced supply. Nearly half of the U.S. corn crop was rated very poor to poor for the week ending July 29.
“Relief from the RFS (Renewable Fuel Standard) is extremely urgent. This very short corn crop will undoubtedly prove to be devastating to the animal agriculture industry, food manufacturers, foodservice providers and consumers,” Michael Welch, past National Chicken Council chair, said in a press release.
J.D. Alexander, president of the National Cattlemen’s Beef Association, accused the federal government of forking over taxpayer dollars to artificially inflate corn prices.
“I find it concerning to the viability of the livestock industry that these mandates are allowed to continue today in the worst drought I have seen in my lifetime,” he said.
“This isn’t rocket science. Implement the law, waive the RFS, let the market work and embrace free market principles.”
The National Corn Growers Association shot back, saying it is premature for the government to be considering a waiver of the RFS.
“With the crop still in the field it is too early to determine this year’s final corn supply. In addition, the ethanol industry now has a significant surplus of ethanol and RFS credits that can greatly offset ethanol’s impact on the corn supply,” said NCGA president Garry Niemeyer.
In its petition, the coalition quotes a study by Iowa State University that concluded waiving the RFS in 2011 would have reduced corn prices by $1.48 per bushel. The coalition said the reduction could jump to over $2.50 per bu. if the average corn yield falls to 135 bu. per acre.
That would provide huge relief to livestock and poultry producers. Feed comprises 60 to 70 percent of the cost of raising a hog to market weight.
The U.S. Department of Agriculture is forecasting a 146 bu. per acre crop, which is 20 bu. per acre lower than its original estimate. The coalition said yields could easily fall another 20 to 30 bu. per acre as the drought deepens.
The U.S. Renewable Fuels Association said the price impact of a waiver would not be of the magnitude suggested by the livestock and poultry industries. It points to another Iowa State University study that found a waiver would only reduce corn prices by an estimated 4.6 percent in 2012-13.
That’s because there are an estimated 2.4 to 2.6 billion excess Renewable Identification Number (RIN) credits in the marketplace. Blenders earned the credits in previous years when they blended more ethanol than they were obligated to under the federal mandate.
They can use those credits in a year like this when corn prices are extremely high to meet their obligations without actually blending any ethanol. The RFA estimates there are enough credits to meet 20 percent of the 2012 renewable fuel requirement.
“The marketplace is the most efficient mechanism to ration demand, not the government and that is already happening,” Bob Dinneen, president of the RFA said in a press release responding to the petition.
He noted that the industry’s consumption of corn last week was the lowest in over two years.
In its petition, the coalition repeatedly stressed the need for “prompt” action by the EPA.
The EPA has issued one waiver determination in 2008, denying a request by the Governor of Texas for a 50 percent waiver of the mandate for one year.
That decision took over three months.
Bruce Babcock, professor of economics at Iowa State University, said it takes time to study the issue and assess the level of harm.
“I don’t see EPA moving real fast on this request,” he said.
“There’s a great deal of uncertainty about just how short of corn we’re going to be. That’s a key factor. I think it’s a little bit premature to do the analysis on a waiver.”
Babcock authored the studies being used by both sides of the debate to bolster their position. He said they’re both right.
There is no doubt that the lower the average corn yield the larger the impact on prices.