Farm Industry News Blog

Livestock producers wary of E15

Livestock associations have recently voiced their disappointment with the EPA’s recent decision to allow gasoline to be blended with up to 15 percent ethanol (E15) in newer vehicles, saying increased demand for ethanol could drive up corn prices and cut into livestock production profit margins.

 

The National Pork Producers Council (NPPC) recently voiced its disappointment with the EPA’s recent decision to allow gasoline to be blended with up to 15 percent ethanol (E15) for vehicle models newer than 2001. The NPPC says E15 could “put further upward pressure on corn supplies.” This after the USDA’s January 12 report confirmed lower harvest and tighter carryovers. Production for 2010 was lowered 93 billion bushels based on a 152.8 bu per acre average.

 

The livestock industry does not want to see a repeat of 2008/09, when corn prices as high as $8/bu led to significantly higher feed costs. The NPPC reports that during that period, pork producers lost an average of about $24 per head and that the industry lost nearly $6 billion.

 

Randy Spronk, a hog and crop producer from Edgerton, MN, and also chairman of the NPPC’s Environmental Committee, recently said that while the U.S. produced its third largest crop with 12 billion bushels in 2010, global demand has reached 13 billion bushels. “We’re not producing enough for demand and we expect demand to increase,” he said.

 

The three largest markets for corn are livestock feeding, ethanol and exports. With export market issues (such as the outbreak of foot-and- mouth disease in Korea) and mandates for ethanol (through the RFS2), rationing of corn would most likely take place in the domestic livestock market, Spronk said. The kind of volatility that happened in 2008 was partly a result of federal biofuels policies, he said.

 

“We’re not against ethanol,” Spronk said, but added that there has to be some adjustment in corn usage so that the industry can ration accordingly. “We have to be careful that government policies don’t do harm to others.”

 

Kristina Butts, executive director of legislative affairs, National Cattlemen’s Beef Association (NCBA), said that ethanol policies have had a significant impact on the beef industry. “We’re more concerned about the long-term impact. Policies pit two large agriculture groups against each other.”

 

“We don’t support government intervention in the marketplace,” Butts said, adding that when Growth Energy submitted its waiver petition for E15, the NCBA submitted comments to the EPA, including a statement that the beef industry lost $5.2 billion in equity between January 2008 and July 2009, when corn prices spiked and demand for beef had slumped.

 

Butts cited an August 2009 report by the U.S. Government Accountability Office that indicated the Volumetric Ethanol Excise Tax Credit’s (VEETC) annual cost to the Treasury could grow from $4 billion in 2008 to nearly $7 billion in 2015 for conventional corn starch ethanol.  With the RFS2 mandate in place, the ethanol industry doesn’t need tax incentives, Butts said.

 

“The beef industry supports consumer choice, but it’s not right when one industry is favored over another,” Butts said.

 

Corn futures have been running between $6-$7/bu, but could go even higher if bad weather delays spring planting. This kind of volatility is difficult to manage, Spronk says, adding that pork producers cannot just stop feeding their livestock.

 

Darrel Good, agricultural economist, University of Illinois, pointed out that E15 will create new opportunity for more ethanol production, but stressed that it is not a government mandate. EPA’s allowance of up to 15% ethanol in gasoline will make it easier to reach the RFS2 (which is mandated), but how much is actually consumed will depend on basic economics. The 45 cent per gallon VEETC remains attractive for blenders, Good added.

 

Increased feed costs reduce livestock producers’ profit margins, but Good pointed out that recently we have seen high hog prices ($60-$70/cwt) and cattle prices of more than $100 cwt.  Margins will narrow with $6/bu corn, but producers will be more reluctant to further reduce production, Good said.

 

A big factor will be the 2011 corn growing season. With more acres and higher average yield, price will not be as much of a problem. However, if corn acres don’t increase and bad weather creates production problems, then we could see “a blow off top,” Good said.

 

Chris Hurt, agricultural economist, Purdue University, added that the impact of E15 won’t be felt right away (at least for six months) because fuel retailers still need time to educate consumers about what vehicles can use E15.

 

The retail fuel industry is concerned about potential liabilities regarding the “mis-fueling” of vehicles, Hurt said, adding that the “solutions aren’t easy.” Some retailers are waiting to see whether the government will provide liability protection.

 

In addition, many retailers will need to decide whether they want to invest the money for installing separate tanks and pumps, or blender pumps. They won’t invest if they don’t think E15 will be economical for them, Hurt said.

 

Today’s livestock industry would not face the same devastation as it did from high corn prices in 2008 because producers have since cut production dramatically, Hurt said. He added that during the global recession in 2008, people consumed less meat because of big declines in income.

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