Smithfield CEO calls for cuts to ethanol mandate
KANSAS CITY, Mo. – Larry Pope, chief executive officer of Smithfield Foods, Inc., called for cuts to federal ethanol mandate in an opinion piece that appeared in the Wall Street Journal July 27. His letter came a day after ethanol advocates released a study that claims to show that cuts to the federal mandate wouldn’t reduce corn prices as much as the livestock industry would hope.
In his letter, Pope noted that drought conditions are devastating corn crops, causing prices for the commodity to hit record high levels. But the Renewable Fuels Standard (RFS) has aggravated the problem, he said.
"The RFS has diverted so much corn as a questionable substitute for gasoline that in the face of this drought-depleted harvest, major food-producing companies such as Smithfield are being forced to seek alternative markets for grain to meet the demands of their livestock and at more affordable prices,” Pope wrote. “Ironically, if the ethanol mandate did not exist, even this year's drought-depleted corn crop would have been more than enough to meet the requirements for livestock feed and food production at decent prices."
Smithfield buys roughly 128 million bushels of corn and corn equivalents annually to feed 16 million pigs on farms across 12 states, Pope said. "This makes us one of the largest consumers of corn in the country. In addition, we contract with about 2,135 US hog producers.
“This year, the double whammy of a drought that's ravaging crops and ethanol demand has pushed corn prices to what are now record-high levels of over $8 per bushel, a quadrupling of prices in less than a decade. This has compelled food producers like Smithfield to find ways to control skyrocketing feed costs," Pope wrote. "For the first time in memory, corn is cheaper when it's delivered to the US from abroad than if it's purchased from domestic suppliers.
"Smithfield was forced to take the unfortunate but absolutely necessary step of buying corn from Brazil—spending money that under normal circumstances would have gone to US farmers," he added.
However, an analysis from the Center for Agriculture and Rural Development (CARD) at Iowa State Univ. suggests that calls for the immediate reduction, revision, or repeal of the RFS would not lower corn prices, the Renewable Fuels Association (RFA) said on July 26.
“The desire by livestock groups to see additional flexibility in ethanol mandates may not result in as large a drop in feed costs as hoped,” wrote Iowa State Professor Bruce Babcock, author of the study.
Babcock analyzed 500 different scenarios assuming varying levels of corn yield this year. In his research, Babcock determined that a total waiver of the RFS would reduce corn prices less than 5 percent and cause less than a 5 percent reduction in ethanol production.
Removing the RFS altogether decreases corn prices by only 28 cents per bushel relative to the case where excess blending credits (RINs) are used for compliance. This is equivalent to roughly 3.5 percent of recent corn prices and 4.6 percent of the CARD study’s projected season-average.
“All available market data suggests that the Renewable Fuel Standard is working,” said Bob Dinneen, RFA president and CEO. “Strong supplies of ethanol in storage and an abundance of RINs combine to make the RFS a workable and achievable program in 2012 and 2013.
"Let’s be clear; the weather impacting much of the country is a very real cause for concern," he added. "The ethanol industry, like any other end user of corn, understands this point and the industry has significantly reduced its corn consumption in recent weeks. However, some appear to be trying incite panic rather than objectively review the facts. The final crop is not yet in the bin. There will be corn available this fall and the market will ration its use. The questions will be how much and how will farmers respond during next year’s planting season."