A delay that changes nothing?

by MEAT&POULTRY Staff
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The meat industry cheered and the ethanol industry jeered, but an agricultural economist says nothing’s really changed.

The announcement made earlier this week by the Environmental Protection Agency that it would delay a decision whether to allow automobile gasoline to be blended with ethanol up to 15 percent was widely applauded in the meat and poultry industry, which argues that increasing ethanol production will raise corn prices, putting the hurt on producers specifically and on the industry in general. Oppositely, ethanol producers, who have struggled despite strong government support, said the delay will only hurt their industry further.

But Bruce Babcock, a professor of economics at Iowa State University, told MEATPOULTRY.com that the delay doesn’t change the situation much. "Unless the U.S. government changes its mind about the ethanol RFS (Renewable Fuels Standard), this won’t have a big impact on the market," he commented. "The industry will have to adjust."

The good news, he said, is that "the industry has already done some adjusting." When feedgrain prices soared to record highs in 2007 and 2008, meat producers were able to soften the impact because livestock prices were also high, but that only "delayed the day of reckoning," Babcock said. Now the high livestock prices are history, which is why the industry’s advocates are lobbying for a lower ethanol standard, but the Iowa State professor said some companies have already refigured their cost structures based on higher feed prices. "Meat companies are cost-plus operations," he said. "When they base their pricing model on higher feed costs, they won’t get hit so hard when those costs go up, depending on what the government decides."

EPA was supposed to render a decision on "E15" by Dec. 1, but the agency said it needed more time to review data on the affect higher ethanol blends might have on automobile engines. A coalition of meat and poultry trade groups claims that raising the allowable limit of ethanol content in gasoline would result in diverting about half of the U.S. corn crop away from food production into ethanol. "While the RFS and blend rates may mandate ethanol production, they cannot mandate corn plantings, production or the prices," comments submitted by the American Meat Institute last July noted. "Nor can mandates create more total land for farm use. Since 2005, corn prices have increased significantly, and price volatility has quadrupled, largely as a result of increased corn demand for ethanol production and limited land available for corn plantings."

The ethanol industry sees the matter rather differently. EPA’s announcement of a delay was called a disappointment by the Renewable Fuels Association, saying it "threatens to paralyze the continued evolution of America's ethanol industry."

According to EPA, testing should be completed by August of next year, with significant results available by mid-June.

Babcock thinks EPA will probably allow the higher ethanol content, but the smart companies are already prepared for it. Will the resultant higher feed costs cause higher meat prices at retail? "I think it has to," the economist told MEATPOULTRY.com.

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