Energy Outlook 2009: Over a barrel

by MEAT&POULTRY Staff
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For the first time in more than 20 years, the U.S. Department of Energy’s annual energy outlook for the rest of this year is projecting virtually no growth in U.S. oil consumption, according to a study conducted by the Energy Information Administration, a statistical and analytical agency within the DOE. This flat oil consumption will likely affect the energy costs meat and poultry producers and processors will face in producing their products during the coming year.

In projecting costs, the U.S. Department of Energy cites recently enacted CAFÉ (corporate average fuel economy) standards meant to improve the fuel economy of vehicles, including trucks used by meat and poultry processing companies in their businesses, requirements for increased use of renewable fuels and an assumed rebound in oil prices as the U.S. and world economy begins recovering from the current economic malaise, possibly later this year or in 2010.

According to John Conti of DOE’s Energy Information Administration, increased use of domestically-produced biofuels and rising domestic oil production spurred by higher prices in the first half of 2008, the net import share of oil, including biofuels, has begun a decline from 58 percent of imported oil in 2007 to less than 40 percent in coming years.

At the same time, DOE is projecting an increasing amount of domestic production and consumption of natural gas by American industries, including meat and poultry processing, because of increased availability of resources and higher demand for electric-power generation. And with growing production of natural gas from unconventional onshore resources, the Outer Continental Shelf and Alaska, the net import share of natural gas into the United States is also expected to decline, from 16 percent two years ago to less than 3 percent in coming years.

In terms of oil prices, DOE’s Conti is predicting despite the drop in oil and gasoline prices during the latter part of last year, oil prices will once again rise. This will be due to tighter constraints on access to low-cost oil supplies. The world crude-oil price should average about $60 a barrel this year, but it is going to rise again as the U.S. and global economy rebound – and global demand for oil once again grows more rapidly than oil supply in non-OPEC countries. The Energy Information Administration is predicting that the average price of crude oil will return to $130 a barrel or even higher.

Total consumption of renewable fuels, including ethanol for gasoline blending and biomass-based diesel fuel, is predicted to grow by 3.3 percent per year, according to Conti at the Energy Information Administration. This rapid growth reflects the renewable-fuel standard enacted into federal law a little more than a year ago, which requires transportation fuels to contain a minimum amount of renewable fuels. For example, last year, the law required 9 billion gallons of renewable fuels be blended into gasoline and other transportation fuels.

The U.S. Department of Energy’s short-term outlook for the rest of 2009 indicates the global economic slowdown is projected to be longer and more severe than first thought, leading to further reductions of global energy demand and additional declines in crude oil and other energy prices. The U.S. economic recession is also contributing to lower natural gas wellhead prices. For example, the Henry Hub natural gas spot price is projected to decline from an average of $9.17 for 1,000 cubic feet of natural gas last year to $6.25 per thousand cubic feet this year.

And the U.S. Department of Agriculture just cut its corn-price outlook based on weaker ethanol demand. USDA’s latest World Agricultural Supply and Demand Estimates indicate slower corn demand would result in increasing corn carryover. Corn-price expectations were reduced, and 2009 prices are expected to range from $3.65 to $4.35 a bushel, down from $4.00 to $4.80 forecast two months ago, and contrasting with $4.20 a year ago. USDA has cut back its prediction of corn use for ethanol by 300 million bushels, about 7.5 percent from two months ago. U.S. soybean ending stocks expectations are unchanged. Forecast 2009 soybean prices were lowered 85 cents and are now expected to range from $8.25 to $9.75.

But Dr. Thomas Elam, an agricultural economist, analyst and owner of FarmEcon, a consulting firm based near Indianapolis, is not so sure that the price of oil and other fuels for energy will necessarily remain flat during the coming year. And he also says the current American biofuels policy is a severe cost and drag to the American economy, especially the farm, meat and poultry industries. Elam says ethanol production, spurred on by federal subsidies, is increasing corn demand and causing sharply-higher feeder costs for producers of meat and poultry products.

Elam says despite the largest corn plantings on record and near-record yields, corn prices remain well over their 3-year average. "If oil had remained at $100 per barrel, plus the government ethanol subsidies, ethanol producers could afford huge corn prices. But with the large drop over the past few months, that advantage to ethanol producers has disappeared. Of course, it’s hard to predict what will happen to oil and fuel prices during the rest of 2009, but my feeling is they will increase," Dr. Elam predicts.

The analyst notes that due to the costs of energy projected during the rest of 2009, meat and poultry producers could be looking at extreme volatility in those prices, as well as the price of feed for their animals. If there is an increase in the coming year, he says everyone from turkey and chicken breeders to growers who raise poultry to companies like Tyson, feed yards and everyone up and down the supply chain will be affected.

"And the problem is, when the price of corn for producers goes up 100 percent thanks to ethanol, poultry processors, for example, just can’t raise the prices of their chicken by 20 percent," Dr. Elam says. Where there is a competitive market, he notes, the producers who raise the animals are the only ones who have any margins to work with at all.

High and volatile energy and feed costs for the poultry and meat industry for the rest of this year make conditions extremely uncertain for the balance of 2009, Dr. Elam projects.

This article can also be found in the digital edition of MEAT&POULTRY, January 2009, starting on Page 48. Click here to search that archive.

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