Two new studies give credence to industry worries that raising the limits on the amount of ethanol allowed in gasoline, as the Environmental Protection Agency may rule, will result in increases in the price of food commodities, including meat and poultry. The authors of the studies – Bill Lapp, who wrote Implications for U.S. Corn Availability Under a Higher Blending Rate for Ethanol: How Much Corn will be Needed, and Thomas Elam, who wrote Issues with an Ethanol Blend Rate Increase – answered reporters’ questions at a teleconference earlier this week hosted by the American Meat Institute.
AMI spokesman Dave Ray said there was no special timing intended in the announcement this week of the two reports. "We’re not expecting a ruling right away. This is just something that needs to go into the mix," he commented.
Lapp’s study estimates that "unless corn acreage grows significantly," more than half of the U.S. corn crop could be diverted away from food into ethanol production if corn ethanol production grows to 22.1 billion gallons, which could be the total ethanol production if EPA allows ethanol to be used in gasoline at levels up to 15 percent (the current maximum allowed is 10 percent).
"Three existing factors already contribute to far greater ethanol production and use than is now mandated by federal law: a $4 billion-a-year tax credit to gasoline refiners who blend corn ethanol into gasoline, a tariff that limits the importation of sugar ethanol, and the slow development of advanced biofuels," stated Lapp. "As U.S. and global economic conditions improve in the coming years, a fourth driver of increased ethanol production will be an increase in crude oil prices. In combination, these factors will provide powerful incentives for gasoline refiners to increase the amount of corn ethanol blended into gasoline to the highest level possible, more than 22 billion gallons under an E-15 standard. As a result of increased demand for ethanol, corn prices will increase and corn production will expand, displacing other crops, including soybeans and wheat."
The meat and poultry industry is especially sensitive to increases in corn prices because so much livestock feed comes directly from or is made in part from corn. Higher feed prices translate into higher meat and poultry prices at retail and in foodservice – and if the current recessionary economic climate continues into next year, that would likely mean reduced meat and poultry purchases, perhaps even sharply reduced, by consumers.
Responding to a question, Lapp, of Advanced Economic Solutions, an agri-business consultancy, said that even when ethanol byproducts that could be used for livestock feed are taken into account – one bushel of corn used to produce ethanol produces about one-third of a bushel of byproducts for feed – his study’s numbers still detail a dismal picture for livestock and meat production. "The existing mandates have already had a dramatic impact upon numerous markets – corn prices remain 60 percent above historic norms, dramatic acreage shifts have occurred in recent years, livestock producers are incurring the largest losses in at least 25 years, and food inflation during 2008 rose to highest level since 1982," according to the study.
Elam, who is president of FarmEcon LLC, also an economy consultancy, said that already the ethanol industry suffers from over-capacity – according to his study, a total 37 ethanol plants, representing more than 17 percent of total U.S. ethanol production capacity, are idle. "The basic reason is that there is no market demand for 2009 ethanol production beyond the 2009 Renewable Fuel Standard, and the 37 closed plants are not needed to make the 2009 RFS," he noted. "The current FarmEcon forecast of corn supply and demand assumes that the RFS, not the energy market, will determine the 2009/2010 demand for corn for ethanol. The forecast shows that for 2009/2010 increased corn demand for ethanol production will cause further significant increases in corn prices, and thus increased costs of both ethanol and food production. Those cost increases will further erode the economic viability of both the ethanol and food sectors."
He continued: "The fundamental economic issue behind the forecast is simple. While the RFS and blend rates may mandate ethanol production, they do not mandate corn plantings, production or prices. Since the 2005 corn prices have doubled, largely as a result of increased corn demand for ethanol production. As a result the cost of the 2008 crop corn was increased by $2.00 per bushel over the 2005 crop. Based on about 12 billion bushels of total use, that represents a $24 billion annual cost increase borne by corn’s food, ethanol and export users." With corn prices like these, he added, it’s no wonder that both the U.S.’s largest ethanol producer, Verasun, and the largest broiler producer, Pilgrim’s Pride, are in bankruptcy.
Both economic consultants agree, as does AMI, that the solution to the issue is curtailment of government incentives for ethanol production – at the very least, a decision by the EPA not to raise the allowable maximum ethanol content of gasoline to 15 percent. Government ethanol policy since 2007 has resulted "in an ethanol sector that is not economically sustainable, even with large tax credit subsidies, the demand guarantees of the RFS, and a generous tariff on imported ethanol. Increasing the blending ceiling will do nothing to address this fundamental fact, and will likely make the economic situation worse for all corn users, including ethanol producers," Elam concluded.