Sunday, July 29, 2012

The ethanol mandate and its consquences

The CEO of Smithfield Foods* penned a column in the Wall Street Journal about how much the ethanol mandate has hurt the production of food. That's right. food. We've had it easy here in America for so long we thought we could take 40% of corn production away from the food chain and think there would be no consequences. Here is a report from the front lines in his words:

"This has been a cruel season for America's agricultural economy. It was partly unavoidable, as our nation's farmers are being devastated by this summer's brutal and worsening drought. The farm economy has withered along with the crops, and the American consumer, once again, will pay for it with higher food prices. ....

But aggravating the problem and adding to the crisis is the U.S. government's Renewable Fuel Standard (RFS), which requires that a certain volume of ethanol (15.2 billion gallons in 2012, mainly derived from corn) be blended into gasoline. This is an arbitrary figure, set irrespective of market supplies, demands or price. It applies to corn that's desperately needed for livestock feed and food for consumers.

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. 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.

To give you some idea of the magnitude of the problem, look at Smithfield. We're the world's largest pork producer. We purchase roughly 128 million bushels of corn and corn equivalents a year from U.S. farmers to feed our 16 million pigs on farms across 12 states. This makes us one of the largest consumers of corn in the country. In addition, we contract with about 2,135 U.S. 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. For the first time in memory, corn is cheaper when it's delivered to the U.S. 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 U.S. farmers.

This is what happens when the corn market, which already has to count on the whims of Mother Nature and is governed by the laws of supply and demand, is victimized by the whims of Washington and the unintended consequences of the diversion of food to fuel.

Ethanol now consumes more corn than animal agriculture does. According to a study recently released by the Center for Global Food Issues, ethanol production currently uses more than 40% of the U.S. annual corn supply, representing a 300% increase from 2005 to 2011. The resulting impact on corn prices is stunning: Per-bushel prices jumped to a record high last week of $8.24 from $2 in 2005, the year the ethanol mandate was put in place.

The U.S. Department of Agriculture also reported that a record-low 26% of the corn crop is rated to be in "good" or "excellent" condition—down 40% from a year ago. And 45% of the corn crop is in "poor" or "very poor" condition. The USDA has declared nearly 1,400 counties in 31 states disaster areas as a result of the drought.

The current corn-price crisis demands that lawmakers and regulators immediately consider how to amend the RFS to help ease the pressure it is placing on the supply of corn for food, and to help reduce the cost to consumers...

Simple solution. End the ethanol mandate. Period.

*Smithfield produces Armour, John Morrell, and other brands.


Ironghost said...

Now all we need is a party that'll stand up to the democrats. Too bad we can't find one in America.

Anonymous said...

The ethanol screw up was 100% on the Republicans.


It is Republicans that won't let the problem get fixed.

Anonymous said...

That's odd, Ironghost...I thought ethanol was a result of the Bush era...huh.

Lumbergh said...

"According to a study recently released by the Center for Global Food Issues, ethanol production currently uses more than 40% of the U.S. annual corn supply, representing a 300% increase from According to a study recently released by the Center for Global Food Issues, ethanol production currently uses more than 40% of the U.S. annual corn supply, representing a 300% increase from 2005 to 2011. The resulting impact on corn prices is stunning: Per-bushel prices jumped to a record high last week of $8.24 from $2 in 2005, the year the ethanol mandate was put in place."

I don't disagree that the ethanol mandate is driving corn prices up, but to point to this year's record crop price and and blame it on ethanol is a fundamental misunderstanding of ag economics. For example, soy bean prices in 2005 ranged from $3.89-$4.30/bushel. They are currently trading just shy of $18/bushel (on their way to $20). 95% of soy is used in food products, so ethanol has nothing to do with the prices.

Anonymous said...

Regardless of the party, it's indicative of how ignorant most of the politicians in DC are. Most are smart enough to get a college degree but stupid enough to agree to substitute food for fuel. It boils down to the farm lobbyist and the greenies getting there way. and as usual we get the shaft.

Anonymous said...

Cast no stones further than Senators (I love Ethanol)Cochran and (Let's subsidize Ethanol) Wicker. They both claim they voted for the subsidy because Mississippi was in line to produce this foul stuff. You can blame both parties for this stupidity. Have you priced catfish lately? Catfish restaurants can't afford the stuff. And wait until chicken prices go up and demand drops and then the farmers go broke and Tyson lays off workers. And enjoy your porkchops today and Lord don't let it come to Jack Daniels having to raise prices.

Kingfish said...

Both parties share the blame here. The mandate began under Bush and got steroids under Obama.

Anonymous said...

I understand the EPA has until November to decide to ease the mandate but since it is an election year they will wait until the election is over.

Anonymous said...

Come on, KF. It's ALL on the Republicans. No "stroids" under Obama. It does no good to try to whitewash the Republicans dirty deeds.

Kingfish said...

So who came up with the increase to 15%?

The EISA was passed in 2007. Who controlled the Congress? Democrats. Only 4 house dems voted against it. The final version passed the House 314-1000 and the Senate 86-8. Now lets see how our guys voted.

Bennie Co-sponsores HR 6. No one else did in the House from MS. Wicker voted against final bill, Pickering naturally voted for it along with Bennie and Gene. Lott and Cochran voted for it.

So yes, there is bi-partisan blame here.

Anonymous said...

Obama wasn't pres in 07

Shadowfax said...

"Wait till Tyson lays off workers"? Say it ain't so. What would that do to the economy? Wait, illegal aliens can't technically draw unemployment insurance. But hold on. Nancy said that's the best way to stimulate the economy....increasing the unemployment insurance rolls. But there's no way Obama would crank out an executive order allowing all these brownies to draw. Is there?

Kingfish said...

You are correct sir. I blame a democrat congress, Republican president, and back home I blame everyone but Roger Wicker.

You want to see a reason why there is a Tea Party and Occupy Movement, this is an example of one.

Anonymous said...

The Republicrats put the Dems in a no win. The Dems had to up the ante.
The Republicrats should never have opened the door...which now neither party can shut.

Shadowfax said...

Listened to a retired general on radio this morning. He's behind the push (that has been voted down in the House) to convert all military fuel to 'alternative energy' at a cost of forty dollars a gallon.

bill said...

Are we running low on oil? Ethanol is good when you mix it with some things, but not gasoline. We can still work toward alternative energy sources without fouling the lawn mower engines of today. No more ethanol in gasoline until it's cheaper to produce and more efficient to run. Use the corn for cornbread.

Anonymous said...

You think the feed cost is gonna hurt the poultry industry, just wait until the electric prices get Kempered.

Col. Reb Sez said...

I think our ethanol policy is great. It makes us a more energy self-sufficient nation. And if we have to import some corn from Brazil one year, that's a lot better than being at the mercy of Saudi Arabia every year.

Are livestock farmers hurting? Sure. But grain farmers are doing great if not hit by the drought. And they will plant more corn next year and prices will drop a bit. But in the end high grain prices are beneficial to America's interests and we shouldn't get derailed because someone is worried about paying a little more for a pork chop.

My local Kroger doesn't carry Smithfield bacon and that's a shame, because they make a great bacon. But I don't care whether their pigs eat grain from Brazil or Iowa. Grain is fungible.

Anonymous said...


High grain prices are beneficial to America's interest?

Please explain that one.

I guess it's the same logic that high gasoline prices are beneficial to America's interest as well.

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