The Bruning Grain and Feed Co. in Bruning, Neb., buys between 6 million and 10 million bushels of corn each year from the farms spread across southeastern Nebraska. But lately, elevator operators have had to search far and wide — and pay more — for corn supplies. That’s because the two, 100-million-gallon ethanol plants that sit within 15 miles of the elevator have begun buying up stocks in and around the surrounding area.
“We’ve missed a lot of sales (to livestock producers) because there is not always enough corn to buy,” says Darreld Domeier, manager of Bruning Grain and Feed. Earlier this spring he had to forgo an order for 100,000 bushels.
Such supply challenges could be cropping up in communities throughout the Corn Belt during the next 18 months, if the ethanol industry’s rapid expansion pace continues. And there is every indication that ethanol growth will not slow anytime soon.
Nationwide — mostly in the Midwest — there are already 114 ethanol plants up and running. Another 80 plants are under construction, according to the Renewable Fuels Association. When all the new plants finally are online, probably during the 2008/2009 crop year, the United States will produce nearly 12 billion gallons of ethanol. That means a lot of corn will be headed for energy production. At 2.75 bushels of corn used for each 1 gallon of ethanol, that’s 4.4 billion bushels.
Former USDA agriculture economist Bill Tierney, now with John Stewart & Associates, predicts U.S. ethanol capacity will exceed 26 billion gallons by the end of 2009, and that it will use about 9.5 billion bushels of corn.
To give some perspective to those numbers, consider that last year the United States produced the third-largest corn crop ever at 10.75 billion bushels. Combined, the livestock and poultry industries consume more than 6 billion bushels of corn annually, with the U.S. pork industry using about 1.1 billion bushels of that total. More than 1.3 billion bushels are processed for food and industrial uses, and about 2 billion bushels are exported. In all, those factors consume 9.2 billion bushels.
Uncertain times ahead
So, is it any wonder that the U.S. pork industry has the jitters about the evolving corn-based ethanol industry?
Certainly, it is expected that the country’s farmers will continue to increase their corn acres. In fact, USDA’s first Prospective Plantings Report revealed that nearly 12 million more acres of corn will be planted this crop year than last, for a total of 90.5 million acres. That marks the largest corn acreage allotment since 1944. Expected corn acres are up in nearly all states.
This corn acreage increase makes pork producers optimistic — and has them praying for good weather. But will there be enough corn in the short term?
In addition to availability, pork producers are concerned about corn’s rising price. A bushel is now going for as much as $4, up from about $2 last summer. Those higher corn prices have pushed soybean prices higher, and therefore soybean meal prices, as acreage has shifted from soybean to corn production. USDA’s early crop report showed a decline in soybean acres for the Corn Belt and Great Plains, as well as fewer expected cotton and rice acres in the Delta Southeast. U.S. farmers plan to plant 67.1 million soybean acres, the lowest since 1996 — a drop of 8.4 million acres or 11 percent from 2006.
The net result is that producer feed costs have risen dramatically, from about $35 per pig last year to about $65 now. In an industry that has seen average margins of $2 to $3 per hog since 1992, that $30-per-head increase is a disaster.
The pork industry will adjust to changing costs and supply challenges created by increased corn demand. High production costs will reduce profitability and, initially, many producers may try to ride it out, hoping that other producers will reduce output. Diversified producers might retire their livestock operations and focus on corn and beans, if prices for those commodities remain high.
Production will eventually fall enough to bring the hog market to a sustainable level. According to Iowa State University’s Center for Agricultural and Rural Development, pork production will likely need to decline in order for the industry to recoup the higher production costs. But this adjustment could take years. CARD also estimates that a 30 percent production cost increase at the farm level will translate into a 7.5 percent price increase at the retail level. That hike also will occur in beef, dairy, egg and broiler prices, leading ultimately to a smaller protein-production industry and food-price inflation.
Just why is the ethanol industry growing by leaps and bounds? The nearly universal call for increased use of renewable fuels is one reason. But the two main factors are high oil prices — the average price of gasoline is $2.62 a gallon, while ethanol is selling for $2.27 — and subsidies. The ethanol industry receives a federal blender’s tax credit of 51 cents per gallon, which is equivalent to $1.40 per bushel of corn, and it’s protected from foreign competition by a 54 cent-per-gallon tariff on imported ethanol. Additionally, the industry benefits from a 10-cent-per-gallon income-tax credit and a host of other state and federal incentives. It is estimated that the total value of subsidies is $2 per bushel of corn. That makes it difficult for pork producers to compete against ethanol for corn.
Pork producers want a level playing field to be able to compete for corn, and that’s why the National Pork Producers Council supports allowing the ethanol blender’s tax credit and the import tariff to expire as of Dec. 31, 2010, and Dec. 31, 2008, respectively.
While the U.S. pork industry supports the development and use of renewable and alternative fuels as a way to reduce America’s dependence on foreign oil (NPPC has called for incentives to digest and capture methane from swine farms and for expansion in the use of biodiesel as renewable fuel sources), there needs to be a balance between the country’s fuel, food and feed needs.
Let’s not jeopardize the nation’s food security and sacrifice the livestock industry for a product that, if it used every bushel of corn produced, would replace only 12 percent of the nation’s oil needs. Instead, let’s strike a balance that benefits all segments of the economy.