Corn-based ethanol production isn’t going away anytime soon, according to Ted Schroeder, Kansas State University economist.
Ethanol production and government subsidies are not new phenomena in the United States, but through the 1970s, 1980s and 1990s, ethanol production and corn use for fuel was minimal. That changed in 2002 and 2003, when production started to grow and it’s been increasing ever since.
Demand has fueled that growth, Schroeder says, as fuel prices increased, auto manufacturers stepped up production of E-85 vehicles and states began mandating ethanol to replace other fuel additives. Federal government policy, including the Renewable Fuel Standard set in 2005, mandated ethanol production to double by 2012.
Today, ethanol accounts for about 35 percent of U.S. corn production, and is likely to reach 40 percent next year. One bushel of corn, weighing 56 pounds, produces 2.8 gallons of ethanol and 17 to 18 pounds of distillers’ grains. That means about one-third of the corn used to produce ethanol returns to livestock production.
While ethanol production is often cited as boosting corn prices from about $2 per bushel in 2005 to $6 today, it is not the only factor. Growth in exports and food use, as well as other trends and factors play significant roles. Specific to ethanol production, Schroeder says corn prices for 2010 through 2012 would be $1 to $1.50 per bushel lower if no corn went to ethanol production. But, he adds, prices would not return to $2.
Nevertheless, there are side effects and unintended consequences related to ethanol production, which has significantly impacted sectors such as livestock producers. He point to cow/calf production, where a $1-per-bushel increase in corn prices causes a subsequent increase in alfalfa hay prices of about 15 percent, adding $12 to $15 to the cost of maintaining a cow through the winter.
However, ethanol does reduce the United States’ dependence on foreign fuels, which results in strong political support. Livestock producers might not like it, but their opposition faces stiff resistance in Congress and the public at large, Schroeder notes. Growth in ethanol production will continue as long as it’s profitable.
So what can livestock and poultry producers do about ethanol and its effect on high production costs? “You can fight to change federal policy such as the Renewable Fuel Standard, import tariffs and other subsidies,” he notes, “but results will be limited. Even if we succeeded in changing these policies, the reduction in input prices would be minimal.”
Instead, Schroeder believes producers and the industry need to focus on two strategies to compensate for higher feed costs.
- Continue investing in technology development and adoption as well as more intensive management strategies that improve production efficiency. This strategy requires time, resources and innovation, but is essential.
- Invest in growing markets for U.S. beef, pork and poultry both domestically and internationally. Demand growth is key to increasing revenue. For example, export sales will add about $54 per hog to producers’ paycheck this year.
The U.S. dollar’s value relative to other currencies has been low, making U.S. meat more affordable, depending on the future trend, this may be the time to focus on expanding and establishing a foothold with consumers around the world.