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The Ethanol Boondoggle

The U.S. ethanol industry has reached another dubious milestone, with USDA forecasting that for the first time, more of the U.S. corn crop will go to ethanol production than to livestock feed. A startling 40 per cent of this year’s crop will go to ethanol, compared to just six per cent 11 years ago.

Even more incredulous is the way in which the ethanol industry has grown. Long supported by farm state members of Congress, the industry has received more than $30 billion in federal aid. Still in existence but possibly soon to disappear are a $0.45-per-gallon blenders’ subsidy and a $0.54-per-gallon tax on imports.

As indefensible as this support is, that’s been nothing compared to the two energy bills passed under the Bush administration that mandated that at least 10 per cent of all gasoline include biofuels. As ethanol is the only commercially produced such fuel, this gave ethanol a guaranteed market, as well as getting about $6 billion annually of free federal handouts at the same time. Ethanol used only 20 per cent of the corn crop until the federal mandates took effect.

U.S. livestock producers can only dream about getting this kind of support. Yet the opposite effect has occurred. Ethanol’s corn use has more than trebled the price of corn in the past six years. Cash corn prices in mid-July were 80 per cent to 90 per cent higher than at the same time last year. Futures prices were edging towards $7 per bushel and there’s little likelihood they will decline. The converse might be true if China keeps buying such huge quantities of U.S. corn. And what if there are problems with the crop later this summer and into the fall? What if USDA over estimated the amount of planted acres and didn’t sufficiently take into account the acres that were flooded or affected by extreme drought?

Ethanol supporters until this year did a brilliant job in convincing politicians that their industry needed to keep being supported and that ethanol’s corn use had little to do with rising food prices. Washington has finally wised up to the first claim and bipartisan legislation looks like it will be eliminating the blenders’ credit (possibly on July 31). The corn use-food price link is also gaining more attention nationally and globally. More and more groups say that people around the world are going hungry because of misguided ethanol policies. But there are still some, including one prominent U.S. agricultural research company, that claim that ethanol has little to do with rising food prices.

Debates over such claims, however, miss the fact that higher corn prices are one of the main reasons why U.S. livestock producers have not expanded their herds the past two years. It is the main reason why poultry processors lost hundreds of millions of dollars two years ago and why most are struggling again to make money. The chicken guys are even more dependent on corn than pork producers. Companies like Tyson Foods regularly state how higher corn prices have added $500 million or more to their annual feed bills.

Other factors have caused cattle producers to keep reducing their herds, notably severe to extreme drought this year from Texas to Florida. But high corn prices are impacting cattle feeders’ ability to make money, as feeder cattle prices have remained extremely high because of shrinking overall supplies.

The shrinking cattle herd, static hog numbers and more meat exports all mean less beef and pork on the domestic market on a per capita basis. Retail meat and poultry prices are currently up 8.5 per cent on this time last year and ethanol policies have been at least partly responsible.

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A startling 40 per cent of this year’s U.S. corn crop will go to ethanol, compared to just six per cent 11 years ago

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A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly.

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