Livestock vs. Ethanol: The Scene Is Set for a Showdown

Prairie Gleanings

Let's keep the demand rationing discussions civil. Ag does not need to pit ethanol vs livestock in the mainstream media.

Published on: July 25, 2012
Don’t kid yourself; this corn crop is going to be small.

Just how small is up for debate. A lot of folks are clinging to an average yield estimate in the 140 bushel range. Others, including many Illinois farmers, say this is wishful thinking.

During the Illinois Farm Bureau’s Commodities Conference, University of Illinois economist Darrel Good examined various rationing scenarios for the coming year. With an average yield of 135 bushels, Good notes price will have to ration approximately 11.8 billion bushels of 2012 corn across three primary sectors: ethanol, feed and export. If the average yield comes in at 125 bu, end users will only have 10.9 billion bushels of corn to work with.

With these numbers, stocks will be extremely tight, but doable. If this drought brings the final yield down below 120 bushels, things could get ugly. Unfortunately, price rationing will likely hurt the livestock industry the hardest.

This brings up the inevitable questions regarding slicing at U.S. ethanol mandates to ease the pressure on the livestock industry. In a recent study, Good and U of I economist Scott Irwin calculated how high corn prices would need to go before a typical ethanol plant shut down production. They arrived at $9 per bushel. Good notes an average yield in the 120 bushel range could very well put us there.

Still, many livestock producers will be priced out of the market before ethanol plants. Before groups push for an RFS mandate waiver, Good notes other steps can be taken to hit the quotas. Up to 20% of the mandate can be met with credits from the previous year. Taking this tact, Good thinks the ethanol industry could squeak by with 4 billion bushels of corn.

Livestock feeders are currently looking at wheat and Brazilian corn as alternatives in this market. Today, the Wall Street Journal reported on Smithfield’s decision to source significant corn stocks from Brazil. However, these options won’t last forever, Good notes. Soon, livestock producers will have to turn to high-priced U.S. corn.

This October, about the time things start to cool down outside, expect the RFS debate to heat up. By then, we’ll have a good handle on how big this crop is. With many analysts, Good included, saying prices thus far have not effectively rationed demand, prices could rocket above the $9/bu mark.

I just hope we can have these discussions without scaring U.S. consumers. We don’t need another round of food vs fuel food mongering. With that in mind, keep it classy as this tragedy plays out. It may not always seem like it, but all of ag really is in this together.