By Steve Ford
The current drought across the U.S. has resulted in high grain and oilseed prices that will affect both farmers and consumers for at least the next year. USDA estimates food prices will increase 5% as a result of the drought with the most affected foods being animal products.
Livestock producers are short on forage and are faced with extremely high feed prices. In response to this situation, many are calling for the federal government to ease the Renewable Fuels Standards, mandating ethanol content in gasoline. However, it is unclear that such an effort would be good public policy.
Recent analysis by Iowa State University economists suggests that relaxing the RFS would have only modest effects on grain prices, partially because lower corn prices would increase the quantity of corn demanded by ethanol producers. Even now, ethanol producers are self-moderating the corn market; several ethanol plants having closed temporarily because high corn prices have removed any profit potential.
Some are calling for a relaxation of the RFS to help livestock producers, but this would simply transfer some of the pain of the drought from livestock producers to crop producers without providing relief to either group.
Crop producers would receive smaller insurance checks for their losses and lower prices for crops they were able to harvest. Many livestock producers operate mixed crop and livestock operations as well, so lower grain prices would result in a transfer of income from one enterprise to another. Whether these farms would fare better with lower grain prices depends on their relative enterprise mix.
A better option would be to target assistance directly to livestock producers rather than manipulating the entire agricultural sector. This is an important concept because while surviving livestock producers will pay higher feed bills in the short run, they will also see higher animal product prices next spring.
In addition, while reduced use of corn in ethanol production will make more corn available to livestock feeders, it will also reduce distillers’ grains produced as a byproduct of ethanol production. This byproduct is higher in protein, however, and it competes more with the soybean complex which would not be affected as greatly if ethanol production declined. A reduction in distillers grains would then lead to higher soybean prices.
Livestock producers will also need record corn production in 2013 if corn prices are to fall to more normal levels in order to relieve their financial stress. High grain prices now provide incentives to plant corn for next year, but if corn prices fall relative to other crops, corn acres may shift to those crops resulting in higher corn prices next year than might otherwise have occurred.
The bottom line is that we shouldn’t propose significant structural policy changes without fully understanding their impacts. The food/feed/fuel interactions are quite complex.