The amount of corn consumed by the ethanol industry combined with continued demand from overseas has cattle and hog farmers worried that if corn production drops because of drought or another natural disaster, the cost of feed could skyrocket, leaving them little choice but to reduce the size of their herds. A smaller supply could, in turn, mean higher meat prices and less selection at the grocery store.The talk about rationing (by something other than price) is at this time just talk, and three years ago there was similar talk. Complete with, not surprisingly, bad economics.
The ethanol industry argues such scenarios are unlikely, but farmers have the backing of food manufacturers who also fear that a federal mandate to increase production of ethanol will protect that industry from any kind of rationing amid a corn shortage.
The subject of debate is the Renewable Fuel Standard, a 2005 law requiring the nation to produce 7.5 billion gallons of renewable fuel by 2012. The standard was changed in 2007 to gradually increase the requirement to 36 billion gallons by 2022.
While a $5-billion-a-year federal ethanol subsidy is scheduled to expire this year, the production requirement will remain.
That has other corn consumers worried that if production falls and rationing is needed, ethanol companies will be exempt. The U.S. Department of Agriculture recently reduced its estimate of this year’s corn crop because of flooding in the Midwest and drought in the southern plains, and corn reserves are expected to fall to a 20-day supply next year. A 30-day supply is considered healthy.
Cattle feedlot operators are becoming less tolerant of record corn prices, and some feedlots are on the brink of putting themselves up for sale or going out of business, speakers said.Inelastic demand for an input is derived from inelastic demand for the finished product. That ought to give the cow-calf producers (doesn't that phrase just summon the echoes of pink-cheeked kids working on their 4-H projects) some bargaining power as buyers bid up the price. Or is Mr Doud worried about McDonald's taking advantage of the situation to extract some quasi-monopsonistic rents?
Gregg Doud, chief economist with the National Cattlemen’s Beef Association, explained in economic terms this is the result of an “inelastic demand function” where there’s no replacement for a good or commodity.
For the livestock industry, that commodity is corn.
“The producer picks up the tab,” he said. “The feedlot folks right now – their red ink will flow at some point into the laps of the cow-calf producers.”
Corn futures continue a big rally on the Chicago Board of Trade at more than $6.50 a bushel, heightened by excessive rainfall in the U.S. Corn Belt. By comparison, corn was trading at just over $4 a bushel a year ago.
There’s even concern there could be rationing of corn supplies for livestock if prices continue to escalate, Doud said.
“Can you imagine what will happen to the livestock industry?” he said, noting it would be the death blow.
Those ethanol subsidies, however, are having the effect any intermediate price theory student would expect.
Even if there’s no rationing, ethanol manufacturers generally have been better able to cope with high corn prices than livestock farmers because their business has bigger profit margins, said Darrel Good, an agricultural economist at the University of Illinois.I wonder what rent-seeker put that provision into the standards.
Randy Spronk, who raises corn and hogs in Edgerton, Minn., said farmers don’t want to attack the ethanol industry but they want a plan in place if the corn supply should drop significantly.
“We really don’t want to attack ethanol but wise people make plans,” he said.
Matt Hartwig, chief of staff for the Renewable Fuels Association, called the effort to rewrite the fuel standard law “little more than a Trojan horse effort” to weaken or even eliminate it. He said the farmers’ complaints were overblown and most livestock producers and meatpacking companies were making good profits.
Also, the ethanol industry now produces about 1 billion gallons of ethanol more than is required and if corn supplies fall short, it could cut back, he said.
The Environmental Protection Agency, which administers the fuel standard, said in a statement that states can already ask for a waiver “under certain circumstances, including inadequate domestic supply or harm to the economy or environment of a state.”
Texas Gov. Rick Perry did this in 2008, claiming rising corn prices were hurting ranchers in his state. The EPA said it denied the request because the quota for renewable fuel wasn’t causing severe economic harm to the state.So much for Governor Perry being consistent on limiting government's power. Pay close attention, though, dear reader to that "reduce our rate of increase in corn consumption." Doesn't the rightward shift of a demand curve (that's Professor Karlson-speak for what the principles texts call "increase in demand") provide an incentive for the production of additional corn? Ultimately, it's not the best interest of livestock that matters, or the best interest of ethanol producers that matters. It's the attempt of consumers to allocate their claims to goods among food and fuel that determines the use of the corn. Whether the consumers can better achieve that allocation through political means or through their consumption decisions is left to the reader as an exercise.
Meyer said many farmers are skeptical about a process that leaves such decisions to the EPA administrator, who “many in agriculture believe won’t consider the best interest of livestock.”
Good, the University of Illinois farm economist, said meat supplies could tighten if competing demands force corn prices higher. He said it boils down to a simple choice: “We’re going to have to reduce our rate of increase in corn consumption or we’re going to have to produce more corn.”