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A decade down the road, the size of
U.S. cattle and beef industries, how they operate, how many they
feed will likely have been determined by 2008, more or less, and
the policies aimed at arming or disarming input costs. Right
now, it’s all about corn, oil and growing demand for them even
as prices continue a rocket-ride upward.
“The mandate by Congress to utilize
a key food ingredient as the dominant input for bio-fuels has
inextricably coupled food to fuel prices, driving up costs for
consumers and affecting the economy, said AMI President and CEO
J. Patrick Boyle in testimony submitted to the House Energy and
Commerce Committee Subcommittee on Energy and Air Quality in
May. “Valuing food for its energy content instead of nutrition
is adding unnecessary inflationary pressure on the U.S.
economy.”
In addressing a June gathering of
the Senate Energy and Natural Resources Committee, Andy Groseta,
an Arizona cattle producer and president of the National
Cattlemen’s Beef Association (NCBA) explained, “NCBA feels that
it is time to level the playing field and allow market forces
rather than government intervention to guide the production and
use of ethanol.”
Though more than the Renewable
Fuels Policy (RFA) is contributing to tight supply and high
prices for feed grains, NCBA emphasized at the time that more
than 25% of the 2007 corn crop was required to meet ethanol
production mandates. Between fewer corn acres this year, and the
ravages of weather so far, the percentage of the 2008 corn crop
required for ethanol grows dramatically.
“Cattlemen are now looking
straight down the barrel of $7 corn, and that may just be the
beginning,” said Gregg Doud, NCBA chief economist. “We already
saw a lot of acres migrating away from corn this year, and that
was before the wet spring pushed into June. By the time
conditions improve in many of these fields, planting corn will
no longer be an option.”
Groseta summed up, “Many cattle feeders are currently losing
about $150 per animal. With 525,000 head of steers and heifers
going to market each week, that amounts to an average weekly
industry loss of approximately $79 million. These losses will be
passed on to the foundation of our industry, the cow/calf
producer. For every $1 per bushel increase in the price of
corn, a cattle feeder must pay $22 per hundred-weight less for a
550 lb. feeder steer…
“Cattle producers have always
depended on the free market to drive their business, and as long
as cattle producers have the ability to compete on a level
playing field with the ethanol industry for each bushel of corn,
the U.S. beef industry can and will remain competitive.”
Tipping Point Out There, Somewhere
Groseta and Doud made their comments the same week that
historic Midwest flooding had some of the nation’s most
productive corn ground under water. Just ahead of the flooding,
the World Agricultural Supply and Demand Estimates had already
trimmed 5 bushels per acre from this year’s estimated crop
because of later planting and slow plant emergence conditions
related to abnormally wet and cool weather in the Corn Belt. All
futures contracts for corn through September of 2009 were
trading for more than $7 per bushel.
At the time, analysts with the
Agricultural Marketing Service explained, “Insurmountable
pressure from the relentless surge in corn prices has finally
broken the feeder cattle market rally, even though available
numbers are tight and expected to become progressively more
scarce. Spiking oil and corn prices have crippled the economy
and crushed consumer confidence, while fear has set in as we
have no way of knowing how high prices can go as market
indicators show no signs of grain/fuel prices weakening.”
Painting with a broader brush, a
Spring report from the USDA Economic Research Service (ERS)
concluded: “World market prices for major food commodities such
as grains and vegetable oils have risen sharply to historic
highs of more than 60 percent above levels just 2 years ago.
Many factors have contributed to the run-up in food commodity
prices. Some factors reflect trends of slower growth in
production and more rapid growth in demand that have contributed
to a tightening of world balances of grains and oilseeds over
the last decade. Recent factors that have further tightened
world markets include increased global demand for bio-fuels
feed-stocks and adverse weather conditions in 2006 and 2007 in
some major grain and oilseed-producing areas. Other factors that
have added to global food commodity price inflation include the
declining value of the U.S. dollar, rising energy prices,
increasing agricultural costs of production, growing foreign
exchange holdings by major food-importing countries, and
policies adopted recently by some exporting and importing
countries to mitigate their own food price inflation.”
Do Good versus Feel Good
“We need to assess the corn-based ethanol mandate and its
unintended effects on food prices for American consumers,” said
Senator Kay Bailey Hutchison (R-TX) in April. “When we passed
the ethanol mandate, the EPA was given the authority to waive
the mandate or make necessary adjustments to prevent collateral
damage. With the price of everyday meat, chicken, bread, and
eggs rapidly increasing, we are asking the EPA to use the
flexibility that Congress gave them because so many families
cannot afford the increasing prices at the grocery store.”
Hutchison, Chairman of the
Republican Policy Committee, and Senator John McCain (R-AZ),
sent a letter (also signed by 22 other Senators) to
Environmental Protection Agency (EPA) Administrator Stephen
Johnson about the status of regulations for states applying for
an ethanol mandate waiver and urged that EPA take into
consideration food inflation concerns.
“Every time hardworking American families buy groceries, they
feel the financial sting of misguided federal policies mandating
that taxpayers support ethanol,” said McCain. “It isn’t a
surprise that food prices are rising when more than 25 percent
of the corn grown today is taken out of the food supply and
instead used for subsidized ethanol production. This subsidized
program - paid for with taxpayer dollars - has contributed to
pain at the cash register, at the dining room table, and a
devastating food crisis throughout the world. We need to put an
end to flawed government policies that distort the markets,
raise food prices artificially, and pit producers against
consumers. We must call on the EPA to exercise its authority to
not exacerbate this already bad situation.”
A week earlier, Texas Governor
Rick Perry asked the federal government for a 50% waiver from
the federal renewable fuel standard (RFS) mandate for ethanol
produced from grain. He pointed out corn prices rose 138%
percent globally over the last three years and global food
prices increased 83% percent over the same time period. With the
implementation of the new RFS mandate, some estimates predict
corn prices will rise to $8.00/bushel for the 2008 crop.
For perspective, the Energy
Independence and Security Act of 2007 increased the ethanol
mandate to 15 billion gallons of corn and 1 billion gallons of
bio-diesel by 2015 and 36 billion gallons by 2022. Congress gave
the EPA the authority to waive the mandates or structure them
differently if the mandate resulted in adverse unintended
effects.
“We appreciate the good
intentions behind the push for renewable fuels. In fact we’re
diversifying our state’s energy portfolio at a rapid rate, but
this misguided mandate is significantly affecting Texans’ family
food bill,” said Perry. “There are multiple factors contributing
to our skyrocketing grocery prices, but a waiver of RFS levels
is the best, quickest way to reduce those costs before permanent
damage is done.”
Hutchison pointed out that
according to the World Agricultural Supply and Demand report,
U.S. wheat stocks are at 60 year lows and soybean stocks at
their lowest levels since 2003. Corn ending stocks relative to
expected use, even with last year’s record crop, are below the
established 25 year average. Since February 2006, the price of
corn, wheat and soybeans has increased by more than 200%. In
2007 ethanol production reached 6.5 billion gallons and the
federal mandate for production this year is nine billion
gallons.
Groseta urged the Senate Energy
and Natural Resources Committee to carefully weigh current
market conditions as they debated several legislative proposals
introduced to freeze or reduce ethanol production mandates, and
to reduce or eliminate incentives that divert feed grains toward
ethanol production.
In his comments to the House
Energy and Commerce Committee Subcommittee on Energy and Air
Quality, Boyle said that the goal of energy security is
commendable and should be considered in relative context to risk
posed to domestic and international food security.
“Congressional and Administration leaders should develop and
implement a plan to decouple the increasing price correlation of
food from fuel,” said Boyle. He noted that, in 2007, livestock
and poultry producers saw their feed prices rise by more than
65% and were anticipating an equally difficult environment for
2008. “Food to fuel mandates and subsidies have had a profound
impact on the meat and poultry industry and its ability to
source affordable feed,” he added.
Boyle pointed out that the Energy
Independence and Security Act of 2007 (EISA), its predecessor —
the Energy Policy Act of 2005 (EPAC), and existing bio-fuel
subsidies and trade protections have concentrated the adverse
impacts on animal agriculture producers and consumers’ food
budgets. “When the EPAC was signed, food inflation was
coincidently at its ten-year average of 2.3 percent. In January
2008, the CPI food index was 4.9 percent, which is more than
twice the ten-year average. Food inflation creates a drag on
the economy and reduces the purchasing power of consumers,”
Boyle noted. He pointed out that the consequences of this
added inflation contributes to an increased food bill of nearly
$200 for a household of four.
Answers to these key questions
and their role in directing the expansion or contraction of the
beef industry are what we’ll be talking about in the 2018
retrospective. |
