The Impact of Bio-Fuels - Finding a Balance
By Bob Taubert, New Horizon Farms
U.S. pork producers currently face a crisis which is shaping up to be worse than 1998/99. The federal government’s current policy on bio-fuels has created an imbalance in the market which must be corrected to make our industry healthy again.
A number of factors have led to the current situation. Demand for commodities has grown worldwide, particularly in China and India. Impacting the supply side of the grain equation has been severe drought, particularly with respect to Australian wheat over the past couple of growing seasons. Further complicating the picture is that oil prices are at all time highs due largely in part to the near record low value of the U.S. dollar.
Last year, U.S. ethanol capacity was 7.6 billion gallons, requiring 2.5 billion bushels of corn. The government’s current Renewable Fuels Mandate requires 10.5 billion gallons (3.5 billion bushels) by 2009; 12 billion gallons (4 billion bushels) by 2012; and 15 billion gallons (5 billion bushels) by 2015.
Current ethanol capacity is outstripping the mandate. Current capacity has been pegged at 8.4 billion gallons (3.1 billion bushels) and is projected to be at 13.6 billion gallons (5 billon bushels) on an annualized basis by the end of 2009.
This has put increased demand on corn. Projections are that there will be less corn grown this year because rising prices of soybeans and wheat have made it more attractive to move acres away from corn. As of the end of March, corn planting intentions were at 86.0 million acres (down 7.6 million from last year); soybeans 74.8 million acres (up 11.2 million); and wheat 63.8 million acres (up 3.4 million).
Less corn production and higher demand leaves a projected corn carryout of 559 million bushels, down 704 million bushels. The lowest stocks to use ratio we have seen in 35 years. This is pressuring the price of corn upward.
What is the impact to the pork producer? Assuming corn at $5.75/bushel and soybean meal at $325/ton, the total cost of production is $174.20 per head or $87.10/cwt. Even though hog prices have risen dramatically in the past few weeks they are still significantly below industry breakeven point. It has been estimated that the industry has been losing equity at the rate of 4-5% a month.
What makes this current situation potentially worse than 98/99 is the added impact of tighter banking credit due to sub-prime crisis which is limiting funds available for risk management. In addition to losing money, producers are required to invest more capital into inventory as input costs have increased to unprecedented levels.
The current situation is not sustainable. Ethanol subsidies put livestock producers at a competitive disadvantage as relates to corn procurement. Hog prices will not increase on their own just because input costs have risen. The laws of supply and demand will rule and supply will have to be cut to increase price. Some producers will not survive and many jobs will be lost. Agriculture in general will consolidate further.
It’s important to remember that the livestock industry is and always has been corn’s biggest customer. I don’t believe we have ever seen a scenario where an industry’s biggest customer is threatened to such an extent.
Every 40,000 bushels of corn used in a farrow-to-finish operation creates one job; this is just at the farm level and does not include any other supportive upstream or downstream industries. Ethanol creates one job for every 1,000,000 bushels of corn. That’s a ratio of 25 livestock jobs for every 1 ethanol job. Livestock production has an extremely positive effect on rural America and even just one lost job is important.
The livestock industry is being brought to its knees. There is worldwide unrest over high food prices. All governments must re-evaluate their bio-fuel policies. Reasonable requests by the livestock industry and other end users for increasing the availability of grain need to be considered.
The unintended consequences of one’s policies are often difficult to determine on the front end of any decision making process. The ability to adjust one’s position based on market changes that one hadn’t contemplated or were initially otherwise unable to determine is often very difficult to do.
Ultimately, the free market needs to decide if we will use our food for fuel or food. It’s the best way we can achieve the balance that’s required.
Bob Taubert is the Managing Partner of New Horizon Farms, a farrow-to-finish pork production company based in Pipestone, MN. Contact (507) 825-5462 or btaubert@newhorizonfarms.com
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