It's almost mind-boggling to contemplate that up to 40% of this year's corn crop could be used in ethanol production. The demand for ethanol and its financial incentives are only growing as energy costs hit record price levels.
It's a multiple whammy for cattle producers. Higher fuel, energy, nitrogen costs, etc., dramatically raise the cost of raising feed inputs and hike producers' breakeven levels. The higher prices also stoke ethanol demand, pulling even more corn into ethanol production. And, of course, the higher prices for gasoline and a host of other products lower consumers' disposable income, which impacts beef demand.
Ironically, the cattle industry has enjoyed some extremely strong price levels for both feeder and fed cattle this spring. But instead of tremendous profits, the surprisingly strong demand and price levels have merely allowed producers to only feel a slight negative pull from the higher corn prices.
One economist told me these were the glory days of beef, that we were poised to reap the rewards of rebuilding demand. Instead, we had to use the bonanza to offset the loss of our export markets due to BSE, and the explosion in production costs caused by ethanol.
The incredible strength of the market fundamentals insulated us from the pain we would have experienced in more normal times. It also explains why the protectionist anti-trade movement was able to prosper during this time despite the validation of what the economists have told us all along in regard to the value of exports to our pricing structure.
It explains why the beef industry, while being vocal about its concerns over the impact of the ethanol subsidies, tariffs and quotas, has merely shrugged off the fact that every calf we produce will be worth a minimum of $100 less than it would have been without the government subsidies. The farm bill is moving forward and the momentum is for increasing the bonanza for ethanol, with no thought on how to minimize the long-term negative effects on livestock production.
I know a lot of cattlemen also raise corn, and quite a few have invested heavily in ethanol production. Many have been less than enthusiastic with my negative take on ethanol subsidies. While I salute the corn industry for capitalizing on this political opportunity, my hope is that you capture these billions of dollars and fully benefit from your glory days. Because the tens of billions of dollars the beef industry created through demand growth went to offset export market losses and increased production costs.