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Surviving In An Ethanol-Driven World

Surviving In An Ethanol-Driven World
Ethanol production is here to stay. How can cow-calf producers cope?

Cattlemen live in a different world now, one driven by a new and different set of factors than were present 10 years ago. Continuing to survive and thrive in this brave new world means change and adjustment as new paradigms come to the fore, according to Ted Schroeder, Kansas State University ag economist.

Take ethanol, for example. Even back in the ’70s, ethanol production was subsidized. But it wasn’t until earlier this decade that the U.S. saw an explosion in ethanol production. What changed?

The answer is demand expansion, driven largely by government mandates. “Demand expansion came from several states that decreed their fleet vehicles were going to run on some sort of ethanol blend. States like California enacted regulations to remove MTBE gas additives and replace it with ethanol blend.” And then the federal government stepped in with the Renewable Fuels Standard that mandated ethanol production and usage, he says.

While many looked to the blender’s credit and import tariffs as the fuel behind the recent rapid expansion of ethanol production, Schroeder says they both had little influence on the ethanol equation.

Back in the ’70s, and up until just a few years ago, ethanol use accounted for roughly 5% of the U.S. corn crop. That changed beginning in 2002 and really became evident in 2003 and 2004. “And therein is where you start to become very directly impacted,” he says.

Why wasn’t a discussion about ethanol production occurring in the ’90s? Schroeder says that’s because 5% of the corn crop really didn’t matter. But, today, 40% of the corn crop goes directly into ethanol production.

Subtract the amount of distillers grains – a byproduct of the ethanol-production process that is fed to cattle – and ethanol production effectively diverts around 28-30% of feed grain usage, he says. “But 28% or 30% is still a large portion of the product going directly into ethanol production.”

Not coincidently, corn prices skyrocketed during this period as well. “And there’s a tendency to say ‘I watched the production growth and I watched the price tend and we went from $2 to $6 (in corn prices). It must because of ethanol expansion.’”

Be careful, Schroeder cautions. “Ethanol expansion has increased corn prices. But it’s not the entire $4, because a whole bunch of other things were happening at the same time.”

While he says it’s difficult to sort all those out, Schroeder’s best estimate is that ethanol demand for corn ratcheted up the price of corn by $1 to $1.50/bu. Other factors at play during this period were global export market growth, a weak U.S. dollar and variations in the size of the crop, among others.

But that $1 to $1.50 is significant, he says. Taking a conservative estimate of a $1/bu. increase, he estimates somewhere around $15 added cost to maintain a cow, based on the increase in hay and forge costs associated with higher corn prices.

Then there’s the higher cost of production in the feedyard because of higher corn prices. “They’re not going to have as strong a demand for your calves when corn is $6 as when it’s $5 or $4,” he says. “A $1 increase in the price of corn, all else constant, with that increased price of forage that goes along with it, probably reduces your revenue about $60/head.”

So what can you do to compensate for that $75/head affect that ethanol has on your ranch? The industry can shrink, he says, which it has done to some extent already. Or it can fight the policy, which it has also done.

But fighting U.S. ethanol policy is likely akin to tilting at windmills. “These policies have been around a long, long time and now they’re centered around energy independence and national security. Those are hard things to sound like you’re against,” Schroeder says.

Instead, Schroeder suggests the industry increase its intensity of investment in technology. “We need to do that anyway. And it’s always going to be something this industry absolutely has to embrace. We cannot compete on a global scale if we don’t continue to do this – invest in technology and develop and discover the new innovations that are going to make our product more affordable, that are going to make our product safer, going to make our product higher quality, and are going to make us more prosperous at the same time.”

However, where he hangs most of his hope is in demand expansion, both here at home and across the globe.

“As we see the economy come out of its slump, we have had demand growth (for beef),” he says. “It’s been pretty modest, but this growth alone has added $10/head to calves.” Given that, he says it’s a very worthwhile investment to figure out how to position (beef) products better and provide them in the form and the types of guarantees and brand labels that today’s consumers want.

Then there are exports. “My calculations say that just since 2009, the growth we’ve seen in exports has added to your pockets about $40/head for a calf. So we have some major growth opportunities in value to offset things like costs associated with ethanol production in this country.”

Schroeder is optimistic that the industry can continue to innovate and capture additional value both domestically and abroad. “And that’s what we’ve got to do. When costs go up, your only options are to shrink the industry or get consumers around the world to want your product more. It’s really as simple as that.”

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