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Betting on the ethanol wager

When it comes to ethanol, figuring out how it's changing the cattle business and the unimagined ways it likely will continue to change it, I have no answers

When it comes to ethanol, figuring out how it's changing the cattle business and the unimagined ways it likely will continue to change it, I have no answers. I've got lots of questions and wonderments, though.

For instance, what are the odds that ethanol production in this nation is sustainable? The rampant growth of the industry has been predicated upon one basic notion — oil prices will remain high enough to make ethanol production economical. That and the fact the government will continue to subsidize ethanol production in the form of a 51¢/gal. tax credit that goes to the folks producing the product, not the folks producing the corn for the product.

$50 $60 crude oil

Cattle-Fax expects crude oil to trade mostly at $50-$60/barrel this year. With the tax credit, the breakeven purchase price of corn for ethanol production would be worth $3.36-$4.05/bu., according to research by Dermot Hayes at Iowa State University. Take that tax credit away and the breakeven purchase price of corn would be $1.83 to $2.52/bu., based on the same level of crude oil prices.

Remove that tax credit and peg oil prices at the most recent five-year average of $31.84 (basis composite acquisition cost/Energy Information Administration), and you're talking a breakeven purchase price for corn for ethanol production of less than $1.14/bu., based on Hayes' figures.

For that matter, assessing whether the world is in danger of running out of oil is like determining if global warming is a product of man or dumb luck and the epochal forces of nature. Folks choose one side or another and leave little room in between.

As recently as last summer, the folks at the American Petroleum Institute explained there was no shortage of global oil supplies, just a matter of matching refining capacity to oil grades. Furthermore, many industry estimates predict global oil production will plateau in the next 50 years or so. That's based on proven reserves, not new sources and technologies coming on line. Plus, much of the increase in recent global demand has come from countries with no recorded history of political and economic stability over the long haul.

Cynically, you also have to ponder how much market share OPEC countries might be willing to lose before lowering oil prices to the point that ethanol production becomes a horribly expensive alternative.

Unavoidable cattle impacts

No matter where reality ends up, ethanol has already taken a chunk out of beef industry profitability.

Assuming a constant fed-cattle price, Cattle-Fax figures the breakeven purchase price of a 550-lb. steer declines about $12/hundredweight (cwt.) for every 50¢ increase in the bushel price of corn; 750-lb. steers decline $6-$7/cwt.

So far, the odds-on bet is feedlots must combat the higher cost of corn by feeding heavier-weight cattle that have spent more time picking up weight in the stocker pasture. With fewer days on feed, average occupancy rates in the feedlot — a key driver of feedlot economics — declines significantly, says Pete Anderson, Vet Life technical services manager. It's not that there are fewer cattle, but fewer cattle days on feed. That would make cattle heading into the feedyard worth even less.

As it is, Cattle-Fax estimates cash corn prices of $3.50-$4/bu. this year. At $3.50/bu., and assuming a fed-cattle market of $85.50, Cattle-Fax says the breakeven purchase price of a 550-lb. steer would be $103.50; and the breakeven purchase price of a 750-lb. steer would be $95.50.

So, cow-calf producers can remain profitable this year, especially those already earning the most through efficiency. But it does mean margins are getting tighter than they otherwise would.

Best-case scenario, these impacts will be part of the business landscape for at least the next several years. Randy Blach, Cattle-Fax executive vice president, pointed out recently, “In the 1990s, we had a supply bull market in corn. This is a demand bull market. Bull demand markets have a longer tail. We will not fix this in one year or in two years. We'll be in this situation for some period of time.”

Members of the National Cattlemen's Beef Association (NCBA) passed a resolution at their annual meeting recommending that ethanol tax credits be phased out, as well as tariffs on imported ethanol (54¢/gal.). That recommendation goes to a vote of the entire NCBA membership. However that turns out, bending the ear of every political and organizational representative you have in support of that notion could be the most profit-positive thing you do for your operation this year.

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