Pork and Ethanol Face Off

A longstanding "beef" with pork producers is the competition for corn with ethanol. The causes of the pork producers' painful losses are myriad. Are biofuels really to blame?
By Craig A. Johnson | February 09, 2010
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Chances are if you hear a news report about the H1N1 virus, the first thing you think is "swine flu." That's just one of the many problems the U.S. pork industry is facing, according to the National Pork Producers Council. When an industry is connected by name to a worldwide epidemic, public perceptions are difficult enough to deal with, but for pork producers this was an exclamation point at the end of a litany of difficulties in recent years.

The U.S. pork industry represents a huge chunk of the nation's agricultural output. The NPPC estimates that the pork industry accounts for as many as 550,000 jobs, jobs predominantly located in rural areas. In 2008, the U.S. pork industry produced more than 116 million hogs, providing total gross receipts of $16 billion. Overall, an estimated $21 billion of personal income, from sales of more than $97 billion of gross national product, are supported by the U.S. hog industry. In 2008 alone, the U.S. pork industry provided about 20 billion pounds of protein to consumers.

The economic engine for the rural economy hasn't resulted in profits in pork producers' pockets. In the past two years, U.S. pork producers have lost an average of $23 on each hog marketed. According to the NPPC, "Since September 2007, the industry has lost more than $5.3 billion or more than 66 percent of its equity as of Oct. 14, 2009. Oct. 13 closing Chicago Mercantile Exchange futures prices for lean hogs, corn and soybean meal suggest that producer losses will exceed $30 per head for pigs sold for the remainder of [2009] and will be nearly $40 per head in November [2009]. Based on lower lean hogs futures prices, cash hog prices will be below the cost of production in all but four months through the end of 2010."

A longstanding "beef" with pork producers has been the level of competition for corn, as a feedstock for ethanol and as feed for the swine industry. Ethanol advocates point out that the cost increase to everyday food items, such as corn flakes, is only a few pennies per box, a cost that consumers and producers can easily afford. However, pork producers don't see the argument so simply.

According to Dave Warner, director of communications for the NPPC, "The ethanol industry would argue that [increased corn prices] are just a small percentage of the cost of manufacturing food, related to corn. They don't feel that the rise in ethanol production added that much to food production. However, for pork producers, you can see [the increase in price] directly. Because we feed our pigs corn and soybean meal we can see directly how that cost has gone up."

Whereas retail food companies may be capable of adjusting their prices to offset the effects of price variability in the corn market, hog producers face different, longer-term dilemmas. "Sixty to 70 percent of the cost of raising a pig is feed grain corn and soy meal," Warner says. "If you use more corn for ethanol then you've just increased our cost for production."

To outsiders, a basic economic question would be: why can't pork producers simply raise prices to accommodate the increased cost of production? Warner says while it looks easy, to think the industry could change its prices is a gross oversimplification. "Passing these costs along to the consumer you can't do it if there's not a high demand with a low supply. If supply and demand are in balance then the prices are not going to go up [and] they're not going to go down much either. In fact, producers have received, over the past three years now, pretty much the same price almost the entire time. They've been getting around $125 to $130 a pig, but three years ago it was costing about $100 to raise the hog. Now it's costing $140 and higher to raise that same hog."

The reality for pork producers is that demand for pork products has essentially remained unchanged while costs have increased. Ethanol is not the only factor affecting the cost increases, but it is one that pork producers tend to single out.

Two-Minute Warning?
Re-evaluating ethanol production at this stage in the game is not so much a solution as it is a desperate attempt to stop the clock. In December, the U.S. EPA delayed its decision on a final determination of the E15 fuel waiver until mid-2010. For those opposed to the increaseand pork producers certainly fall into this categorythis served as the two-minute warning, a brief respite before an all-out offensive to change the outcome of the game.

The Renewable Fuel Association's position has been that, while pork producers and ethanol producers are using a shared resource, the two products of their industries need not be mutually exclusive. "Ethanol should be the least of the pork industries worries," says Geoff Cooper, RFA vice president of research and analysis. "[Pork producers] have some significant demand problems related to the swine flu outbreak and the global economic recession. I know things are improving with the lifting of the import ban in China, and we think that's what they should be focused on. If they're concerned about prices and demand, they should be focused on building demand through exports and here domestically."

As Cooper went on to say, "The pork industry is a major user of corn, so in that way they are competing with other end users for access to corn. The flip side of that is the corn industry is producing significantly larger amounts of corn annually and that allows all demands, including the relatively new demands from ethanol, to be satisfied."

Pork producers have a different take. They see both industries competing for a finite resource and are therefore direct competitors. "If they increase ethanol production then they use more corn," Warner says. "If they use more corn that means somebody's got to use less. We either won't export as much or it's going to be cut from livestock, which right now is the biggest user. There's a small percentage that goes into other uses, whether it's industrial uses or for manufacturing, so if you have an increase in demand with an unknown supply that's going to drive up the price."

Everything But the Blame
Pork producers like to say that they squeeze every bit of potential profit out of the process, using everything, including the "squeal." Correspondingly, ethanol producers like to say they use every part of the kernel, including the "pop." All clichs aside, there are areas where these two enormous agricultural interests may have more to gain from one another than they do by enmity.

For the RFA, fighting against the E15 waiver is an example of pork producers taking their eye off the ball. According to Cooper, "We agree the economic impacts of moving to E15 should be analyzed and considered. The fact of the matter is there have been several studies conducted looking at the impact of moving to an E15 blend. All the analyses that have been done suggest that the impact to livestock producers would be negligible."

Cooper points out that a crude comparison of the interests of the two industries, creating "us versus them" paradigms is a misreading of the facts. "If you go back to the spike in commodity prices that we saw in 2008 when corn rose to $7.50 to near $8 a bushel, folks like the NPPC immediately jumped on the bandwagon of well, it's got to be because of ethanol that we're seeing these record high corn prices.' The corn and ethanol industries have been vindicated when you look at the fact that we're producing more ethanol than we were a year ago and we're looking at prices for corn that are not out of line with historical norms. Prices today are lower than they were a year ago and we're producing 15 percent more ethanol than a year ago."

In fact, as the economy slowly improves, pork producers have begun to see a bit of a silver lining in their export markets. "In 2008 we had a tremendous year for exports," Warner says. "Demand outside of the U.S. was up significantly, and that probably kept a lot of producers in business. In 2008 producers were averaging around the high thirties per-head loss. Exports added about $48 to the price they received, so if they hadn't had the exports they probably would have been losing significantly more than $30."

While increases in exports may buoy the industry and keep some pork producers afloat, many are struggling through the market correction punishing almost everyone in every industry. The large 2010 corn crop may settle the debate for now as corn prices have dropped benefiting both pork and ethanol producers. EP

Craig A. Johnson is the contributions editor of Ethanol Producer Magazine. Reach him at cjohnson@bbiinternational.com or (701) 738-4946.