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Blog: Simplistic argument targets ethanol, again

A recent column provides some insight into anti-ethanol stances by making a connection between beef prices, the cow herd expansion and restaurant profits, with rather breath-taking simplification.
By Susanne Retka Schill | August 15, 2016

I’ve often wondered about the restaurant association’s anti-ethanol stance. The field corn used for ethanol isn’t the sweet corn we eat, but rather a source of animal feed. A recent column in Forbes from contributing writer Thomas Landstreet provides some insight by making a connection between beef prices, the cow herd expansion and restaurant profits, with rather breath-taking simplification.

“This historic herd expansion was predictable for a number of reasons,” he writes. “For the last 50 years, corn prices hovered between $1.80 and $2.30 per bushel. Enter the 800 lb gorilla (government) and as part of the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007, the corn ethanol mandate diverted 40% of the corn crop away from the food supply. A general upward drift in corn prices commenced driving prices up to over $8.00 a bushel. Corn gluten feed is a major cost to raising beef cattle, so cattle farmers were forced to cull their herds early. The 2012 drought didn’t help but contrary to the arguments of ethanol advocates (who are not to be trusted with statistics), droughts come and go. Bad regulatory policy can last a decade or more, as this one has.

“When the policy disruption became absolutely unbearable (and it has to become unbearable for a bureaucrat to change directions), Gina McCarthy, head of the EPA announced in September of 2013 a proposal to freeze the ethanol mandate. Almost overnight, corn prices collapsed to under $4/bushel. Meanwhile, beef prices continued to march higher as it takes years to regenerate the herd. As the spread between corn and beef widened, the incentive to increase the herd intensified.”  To read his complete analysis, read here.

It makes a compelling argument, but it’s far too simplistic. One clue that the writer doesn’t know very much about cattle feeding? He connects the high price of corn gluten feed with the reduction in the cattle herd. Corn gluten feed is a coproduct of corn wet mills—the giant mills run by the big players like ADM, Cargill and Tate and Lyle. (Plus a handful of small, single mill operators.) The primary product is high fructose corn syrup and they are very careful to not disclose how much ethanol actually is produced. The corn ethanol industry that has seen the big expansion in the last decade uses dry mill technology, with ethanol and distillers grains the primary products.

The second clue that the writer doesn’t know a whole lot about agricultural market dynamics, is that he dismisses the run up to $8 corn due to drought as a temporary thing, while bad policy has a decades-long effect. Droughts come and go, true. And the price of corn dropped once production bounced back in the next growing cycle. But, wasn’t the reduction in the cattle herd that resulted in the beef market’s soaring prices due to significant multiyear drought in major parts of cattle country? Cows weren’t culled because of the price of corn gluten feed, but because there wasn’t the grass to feed them. Corn is fed to grow and finish cattle, and yes, the price of corn impacts profitability. The cattle on feed number, though, is part of a much more complex cattle system.

The distillers grains produced at dry ethanol mills has become a big part of that system. You might say ethanol production makes efficient use of the corn kernel converting the starch to make ethanol—about a third by weight. Another third becomes carbon dioxide (with a nice proportion ending up in your soft drinks as carbonation) and a third becomes the feed coproduct, distillers grains. The DGs contain the nutrients of most interest for feeding. Distillers are fed close to a 1:1 replacement for corn to cattle. (The proportion differs by age of the animal, and will differ with other species.) The price of distillers grains has often been a bargain at 60 to 80 percent that of corn, but has gone higher than the price of corn when export demand boosts markets.  

Citing $8 corn, as if that were the stable price of corn, is a tad simplistic, too. Yep, it may have hit $8 on the Chicago Board of Trade during the drought, but for how long? Those kind of market highs are generally speculator driven. The actual buyers of grain to feed or process sit out those highs, waiting for dips in the markets when they can place decent hedges. Farmers would love to get those prices, too, but the local cash bid usually includes a deduction from the CBOT price for transportation that’s called basis. Basis also reflects local demand. The higher the futures prices, the less the local market wants to buy grain and the wider the basis grows, not to mention the discounts get steeper whenever the price goes high. Right now, September and December corn futures are quoting around $3.30. The closest elevator to me in North Dakota has been posting a 65-75 cent basis, so the cash bid is $2.60—only 30 cents higher than that 50-year range quoted by the Forbes contributor. (If only the price of gasoline, tractors, cars and other goods were still as cheap as 25 or 50 years ago.)

Corn farmers are thankful ethanol production has provided a new steady demand. Having an ethanol plant within driving distance of most corn producers has definitely improved the basis for farmers. Ethanol plants run 24-7, year-round, with only a couple of weeks downtime during the year for maintenance. They have a huge appetite for corn, and thus create a new, stable market. By the way, a speaker at the FEW this year pointed out that with the increase in corn yields in recent years, there is more corn used for feed today (including the DGs returned for feeding) than there was before the build-up of the ethanol industry.

Using up the glut of surplus corn is what the farmers who started the first “stills on the hill” were hoping to do back in the 1980s.  I remember the farm crisis of that decade when the number of farm foreclosures is what was skyrocketing. There were tractorcades on Washington trying to shine light on the crisis. Farmers tired of surviving on government programs were looking for solutions to use up the surplus of corn. One suggestion was to burn corn kernels in pellet stoves for heat. Another was to use the millennia-old technology and ferment their own ethanol to power vehicles.

Whenever sectors of the economy cry about ethanol creating more demand for corn and driving up the price of corn, remember, that was the point.

A couple of years ago, I spoke to an ag economist who pointed out that while ethanol gets all the attention, another series of events probably had an even bigger impact on commodity prices – the expansion of the soybean market, particularly soybean exports to China. The economist pointed out that between 2005 and 2012, the expanded demand for corn for ethanol claimed the equivalent of an additional 19 million acres of U.S. corn, while China’s demand for soybeans added 31 million acres worth of U.S. soybeans.

Interesting, isn’t it, that all the attention gets focused on ethanol driving up corn prices? It’s not hard to leap to the conclusion that there are powerful, well-funded interests making sure the attention stays on ethanol. Seemingly knowledgeable writers keeping popping up with well-reasoned columns all the time. But as this one demonstrates, simplistic analyses overlook very complex market dynamics.