August 02, 2012
The Renewable Fuels Standard, Ethanol, and the U.S. Corn Crop
Published in Senator Grassley
The President and CEO of Smithfield Foods, Larry Pope, took to the opinion pages of the Wall Street Journal again to blame all that ails him on the Renewable Fuels Standard.
Some may recall that he did the same thing back in April of 2010 when commodity prices were rising. At that time, he perpetuated a smear campaign and blamed ethanol in an attempt to deflect blame for rising food prices while boosting Smithfield’s profits. And now he’s at it again.
I may start referring to Mr. Pope as Henny Penny from the children’s folk tale Chicken Little. Every time Smithfield has to pay a little more to America’s corn farmers to feed his hogs, Mr. Pope starts up with the same argument that the sky is falling and it’s all ethanol’s fault.
Mr. Pope’s opinion piece in the Wall Street Journal might lead some to believe that he’s very knowledgeable about the ethanol industry. But there are many areas where he’s not. He continues to perpetuate the myth that ethanol production consumes 40 percent of the U.S. corn crop. Mr. Pope states, “ethanol now consumes more corn than animal agriculture does.”
Everyone with a basic understanding of a livestock farm, a corn kernel or an ethanol plant knows that’s not true. According to USDA, 37 percent of the corn supply is used in producing ethanol. But the value of the corn does not simply vanish when ethanol is produced. One-third of the corn re-enters the market as a high value animal feed called dried distillers grains.
I would imagine that millions of hogs raised by Smithfield every year are fed a diet containing this ethanol co-product. Mr. Pope appears unaware of its existence. When the distillers’ grains are factored in, 43 percent of the corn supply is available for animal feed. Only 28 percent is used for ethanol.
This is the inconvenient truth for ethanol detractors. They prefer to live in a bubble where they believe that ethanol is diverting corn from livestock use. That’s just not the case.
Mr. Pope also proclaims, “Ironically, if the ethanol mandate did not exist, even this year’s drought-depleted corn crop would have been more than enough to meet the requirements for livestock feed and food production at decent prices.”
I’d like to ask Mr. Pope, why do you think that is? Why did farmers plant 96 million acres of corn this year? Why have seed producers spent millions to develop better yielding and drought resistant traits? The answer is simple: Ethanol.
If not for ethanol, farmers wouldn’t have planted 96 million acres of corn this year. Without ethanol, I doubt we’d have seen investment in higher yielding and more drought tolerant corn plants.
I’m sure Mr. Pope is an intelligent man. But he’s woefully uninformed on the issue of what the ethanol industry and the demand for corn has done for the size and genetic improvement of the corn crop.
It’s easy to understand Smithfield’s motive. They benefit from an abundant supply of corn, just not the competing demand for it. What is Smithfield’s primary problem? Again, the answer is simple: cost and profit. They still want to pay $2 for a bushel of corn.
This is an important point that I hope people understand. For nearly 30 years, until about 2005, companies like Smithfield had the luxury of buying corn below the cost of production. Corn prices remained at about $1.50 to $3.00 a bushel for nearly 30 years. Farmers routinely lost money.
The federal government then provided economic support for the farmers. Producers like Smithfield had the best of both worlds. They were able to buy corn below the cost of production, and let the federal government subsidize their business by guaranteeing a cheap supply of corn.
In the view corporate livestock producers, subsidies are just fine if they allow them to buy corn below the cost of production. Anybody could look like a genius with that business model.
Mr. Pope also continues to overstate the impact of corn prices on the consumer. Agriculture Secretary Vilsack recently stated that farmers receive about 14 cents of every dollar spent on food at the grocery store. Of that, about three cents is the value of the corn costs.
A research economist at the USDA recently stated that a 50-percent increase in the price of corn will raise the total grocery shopping bill by about one percent. To put it in perspective, the value of corn in a four-dollar box of corn flakes is about ten cents.
Mr. Pope also exaggerated the impact of ethanol on food prices in 2010, and he’s doing it again today. He’s using the devastating drought to once again undermine our nation’s food, feed and fuel producers. And he’s doing it to make more money.
Repealing the Renewable Fuels standard won’t bolster Smithfield’s profits. Because of the flexibility built into the renewable fuels mandate, a waiver won’t significantly reduce corn prices.
A recent study by Professor Bruce Babcock at Iowa State University found that a complete waiver of the Renewable Fuels Standard might reduce corn prices by only 4.6 percent. The report states, “The desire by livestock groups to see additional flexibility in ethanol mandates may not result in as large a drop in feed costs as hoped.” And, “…the flexibility built into the Renewable Fuels Standard allowing obligated parties to carry over blending credits from previous years significantly lowers the economic impacts of a short crop, because it introduces flexibility into the mandate.”
The drought is enormous in both scale and severity. But we won’t know the true impact until September, when the harvest begins. The latest estimates from USDA indicate an average yield of 146 bushels per acre. That would result in a harvest of 13 billion bushels. This would still be one of the largest corn harvests.
I would suggest that those claiming the sky is falling withhold their call for waiving or repealing the Renewable Fuels Standard. It’s a premature action that will not produce the desired result. And it would increase our dependence on foreign oil and drive up prices at the pump for consumers.