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Published August 03, 2012, 03:52 PM

Petition requests RFS suspension

Livestock and poultry producers formally asked the Obama administration July 30 to suspend the nation’s renewable fuels standard because it is causing “severe economic harm” as corn prices surged to a record.

By: Elizabeth Campbell and Mario Parker, Forum Communications

Livestock and poultry producers formally asked the Obama administration July 30 to suspend the nation’s renewable fuels standard because it is causing “severe economic harm” as corn prices surged to a record.

A coalition including the National Cattlemen’s Beef Association and National Pork Producers Council, sent a petition to the U.S. Environmental Protection Agency asking for a waiver “in whole or in substantial part” to the output requirements under the Renewable Fuels Standard for 12 months.

“An unsustainable situation has been created by the drought combined with the lack of cushion in corn supply due to the tremendous demand from ethanol producers,” says Tom Super, a spokesman for the National Chicken Council, part of the coalition. “We believe that the RFS is causing severe economic harm during this crisis.”

The drought that sent corn prices to a record is devastating meat producers and the demand for grain used to make ethanol is reducing available supplies to make food, the livestock groups says. The current mandate requires refiners to use 13.2 billion gallons of the biofuel this year and 13.8 billion in 2013. It’s “time to wean” the ethanol industry off government mandates, says J.D. Alexander, the president of the National Cattlemen’s Beef Association.

“The higher-priced corn, the higher-priced cost of production and higher cost of eventual products is going to be” passed along “to the consumer,” says Alexander, a Nebraska rancher who says he’s never seen anything like this drought in his 40 years in the business, adding that he’s having trouble finding corn to feed his cattle.

The price of corn, the main ingredient in livestock feed, is up 61 percent since June 15 and reached a record $8.1775 a bushel July 30 in Chicago, as the drought erodes yield prospects for the crop that the government had forecast in June would be a record.

Consumers may buy less meat as prices rise, says John Burkel, the vice chairman of the National Turkey Federation and a Minnesota turkey grower. Stores are less likely to offer cheap turkeys during Thanksgiving this year, he says. While grocers typically advertise turkey at below cost to attract consumers for the entire holiday meal, retailers “can’t possibly continue doing that at these price levels,” he says.

Ethanol industry struggling

Bob Dinneen, the president of the Washington-based Renewable Fuels Association, the largest U.S. ethanol trade group, said in an email that he expects the government to deny the waiver request. “This summer’s hot, dry weather conditions have caused significant challenges for all users of grain,” including ethanol refiners, Dinneen said.

Ethanol producers have responded to higher costs by cutting output 17 percent to 796,000 barrels a day in the week ending July 20 from a record 963,000 on Dec. 30. Poet LLC is the largest U.S. ethanol producer, followed by Archer Daniels Midland, in Decatur, Ill., and Valero Energy Corp.

Todd Schmit, an expert in agribusiness management and marketing and associate professor of economics at Cornell University’s Dyson School of Applied Economics and Management, says soaring corn prices will bring ethanol plant closures.

“Strong increases in corn prices relative to the price of ethanol are resulting in tighter operating margins for corn-based ethanol facilities,” he says. “Based on current market prices, operating margins are at their lowest levels in decades — only a 78-cent return on every dollar of operating costs. In addition, commodity and energy prices are exhibiting increased volatility.” Both have implications for corn-ethanol plant investment and disinvestment decisions, he adds. And with about 40 percent of the U.S. corn crop going to ethanol production, the implications are important to agricultural and energy markets.

“Based on a real options-pricing model using historical data on corn, distillers grains, ethanol prices, and investment and operating costs of corn-based ethanol plants, we would anticipate plant closings to occur when the operating return-to-cost ratio drops below 0.70,” he says. In June, markets indicated a ratio of about 0.78, he adds, and corn prices went up almost $3 per bushel. “If ethanol prices in July hadn’t also strengthened some, margins would be below the exit threshold today. If corn prices continue at their historical highs, a 10 percent reduction in ethanol prices could signal that some ethanol plants will be shuttering their doors.”

Editor’s Note: this article is from Forum Communications, which owns Agweek.