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Published July 21, 2012, 07:47 AM

Corn v. Cattle: Renewable fuels mandate taking heat during drought

A deepening drought has exposed some old cracks in the relationship between farmers and cattle producers.

By: Denise Ross, The Daily Republic

A deepening drought has exposed some old cracks in the relationship between farmers and cattle producers.

As the divide grows, the federal law underpinning the ethanol boom and its accompanying high land and crop prices is coming under fire.

This week, the Nebraska Cattlemen called on the Environmental Protection Agency to grant a waiver to Renewable Fuels Standard requirements, claiming the drought is driving corn prices too high while cattle prices plummet.

“We’re already starting to see the cattle market being hammered by a corn market that, in our opinion, is responding to drought hinged on a government mandate, rather than responding to a market based on market principles,” Michael Kelsey of the Nebraska Cattlemen told the Lincoln Journal Star.

For years, ethanol has been the source of a rift within agriculture. Cattle producers, who use corn in feed, want lower corn prices. Farmers want and have received higher corn prices, thanks largely to government mandates about the amount of renewable sources — including corn-based ethanol — that must be mixed into the nation’s fuel supply. Those mandates are known as the Renewable Fuels Standard, or RFS.

With a drought stripping pastures of grass this summer, cattle producers will lean more on corn for feed. Drought conditions are also reducing corn production, but a mandated amount of corn must still be converted to ethanol. That leaves a dwindling amount left over to meet the growing demand for cattle feed, which contributes to a surge in corn prices at a time when cattle producers can least afford it. Corn prices are up 25 percent from their level a month ago, while feeder cattle prices are down 12 percent over the same period.

Despite increasing criticism of the RFS and its impact on corn prices, ethanol advocates say they believe the RFS is sturdy and will be around for years to come.

“The RFS is not going away anytime soon,” said Sen. John Thune, R-S.D. “I know it’s got its critics, and I know they’re coming after it.”

Unlike the ethanol blender’s tax credit, which succumbed to political pressure and was done away with at the end of 2011, the RFS does not cost the federal treasury anything.

“The RFS is viewed differently, and we will be on a lot better political ground to defend that,” Thune said.

In 2005, Congress adopted the RFS, credited by its fans as the underpinning of the ethanol-corn-land price ecosystem. In its first year, the RFS required that 4 billion gallons of renewable fuels — primarily ethanol — be used in the nation’s fuel supply. The number of gallons has been set to increase each year, reaching 13.2 billion gallons this year and scheduled to reach 36 billion gallons in 2022 (less than half of that will be allowed from traditional corn ethanol, as a push continues for other sources).

Oil companies, livestock producers and makers of processed foods fought hard against the RFS. This week, a study released by a coalition of the nation’s meat and dairy producers, including the American Meat Institute and the National Cattlemen’s Beef Association, broke down the many disadvantages those groups see in the RFS. The study cites numerous drawbacks, from a distortion of the free market to rising food prices to negative effects on fuel mileage.

Sen. Jim DeMint, R-S.C., has long fought against the RFS, most recently introducing an amendment to the farm bill that would repeal it. His amendment failed on the Senate floor.

The case for the RFS

The case to keep the RFS is strong, said Brian Jennings, executive vice president of the American Coalition for Ethanol, based in Sioux Falls.

“The purpose of the RFS was to reduce foreign oil imports and to create jobs in rural America. It has succeeded beyond anyone’s imagination,” Jennings said. “In 2007, the U.S. dependence on foreign oil stood at 62 percent; in 2011, that dropped to 45 percent.”

Some credit for the drop goes to increased domestic oil production, but ethanol officially gets credit for more than half of it, according to the U.S. Energy Information Administration, Jennings said.

In addition, blending ethanol with gasoline increases octane, which benefits oil companies, others argue. And without ethanol, gas prices would be even higher, he said, as oil would need to fill fuel needs that ethanol now does.

The South Dakota Cattlemen have not talked about joining their Nebraska counterparts in calling for a waiver of the RFS, said Cory Eich, first vice president of the South Dakota Cattlemen’s Association.

“We as the South Dakota Cattlemen support the RFS, although we are not unanimous,” Eich said. “I was surprised that the Nebraska Cattlemen took that stance, being down there in ethanol country.”

Others question just how much the drought is contributing to high corn prices.

“Based on the most recent USDA report, yes they’ve reduced the yield expectation for corn, but that is across a record number of acres. Even with the reduced yield, you’re still looking at a fairly large corn crop,” said Matt Diersen, a professor in agriculture economics at South Dakota State University.

South Dakota Corn Utilization Council President Chad Blindauer, of Mitchell, said both exports and ethanol have driven demand for corn as farmers have worked to meet the need.

“As ethanol has increased, corn production has increased as well. Yes, we are using a lot of corn for ethanol, but we also increased acres and yield to meet that,” Blindauer said. “We have increased exports tremendously as a percentage of our crop. Five years ago, China wasn’t buying any corn.”

Plus, the food vs. fuel argument is not a zero-sum game. SDSU’s Dierson and the Cattlemen’s Eich both note that dried distillers grain — an ethanol byproduct, or “coproduct” — has quickly become used heavily as cattle feed.

“Ethanol takes corn out of its traditional channels, but at the same time, once that corn has been turned into ethanol, you also have that byproduct. It goes right back into the feed supply side of the corn channel,” said Diersen, who believes there is an excess supply of dried distillers grain.

Eich said much of the cattle industry has converted entirely to “distillers.”

“There are some places, I don’t know if they would know what to do if they couldn’t get distillers. I know several feed lots that don’t even put up silage anymore,” Eich said.

Ethanol after RFS?

While opposition to the RFS is steady, it isn’t growing, said the American Coalition for Ethanol’s Jennings.

“This opposition is from the same cast of characters that opposed the RFS from the very beginning,” Jennings said.

While threats to the RFS don’t appear serious right now, experts say an end to the RFS wouldn’t likely equate to an end to ethanol.

“The industry is much more mature and in a much different place than it was 10 years ago,” Thune said. “The ethanol industry today is strong enough. It’s enough of a part of our fuel supply.”

While the RFS can be credited with the building up of the ethanol infrastructure, it might not be necessary to maintain profits, Diersen said.

“Once a plant is up and running and the initial investment has been recouped, then you’ve got a different situation. Then you only need to be profitable at the margin,” Diersen said.

Market forces, such as this summer’s drought, are likely to have more impact on ethanol’s future, some say. As corn prices have gone up, some ethanol plants have scaled back or even idled. Some of that is due to excess supply made during 2011 to use the blender’s tax credit before it expired.

Still, Blindauer said that when high corn prices affect ethanol production, that’s “the free market working as it should.” He believes the long-term economics favor ethanol even without the RFS.

And SDSU’s Dierson said that in a future year with a large corn crop but no drought, the dynamics all change.

“Then you would have very cheap corn and would probably have expanded ethanol production,” he said.