Jolley: Newest free market battleground might be Iowa cornfield

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Remember that old rule-of-thumb about corn: knee high by the Fourth of July?  In most places, it was scarcely ankle high and too much of it was just plain dead.  USDA kept surveying fields and dropping their crop estimates.  At first, they predicted only a slight decline; with our strong reserves, they hoped, there was nothing to get overly excited about.

When the enormous scope of the dreaded drought of 2012 was finally understood, those corn crop estimates shrank faster than the economy in ’08.  Recent reports say that as much as 90% of all corn and soybean crops are in drought areas and over half of U.S. counties are in drought disaster areas. In many countries, those numbers could lead to massive famine. In this country, the price of corn went sky high, resembling the ascent pattern of an old-fashioned Saturn rocket. 

The price of a bushel of corn had quadrupled in the last decade.  According to the just released August USDA crop report, corn is projected to reach nearly $9.00 per bushel, up sharply from the $5.40 to $6.40 projections in July, a one month jump of somewhere around 50%.

Take a look at the Trading Charts Weekly Commodity Futures Price Chart for corn.

Understanding that corn has two basic uses – food and fuel – the National Pork Producers Council took the lead in petitioning EPA Administrator Lisa Jackson for temporary relief from the Renewable Fuels Standards that consumers more than a third of the crop. NPPC, pressuring her to tilt the table toward food, requested “that you utilize your authority under the federal Renewable Fuels Standard (RFS) to waive the applicable volume of renewable fuel, in whole or in substantial part, for the period of one year pursuant to section 211(o)(7) of the Clean Air Act (“CAA”) (42 U.S.C. § 7545(o)(7)).”  For good measure, the petition was also sent to USDA Secretary Tom Vilsack, Department of Energy Secretary Steven Chu and Director, Office of Information and Regulatory Affairs, Cass Sunstein. 

To understand the financial forces at play here, corn is the biggest single crop produced in the United States.  The USDA estimates that about 70% of our annual crop is used for either animal feed or ethanol, split evenly between those two markets.  We’re talking billions of dollars on the table and some of the most formidable of Washington’s heavy hitters can be expected to pull up a chair and start grabbing at the old money pot.

The warring factions are divided into two groups; NPPC and friends who petitioned for relief and those RFS fans who think things are just find as-is.  On the ‘grant us relief’ side, the NPPC petition was co-signed by these ag industry associations:

  • American Feed Industry Association
  • American Meat Institute
  • American Sheep Industries Association
  • California Dairy Campaign
  • Dairy Producers of New Mexico
  • Dairy Producers of Utah
  • Idaho Dairymen’s Association
  • Milk Producers Council
  • National Cattlemen’s Beef Association
  • National Turkey Federation
  • Nevada State Dairy Commission
  • North American Meat Association
  • Northwest Dairy Association
  • Oregon Dairy Farmers Association
  • Southeast Milk, Inc.
  • United Dairymen of Arizona
  • Washington State Dairy Federation

Their petition was closely related to another strong push for relief when more than 100 members of the U.S. House of Representatives – most of them from Midwestern states that are feeling some considerable pain -  sent a letter to Ms. Jackson urging her to consider RFS relief.  A pair of trade associations serving the ethanol industry immediately fought back.

Renewable Fuels Association (RFA) President and CEO Bob Dinneen scoffed at the very idea of a waiver. “This year’s weather has been more than challenging for farmers and ranchers across the country.  However, waiving the RFS will not make it rain in Indiana, bring pastures to life in the Plains, or meaningfully lower corn prices.”

RFA Vice President of Research and Analysis Geoff Cooper called the USDA’s August estimate, which was a major downgrade from July’s already frightening forecast, ‘no justification for a waiver of the Renewable Fuel Standard.’  A wealth of excess RFS credits will help alleviate the corn shortfall, he says.

Dinneen’s suggestion that freeing up 35% of the corn crop from government mandated production could ‘meaningfully lower corn prices’ seems hard to swallow.  I requested an interview with him twice with the lead question being “Hey, Bill, how do you explain that claim?”  Both requests were ignored.

Going all ‘atta boy’ on Dinneen was Tom Buis, CEO of Growth Energy, who said “The RFS is clearly under attack, it really is a shame the critics are trying to take this drought and turn it around and blame ethanol.”

It really is a shame that both Dinneen and Buis are trying a sleight-of-hand approach to defending their turf.  No one is blaming the drought on ethanol and no one is suggesting the waiver will make it rain in Indiana.  So far prayer, cloud seeding and rain dances haven’t worked, either.

What are those 18 relief-seeking organizations suggesting? Waive the ethanol requirement during this crisis to help mediate the price of corn and make the cost of food production a little more manageable.  They ask for nothing permanent, just some short term relief until the worst drought in half a century abates. 

Not that they’ll get the waiver soon. In a boringly typical Washington legislative (in) action, right after those 100 brave House Reps signed the letter to Jackson, they fled the scene of their latest crimes for their annual five-week summer vacation. 

A denying Dinneen issued a statement that said: "Waiving the RFS won't bring the type of relief the livestock groups are seeking. Because ethanol plants also produce a high protein feed, limiting ethanol production will only further complicate drought related feed issues and costs.”

More to the point, Dinneen stated, “All available market data suggests that the Renewable Fuel Standard is working.  Strong supplies of ethanol in storage and an abundance of RINs combine to make the RFS a workable and achievable program in 2012 and 2013.”

He’ll have to fight Larry Pope, chief executive officer of Smithfield Foods, Inc., over that claim.  The leader of one of the largest buyers of corn for animal feed, he wrote a Wall Street Journal opinion piece (July 27) that quickly dismissed Dinneen’s claims.

"The RFS has diverted so much corn as a questionable substitute for gasoline that in the face of this drought-depleted harvest,” wrote Pope, “(that) major food-producing companies such as Smithfield are being forced to seek alternative markets for grain to meet the demands of their livestock and at more affordable prices.”

Suggesting that the ethanol industry is well-established and should be ready to leave government assistance behind to go truly free market, J.D. Alexander, President of the National Cattlemen's Beef Association, said "It's time to wean the ethanol industry and let it stand on its own."

And that statement, made in today’s clear political trend toward getting everyone and everything off the government dole and making businesses survive on their own merits, might just be the best bottom line to this entire debate.

What’s the downside on the request? Politics, of course.  President Obama, a strong supporter of ethanol, is seeking a second term and has to do battle in some fiercely contested farm belt states where the mandate is very popular.

The opinions expressed in this commentary are solely those of Chuck Jolley, a veteran food industry journalist and commentator.

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usa  |  August, 15, 2012 at 12:25 PM

If the high protein feed produced by ethanol plants is economicaly sustainable, then ethanol has nothing to fear from waiving the RFS.

John Norwood    
West Des Moines Iowa  |  August, 17, 2012 at 08:25 AM

Chuck- Let's inform the discussion, by showing the basic math to reflect what's actually happening to the corn that's being diverted to ethanol. If 35% is going to ethanol, but 2/3 comes out the back end of ethanol plants as DDGs, then we're talking about 12% (.35x.33) actually being converted to fuel vs. being consumed by animals as carbohydrates. Many of my coastal friends and colleagues from private equity to politics to my mother don't understand the fact that ethanol plants actually produce more products than ethanol! Many thanks, John Norwood

Kansas  |  August, 17, 2012 at 09:05 AM

John, Thanks for pointing out something that I might have not been too clear about in my commentary. I might add, though, that the cost of transporting DDG's makes them a prohibitively pricey byproduct for feeders located more than 50-75 miles from an ethanol plant. And to be clear, all the corn that enters an ethanol plant is used for the production of ethanol, most of the residue is DDG's or a similar product. A few feeders I've talked with are concerned that the quality control of those back end products aren't up to snuff - nutritional value tends to fluctuate -so they're hesitant to use them.

John Norwood    
West Des Moines  |  September, 11, 2012 at 10:52 PM

Yes, that's right. DDGs have a high degree of variability in nutrient content depending on the producer and there production process, and we know that oil is being spun out for other uses. So, there will need to be new standards for DDGs and those in the market to sell and purchase. I hear you in response to the value of reducing transportation costs by moving cattle closer to the plants. However, we also know that DDGs are being shipped around the world. DDGs are higher in protein and fat than traditional corn on an equivalent weight basis since the carbos in corn are being converted in ethanol. Feeding DDGs requires nutritionists to be on top of livestock diets. Too much of DDGs can be a problem akin to kids eating too much fast food.

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