Adapting to the ethanol age

Corn-based ethanol production isn’t going away anytime soon, K-State economist Ted Schroeder told attendees at the Range Beef Cow Symposium this week in Mitchell, Nebraska.

Ethanol production and government subsidies are not new phenomena in the United States, but production, and corn use for fuel, was low through the 1970s, ‘80s and ‘90s. Production began picking up in 2002 and 2003, and has grown rapidly since. Demand has fueled that growth, Schroeder says, as fuel prices increased, auto manufacturers stepped up production of E-85 vehicles and states began mandating ethanol to replace other fuel additives. Federal government policy, including the Renewable Fuel Standard set in 2005, mandated doubling of ethanol production by 2012.

Ethanol production today accounts for about 35 percent of U.S. corn production, and that figure is likely to rise to about 40 percent next year. One bushel of corn, weighing 56 pounds, produces 2.8 gallons of ethanol and 17 to 18 pounds of distillers’ grains, so about one-third of the corn used in ethanol production returns to livestock production. So, while ethanol production contributes to the increase in corn prices from around $2 per bushel in 2005 to $6 today, it is not the only factor. Exports, food use and other trends play significant roles. Schroeder says for 2010, 2011 and 2012, corn prices would be $1 to $1.50 per bushel lower if no corn went to ethanol production, but prices wouldn’t return to $2.

Nevertheless, ethanol production significantly impacts the economics of cow-cal production. A $1 per bushel increase in corn prices, Schroeder says, causes a subsequent increase in alfalfa hay prices of about 15 percent, meaning about $12 to $15 higher cost to maintain a cow through the winter, plus higher costs to develop replacement heifers. Cow-calf producers also take a hit on the sale side, as a $1 increase in corn prices raises feedyard cost of production by about $60 per head – a cost feedyard buyers pass along through lower prices paid for feeder cattle.

Ethanol does, Schroeder says, reduce U.S. dependence on foreign fuels, and thus has strong political support. Livestock producers might not like it, but their opposition faces stiff resistance in Congress and the public at large. Growth in ethanol production will continue as long as it’s profitable.

So what can producers, and the beef industry do about ethanol and its effect on high production costs? We can fight to change federal policy such as the Renewable Fuel Standard, import tariffs and other subsidies, but results will be limited. Even if we succeeded in changing these policies, the reduction in input prices would be minimal.

Instead, Schroeder believes producers and the industry need to focus on two strategies to compensate for higher feed costs.

1. Continue investing in technology development and adoption as well as more intensive management strategies that improve beef production efficiency. This strategy requires time, resources and innovation, but is essential for industry survival.
2. Invest in growing consumer markets for beef, domestically and internationally. Demand is key to increasing revenue for producers and the entire industry. Schroeder notes that small increases in domestic beef demand from 2009 to 2011 have added $15 per head to the value of feeder cattle. Export demand during the same period has added about $40 to the value of each calf. The value of the U.S. dollar currently is low relative to many currencies globally, making our beef exports more affordable. Now is the time, Schroeder says, to introduce our products into international markets and establish a foothold with consumers around the world.