I have been a supporter of development of alternative fuels in the U.S., and I remain so, but with some concerns that the delicate balance of marketing agricultural products and the seemingly timeless axiom of supply and demand may be skewed by the rapid conversion of grain to fuel.
Corn prices recently topped a 10-year high, of $3.86 a bushel. At the same time, the U.S. dollar hit a two-year low in value against the Euro. I'm not a marketing guru, but I know enough to know that's trouble for the export-import grain business. The high price of corn, which most analysts agree is driven by the prospect of ethanol plants seemingly popping up on every other street corner, is causing some concern in other sectors of agriculture.
One of the crops most directly affected, both positively and negatively, is cotton. For starters, the distillers grain that is a byproduct of ethanol production is a lower cost alternative to cotton seed as a supplemental feed source for dairy cattle. Some ginners survive on sales of excess cotton seed and hulls.
The high cost of corn positively affects cotton by reducing the cost of corn subsidy programs, which are by far the largest in the ag industry. With debate for a new farm bill kicking off, high priced corn makes for a good success story, but also threatens to divide cotton and corn lobbyist jockeying for position in the 2007 farm bill.
The most direct and highly publicized threat from ethanol-driven high corn prices is the extra cost to the beef cattle industry. I'm told the distillers grain that is widely fed to dairy cattle isn't a good feed source for beef cattle. Corn prices at a 10-year high clearly up the ante on beef production costs and threaten to further jeopardize its pricing strategy that is already considered too expensive by many American consumers.
Poultry will likewise be negatively affected by high corn prices. Poultry rations contain a high percentage of soybeans or other white grains to avoid the yellowing of skin created by feeding high percentages of corn. Unfortunately, for the chicken and turkey producers soybean prices are high, too. Soybeans, despite a record surplus, continue to sell in the $6.50-$7.00 per bushel range, in small part due to speculation of new biodiesel plants coming online.
Soybean prices at $6.95 per bushel and corn at $3.86 a bushel continue to mirror each other in growth. For the past several months, buyers for large cattle, swine and poultry operations have waited for prices to go down to book feed for their animals. So far prices have gone the other way.
It is likely those of us who resented paying $3 a gallon for gas won't like paying an extra dollar or two per pound for chicken, pork or beef. Unfortunately for U.S. meat producers the poor performance of the dollar will reduce the options for selling excess product overseas. The only option appears to be to reduce supply, which will ultimately pique demand and increase prices — not to mention knocking plenty of livestock producers out of business.
Making ethanol from $4 per bushel corn versus $3 per bushel corn adds to the cost of ethanol at the pump. Will that mean ethanol will be more expensive than gasoline? If so, will that drive the price of gas up? I don't know the answer to that, but I don't like the possibilities.
I'm far from ready to jump ship on alternative fuel production, but I do contend development of ethanol from corn and biodiesel from soybeans needs to be carefully planned, taking a careful look at the impact gigantic growth in production of these renewable fuels will have on other segments of the ag industry.
Research is well under way to develop such crops as non-edible peanuts, sweet potatoes, switchgrass, sweet sorghum, even algae into renewable fuels. We would be wise to put equal or greater emphasis on those sources, rather than dangerously impacting grain markets by over-dependence on corn and soybeans for fuel.