Resolving drought's Civil War
The drought of 2012 has tensions running high. The corn and soybean crops are boiling away, livestock farmers are liquidating herds rapidly and ethanol refiners are wondering how much longer they can keep their doors open with corn prices many say could reach $10/bushel before too much longer.
Those tensions are starting to manifest themselves in a heightening "Civil War" between the ethanol and livestock industries. Both are struggling to continue to make ends meet, but at some point, both sides recognize something's got to give if all -- or even most -- can stay in business.
But, before you fire another shot in the Civil War, remember it's not the other side of the business that's caused the grain price spike and inevitable supply shortage; Mother Nature's the one wreaking havoc on the entire industry, and with most all outlooks calling for the drought to continue, it's time to start looking for solutions where all sides can make it through scarred, but alive.
"The drought is what has caused the damage. Not the government, corn farmers or the livestock industry. It's Mother Nature," says Purdue University Extension ag economist Chris Hurt. "The issue, then, is this is potentially disastrous for a number of different groups. If we can take a broader perspective, how does agriculture get through this with the least damage to agriculture in the long run?"
- Talk: Agriculture's 'Civil War'
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- Read more: Ethanol mandates & corn prices
- Talk: Trend-line yields as an ethanol benchmark
The law's the law...right?
Yes, the Environmental Protection Agency is backing the Renewable Fuels Standard (RFS). But, it's law, and "there's nothing in that law saying they have to treat everybody fairly," Hurt says. The RFS's implementation came after clear signals that "the country wants fuel," but the drought has suddenly and, many argue necessarily, changed opinions of the RFS. But, though it's suddenly become unpopular, Hurt says it's important not to give up on the law altogether.
"Any legislation has some shortcomings. We write a law for the problems of today and then 5 years down the road, a new problem comes up. Then, that law has to evolve to solve that problem," he says. "The ethanol policy is one of the factors that has given us high corn, soybean and wheat prices. Those prices are part of why land prices have doubled."
That's a tough argument, though, if you're a cattle producer hauling 3 or 4 times more animals to town or a hog farmer selling off sows in an effort to liquidate your herd to a manageable size under the pressure exerted by $8+ corn and skyrocketing soybean meal.
"If we're going to have to go to $10 (per bushel) for corn and $20 for soybeans, that's an $80 loss per head on hogs in the 4th quarter of this year. This is massive," Hurt says. "You're talking about massive liquidation. Livestock people are going to bear the worst brunt of the drought. Losses will be worse than the crops sector."
Long term effects
But, in the longer term, these additional pains will eventually be shared with crop farmers; the stratospheric take-off in grain prices will eventually turn lower. And, when it does, look out.
"What does this do for the corn grower in the long run? We set ourselves up next year to perhaps plant 100 million acres of corn and look at a usage base more like 10 1/2 billion bushels with a crop of 15 billion," Hurt says. "We're not only setting up for the highest-priced [corn] crop ever seen, but also going to $4 or lower. That would be the biggest inversion we've ever seen. Building inventories of 3-4 billion bushels has been disastrous in the past."
This isn't just a disaster on the crops side. The livestock industry has its own "complication" and that's hay and forage. Also in short supply, this could create an even more dire set of circumstances for cattle producers.
"What we can feed the cows now is our hay. If the drought doesn't turn, we're not going to have any more grass this summer and fall and we're feeding our hay and that's going to be gone in a few months. And, the disaster isn't in full proportion yet," Hurt says. "We're setting up, if this doesn't turn, this same area could see small square bales of grass hay at $12 to $15 a bale versus $3 to $4."
One potential solution
Ultimately, it may not be a matter of whether or not to end the RFS altogether on account of the drought. Instead, a combination of disaster aid for livestock farmers (which lawmakers started taking on Wednesday when they released some federal lands for grazing) and a potential scaling-back of the ethanol mandate to match the decrease in corn yields caused by this year's drought could go a long way in helping the greatest number of farmers survive the drought.
"if the crop is down 25%, then we should set up some flexibility for a 25% adjustment [in the RFS]. That's not to say every end-user should adjust 25%. But, we should not set it up so they don't have to adjust at all," Hurt says of the RFS that currently mandates 7.5 billion gallons of biofuels be produced in 2012. This wouldn't necessarily mean the mandate would generate 25% less fuel; Renewable Identification Numbers (RINs), or blending credits, could take up some of the slack left by a decreased mandate. So while corn would still have to enter the ethanol production chain, RINs could potentially offset "a substantial amount of the reduction," Hurt says.
This may not be feasible on this magnitude, something Hurt is quick to admit. Regardless, though, it's one way that the livestock and ethanol sectors could ultimately work together -- not as opponents -- to help the entire agriculture industry survive something that is Mother Nature's doing, not one side of the business or another.
"If we don't throw all the livestock producers out of business, don't have to spike all these food prices as much, then we won't have to have as much downside," Hurt says. "The bottom line is this is a natural disaster and we're all going to have to kind of come together and think about what's best for us in the long run."