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News and analysis on the global poultry
and animal feed industries.
on June 23, 2009

Ethanol euphoria

There is no lack of economic incentive to build an ethanol plant.

At the beginning of 2006, the installed capacity of ethanol production from corn in the USA was 4.5 billion gallons per year. By 2010, that capacity is projected to double to 9 billion gallons counting all the plants under construction and those that will probably be built. The price of ethanol climbed from $2 a gallon at the end of 2005 to over $4 per gallon in the summer of 2006. High prices in addition to generous federal tax subsidies, government mandates for ethanol use and protective tariffs have all combined to produce returns that can exceed 100 percent per year on invested capital. The returns have created ethanol euphoria, a frenzy similar to that of the California Gold Rush of 1849.

The poultry industry has watched the development of ethanol with a wary eye. Just a few years ago, the development of the U.S. ethanol industry seemed to represent a minor potential irritant to the livestock and poultry industry. Today, the situation has changed. In this coming crop year, 2 billion bushels of corn, 20 percent of the crop, will be used for ethanol. That amount is likely to double to 4 billion bushels by 2010.

Something has to give between now and 2010. There will be, of course, higher prices of corn. Higher prices will, in effect, “buy” the additional acres of corn production that will be needed. The acres will come from soybeans and quite possibly the Conservation Reserve Program. It would be ironic if, in an effort to be “green”, Conservation Reserve land is put to the plow.

How much higher will corn prices go? Dr. Robert Wisner of Iowa State University projects corn prices of $2.85 in 2008 compared to $1.90 in 2005 or about a $1 per bushel increase that can be attributed to ethanol. A corn price of $2.85 inevitably accompanied by higher soybean prices would increase the cost of a whole eviscerated chicken by about a nickel a pound. The nickel increase will take place assuming increased ethanol production, normal harvests of corn and increasing acreage devoted to corn. An extra nickel will increase the cost of production of the U.S. chicken industry by $1.8 billion per year and of the world chicken industry by $7.2 billion per year.

The worldwide consumption of chicken meat is income elastic. That means that as income increases around the world (or when chickens get cheaper), the consumption of chicken increases significantly. The flip side of the coin is that falling income (or higher chicken cost) reduces chicken consumption significantly. The extra nickel of chicken production costs will cause the production and consumption of chicken to fall by approximately 2 billion chickens per year worldwide. In per capita terms, that represents one pound per person less worldwide, with the poorest and most protein deficient portion of the world population absorbing most of the decline in consumption.

Although a $7 billion hit is bad enough, of great concern to the world chicken industry is the effect of a future U.S. drought on corn prices. Since the amount of corn used for ethanol is, to a great extent, mandated by the federal government, any rationing of supply in the case of a drought must be carried out by the animal industries both in the USA and abroad who depend on U.S. corn. As a result, the price of corn (and all grains) after a U.S. drought would climb to historically high levels, an event that could lead to a devastating reduction in animal protein production worldwide.

If the production of ethanol from corn was a solution to U.S. energy problems, the effort might justify sacrifices on the part of the animal industries. However, even consuming the entire U.S. corn crop for ethanol would replace less than 20 percent of all the gasoline used in the USA. The entire U.S. corn crop will not be used to produce ethanol. Therefore, the ethanol “solution” will, at most, replace 10 percent of all U.S. gasoline use. Given that reality, the E85 (85 percent ethanol gasoline) campaign represents willful ignorance at best. Before reaching even 10 percent of U.S. gasoline use (14 billion gallons), ethanol made from corn increases the risk of a worldwide grain and protein crisis.

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