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News and analysis on the global poultry
and animal feed industries.
on August 7, 2008

What’s behind the feed cost escalation?

The two major components of feed, corn and soybean meal, have demonstrated unprecedented escalation in cost since introduction of the Renewable Fuel Standard (RFS) in 2006.

In August two years ago, corn traded at $2.25 per bushel, rising to $3.40 by April 2007. The Energy Independence and Security Act of 2007, which doubled the ethanol mandate, caused further escalation in price with last month's Chicago Board of Trade quotation hovering at $7/bushel.

During mid-June, USDA's Economic Research Service estimated a price range of $5.30 to $6.30 per bushel for corn harvested during 2008-09. This estimate was based on planting 86 million acres and harvesting 92 % of this area with an average yield of 149 bushels per acre.

USDA further estimated that total supply would amount to 13.18 billion bushels, including carry-over stocks of 1.4 billion bushels. Of the total supply, 41% was projected for animal feed, seed and industrial uses with 30% diverted to ethanol and the remaining quantity for export and an extremely low carry-over of 673 million bushels.

The USDA projection contained in the World Agriculture Supply and Demand (WASDE) commodity report for June does not take into account the effect of severe flooding in the nation's heartland that will markedly depress acreage and yields of both corn and soybeans. Reality is represented by the futures market which is pricing corn and soybeans far above the USDA projections.

Industry organizations including the National Chicken Council and more than 20 industry consumer groups have formed a coalition to oppose federal mandates that they maintain contribute to record food price inflation both in the United States and the international markets. The website of the coalition (www.foodbeforefuel.org) presents economic studies opposing the RFS.

An opposing view is presented by the administration in a written response by Sam Bodman, Secretary of Energy, and Ed Schafer, Secretary of Agriculture in response to a series of questions by Sen. Jeff Bingaman, (D-N.M.), chairman of the Committee on Energy and Natural Resources. A formal response includes the support of the two Secretaries of the policy of the current Administration (www.usda.gov). They state clearly that "biofuels are already moderating gasoline prices" and that "biofuels-related feed stock demand plays only a small role in the global food supply and pricing".

In response to specific questions, the joint USDA/DOE (Department of Energy) document claims that ethanol and biodiesel consumption accounted for approximately 3% to 4% of the overall rise in retail food prices during 2007 and 4% to 5% of the total increase in all food CPI during the first four months of 2008. It is claimed that factors unrelated to biofuel development are responsible for escalation in cost of corn including the depreciation of the dollar, increasing demand by more affluent consumers in developing countries and recent drought and inclement weather in the Southern Hemisphere.

The two departments claim that biofuel production in the United States was responsible for approximately 10% of the increase in the International Monetary Fund Global Foods Commodity Price Index, which is considered by many to be a highly significant rise.

Consumers in the United States are apparently regarded as being relatively protected from increases in retail food cost since the farm price of commodities, according to USDA, accounts for only 20% of total purchases.

The Energy Independence and Security Act of 2007 would require greater diversion of soybean oil to biodiesel. Again USDA maintains that the increase in the CPI for all food will only be 0.2 to 0.3 percentage points and would raise the IMF Global Commodity Price Index by 1% to 2%.

Nine billion gallons of ethanol

In 2008, refiners will incorporate 9 billion gallons of ethanol into the nation's gasoline supply. It is calculated that this will save 7.2 billion gallons of gasoline, which would otherwise have to be refined with 60% of the required feedstock derived from imported oil. USDA and the Department of Agriculture estimate that without blending ethanol into gasoline, pump prices would be 20 cents to 35 cents per gallon higher than at present, taking into account the 51 cent-per-gallon tax credit for ethanol blenders. The USDA and DOE assume that by 2012, two billion gallons of advanced biofuel will be derived from cellulosic sources and not from corn.

The USDA/DOE document, which includes a detailed appendix with tables and figures supporting the administration's action, raises a number of questions. There is no mention of importation of ethanol derived from sugar cane, which is available in Brazil but is currently subject to an exclusionary tariff. The administration is relying on the current ethanol refining capacity and the output from new plants amounting to an additional 6 billion gallons per year to supply the U.S. market. It is apparent that with current ethanol prices a plant can only recover variable cost of production and that despite subsidies some plants are closing due to losses as the price of corn as a feedstock rises.

Disconnect

Clearly, there is some disconnect between the USDA/DOE calculations and the realities faced by producers and consumers. All segments of the intense animal industry are faced with escalation in feed cost which cannot be passed on to consumers without markedly depressing demand. There is a chorus of opposition to the current U.S. biofuels policy from virtually every international agency and agro-economist not affiliated to the present administration. The U.S. egg industry will consume 363 million bushels of corn in 2008. Each $1 per bushel increment in cost will add 5 cents per dozen eggs and impose an incremental cost of $8.6 million per week to the collective feed bill of the U.S. egg industry. The impact of an increase in corn from $3 to $7 is over 20 cents per dozen without completely taking into account the parallel increase in the cost of other grains, DDGS and soybean meal, which are both directly and indirectly influenced by diversion of corn to ethanol.

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