CornLust: How the grain-hungry ethanol industry gouges livestock ranchers—and, eventually, you

May 2, 2008
By Jennifer Litz
Editor

Care much about ethanol? You know, that mostly corn-derived renewable energy fuel that’s supposed to save us from going down the tubes to a globally warmed hell?

It’s cleaner burning than regular gasoline. It can be more economical than gasoline—but not necessarily in the state of Texas, where it’s currently only about 15 percent cheaper than gas (but there’s not as much energy in ethanol, so you can’t go as far on it).

It should also reduce our dependency on foreign oil sources. That’s a big reason for the passage of last fall’s energy bill. It mandated an increase in biofuel production to 36 billion gallons per year by 2022. Of this, 21 billion gallons must come from biofuels other than corn-based ethanol. That means we still need to produce about twice as much corn-derived ethanol as we’re producing now (around 8 billion gallons).

Ethanol is currently also mixed with gas to replace MTBE (methyl tertiary butyl ether), a gasoline additive recently found to be a carcinogenic groundwater pollutant.

So what if I told you ethanol could be eating your steak dinner? Literally. When 20 percent of corn production goes into a government-sanctioned industry like ethanol, the price rises for everyone else. It’s classic supply and demand economics. Costs haven’t been passed down to the consumer yet, but higher demand for corn is already gouging livestock ranchers and feedlots.

Local vendors claim they’re already feeling the squeeze—and not just from corn, but wheat and other grain also. But the question abounds: Can we really attribute these inflating prices to ethanol production, which will only increase? Or do more transient things like drought and a weak dollar have more to do with it? Or the rising cost of oil, which plagues production of all agriculture?

If ethanol is the problem, beef, chicken, and hog farmers are going to have to find something else to feed their animals, or we won’ be able to afford protein.

Or really, food in general, as there’s very little in the American diet that hasn’t touched corn somewhere along the way.

Corn, Corn Everywhere—And Not a Drop to Spare

 

What if we Changed the Way we Feed Cattle? The entire livestock industry is based on grain-fed beef, mainly corn. Corn has a long, subsidized history in the United States, and it was mostly convenience that turned the grain into cattle feed at the turn of the 20th century. More below.

In San Angelo, restaurants and food retailers have already been feeling the crunch of something that’s been driving up their raw food costs in the last few months.

Jose Garcia, owner of Julio’s corn chips in San Angelo, spends a mind-boggling amount on corn oil every week. His Del Rio-based brother Miguel is spending twice as much.

“Normally, a 5-gallon tub of oils last year was $19, now it’s $33,” Garcia says. “And it’s going to hit $40 by the next time we place an order in a couple of weeks.

“I’d have to check my records, but it just went up; we had a small increase . . . ever since the ethanol deal. [It’s] the shortage of corn, I hear. And that’s why everything’s up.”

Garcia says rising prices haven’t really cut into his business so far, but admits that if he were to pick up a very large account, it could get very expensive. He cites his brother’s costs as an example.

“My brother pays $6,000 a week for oil. He uses quite a bit more than I do. But I’m doing half of that.”

The Garcias aren’t the only ones feeling the corn gouge. Jason Jacoby, owner of Jacoby Feed & Seed Co. in Melvin, 60 miles southeast of town, saw corn prices skyrocket last fall—right around the time the president and Congress were posturing about an energy bill that would bolster corn-dependant and other biofuels.

“It’s about 40 percent higher than what it’s ever been,” Jacoby says of his corn costs. Jacoby’s sacks of corn now run from $6.50-$7.50, where they were previously around $4. Most of his corn, he says, goes to ranchers and hunters for livestock and wildlife feed.

Many who previously bought feed for deer have stopped buying altogether, since Jacoby’s had to raise prices. But ranchers who have deer and/or cattle behind fences can’t simply stop feeding.

Jacoby thinks ethanol production plays a hand in rising costs of corn, especially when ethanol plants are bidding on corn in the Midwest, as Jacoby does when we don’ t have enough in Texas. But he thinks stocks and the weak dollar are culprits, too.

“There’s more demand for it [corn] than supply,” he says. “That’s what scares me. They had a bumper crop in the Midwest—corn stacked everywhere that is already sold. But what happens if they don’t plant as many acres because soybeans are worth more money? Then you could see this stuff double easy—go from $5.50 a bushel to $10 in the matter of three or four months. And then you talk about some seriousness.”

“But I guess if you look at the overall market, it’s not just corn that’s up. Everything else is. And that’s where I contribute a lot of that to the weak dollar.”

It’s Not for the Cows Anymore

Dr. Brian May can qualify Jacoby’s “everything else.”

“Bread is going up, and other grain products and cereals, because all of them use some grain to make their products,” says May, associate professor of agriculture at Angelo State University. “And because corn has gone up so much, the other grains are going up with it—wheat, oats, barley, milo, all of that.”

Other grains are going up, May says, because ranchers are struggling to find something else to feed cattle, chicken, hogs, and other animals in the face of rising corn costs. The result? Even wheat has gone up “about 400 percent since last year.”

“It’s gone up from $3 to $4 bushel, now trading at $12 a bushel. And we don’t have anything to point at for the reason, other than we see that corn started going up first. It’s just hard to know what the dynamics are. It’s like trying to figure our why gasoline has gone up. And oil keeps going up.”

Dr. David Anderson has a simple explanation for the rising cost of wheat. Anderson is Associate Professor and Extension Economist in the Department of Agricultural Economics at Texas A&M University.

“Much of that increase is due to supply factors around the world,” Anderson says. “Australia is a big wheat exporter, and they’ve had a record drought going on. So they don’t have the stuff to sell into the world market. In the U.S., in Oklahoma and Texas, 2007 was when we had all the spring rains, and it ruined a lot of the wheat crop. Wheat is more of a supply problem.”

Don’t expect the same kind of shorter-term culprit for corn prices.

“The corn side and everything else is ethanol related,” Anderson says. He explains that the biggest corn gobblers have traditionally been livestock, then exports to other countries, and finally food and industrial use. Now, ethanol production has surpassed exports in that list, and will soon be rivaling feed.

Anderson says that rising oil prices continue to make it more expensive to get all food products to market, via trucking and other motorized needs for crop production and delivery. But these high oil prices also hike up the demand for ethanol, which can be slightly cheaper, if the price spread between it and gasoline is wide enough to surpass the biofuel’s lesser energy.

Which spells out exactly how prices will continue to rise for livestock feed. And perhaps, eventually, for regular consumers.

“Other industries affected? On the corn side, our food industry,” Anderson says. “That’s livestock meats, and everything—because you can’t hardly buy a food product at the grocery store that doesn’t have some corn in it.” There are few foods in the middle of the grocery store that don’t list “high fructose corn syrup” or some other corn derivative in their ingredients list.

“In 2007, we had record high retail prices for beef,” Anderson says. “But we haven’t seen the effects of high-priced corn throughout the beef industry yet. The group feeling that right now is livestock feeders. And the livestock industry is really bearing the brunt of higher corn prices.

“Longer term though, cattle feeders and ranchers just aren’t able to pass on higher costs, ‘cause there are lots of ranchers, lots of cattle feeders. So they end up eating those costs. But because they end up less profitable, those parts of the industry end up cutting production. And then when production is cut, the consumers start seeing higher prices. I would say that we have not yet seen the impact, because haven’t had enough time to see that.”

Adding to this, Anderson says, is a weak dollar, which makes outside countries buy up even more of our corn.

“We continue to export a lot of corn,” Anderson says. “The main reason is the rest of the world [also] sees these higher prices for corn because of what’s happening in biofuels.

“And the other thing is that this is a complex problem. The economy is a complex thing, whether it’s energy prices or corn prices. And we’re still feeling this transition.”

Coming to a Steak Dinner Near You

So when’s it going to hit the consumer in the gut, at the grocery store or the restaurant?

That seems to be getting closer. Angelo State University’s Dr. Brian May believes prices for steak will have to rise soon at the grocery store.

Bernay Sheffield, owner of Zentner’s Daughter Steak House, has experienced recent price hikes, but hasn’t yet let them affect menu prices.

“We’re paying more for beef,” Sheffield says. “It’s been going up the last couple of months, incrementally. We’ve noticed [an increase] in everything. Produce also, because the cost of diesel has gone up. And all that’s tied in.”

Sheffield knows the stops his fare makes along the way to him are becoming more expensive. He heard of an impending 1,000-strong trucker strike in response to the rising cost of diesel. He also talked to a distressed farmer whose fertilizing costs went from $4 to $29 an acre in one year. “Fertilizer is petroleum based; all the oil companies are in the fertilizer business,” Sheffield reasons. “That’s going to affect us all.”

Sheffield says ethanol costs could be one of many factors that are affecting his costs.

“I think that has a lot of do with it also, it has to. Look at the price of corn. In listening to the truckers, I’m not sure it saves them any money when they use ethanol. I’ve heard there’s so much water in that, that it can affect the engine. It’s a vicious cycle.

“We’re trying not to raise our prices, we’ve been here so long. But it’s really getting hard to not have to.”