Continuing drought conditions have livestock and corn producers facing extreme marketing challenges, one of them being a way to find consensus regarding rising prices and growing competition for corn.
Much of the controversy is centered on the Renewable Fuels Standard, a government mandate on ethanol production. Livestock producers say the drought is causing short corn supply and the RFS is driving their feed prices up. Corn growers say it's too early to tell if corn yields will satisfy both the ethanol market and the livestock sector—but who is right?
A new report, "Potential Impacts of a Partial Waiver of the Ethanol Blending Rules," by Purdue University, examined the issue and found that even if the Environmental Protection Agency were to institute a partial waiver of the RFS, corn prices may not necessarily ease.
Many factors surrounding the issue were examined when preparing the report, including ethanol stocks, drought conditions, consumer impacts, market reaction and unintended consequences of an RFS waiver.
Paper authors Wally Tyner, Farzad Taheripour and Christopher Hurt, all professors at Purdue, say corn price has gone up nearly 60% since June 15, causing price shifts for key food staples such as milk and eggs.
During a webinar Thursday, sponsored by Farm Foundation, Tyner said conditions would need to be just right for a waiver to work in favor of the livestock sector. The key will be flexibility with ethanol producers through the use of RINs, or renewable fuel identification numbers, also referred to as "credits."
The RINs come into play because refiners have built up credits over the last few years. This means that there are "leftovers" from previous years to use toward 2013 blending requirements.
Hurt says RINs are important because they could be turned in, rather than producing ethanol. He estimated that there is about 2.6 billion gallons of ethanol that could displace ethanol scheduled for future production.
"If refiners and blenders do not have or choose not to use ethanol blending flexibility, a waiver has very limited impact. To the extent that there is flexibility, even the use of prior RINS or a waiver, could reduce the corn price," Tyner said.
Tyner estimated that the price of corn could be reduced by 67 cents a bushel if the credits are used—and that is without an EPA waiver.
Flexibility with the ethanol producers also lies with system changes. Tyner says the way the process is set up now, refiners and blenders might not be able to change for technical reasons and their systems can't be changed quickly. Those cases mean little flexibility, and a waiver would have little impact.
"It's very clear that in the face of the drought, livestock producers have a lot of adjusting to do, if there is not flexibility in ethanol use for corn," Tyner said.
But, Tyner says, if we assume that refiners and blenders do have flexibility, then there is can be qualitative analysis to determine what could happen if a waiver was granted.
The analysis shows that refiner and blender flexibility combined with a small waiver and credits could result in a 47 cent per bushel price decrease, and a large waiver could provide up to $1.30 per bushel.
Tyner says the flexibility would help share the cost of the drought among ethanol refiners and producers, but he added that it would penalize corn growers that had previously counted on the ethanol market to unload corn.
Steve Meyer, Paragon Economics President, also participated in the webinar. He explained that any decrease in corn price could be a very big deal for livestock producers.
Meyer says for a hog producer, cost savings could be up to $3.50 a head, and explained that when 100 billion are produced each year, it adds up.
"We're not talking about peanuts here," he said. "There's real money to make."
Meyer explained that the long-term implications for the livestock sector are rooted in decreased productivity.
"Mother nature isn't real picky on how she screws things up for us," Meyer said. He explained that herds will be reduced as a result of the drought and the ability to produce meat, milk and eggs is therefore hindered.
Vern Eidman, professor emeritus of economics at the University of Minnesota, also commented on the report, emphasizing that the much of the corn crop isn't out of the ground yet. He says more information is needed before a decision is made, and referenced the coming USDA supply and demand reports that will be out in September and October as key information to address before moving forward.
"I feel it's important in any discussion of this analysis to emphasize that rolling back the RFS at this point would not impact corn use for ethanol this year," Eidman said. "It's important for everyone to understand it will take more time for the roll back to occur."
Though there are many factors to consider, Hurt says there could also be unintended consequences following either decision. He says there was concern that as corn prices climb higher, other sectors, such as the livestock sector cut back. He referred to the situation as "demand destruction."
"Demand destruction in the long run has some consequences if we return to normal production for the next 12 months. Then we have fairly large supplies, we have the possibility that we will be looking at a 15 billion bushel corn crop at this time a year from now, with a utilization base of 11 billion bushels," Hurt said.
He worries that such a severe cut back could cause instability and volatility, causing a huge dive in the price of corn.
"Anything that tends to moderate prices a little bit for the '12 crop probably helps support later on," Hurt added.
Tyner explained that nothing can change the drought, but altering the RFS may or may not be a way to cope.
"The economic harm has been done by the drought. Corn prices are substantially higher. In thinking about a waiver, EPA can't change that, they can't change the law. They can only distribute that among the affected parties," Tyner said.
Though a timeline on when a decision might be reached by the EPA is not certain, the report authors agree that it should be some time in October. Because four governors have requested a waiver within the past week, the EPA has less than 90 days to return a decision.
Learn more about the RFS debate: More Governors Put Pressure On RFS Debate