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Unintended Consequences Of The Ethanol Boom

11 September 2008

US - While increased ethanol production has certainly yielded some benefits, it has also carried with it a number of unintended consequences, particularly for the livestock sector.

A few short years ago, most analysts and policy makers contemplating a four- or five-fold increase in ethanol use would probably have envisioned an array of related external benefits: a reduction in harmful automobile emissions, a lessening of dependence on foreign petroleum, a boost in corn prices for farmers, and an abundance of cheap by-product feeds for live-stock producers.

Growth in ethanol production has made carryover feed grain sup-plies very tight by historical standards exposing livestock producers to more feed price risk than in the past. In turn, tight carryover supplies not only push average prices up, but also contribute greatly to corn price variability. Thus, increasing ethanol production means that livestock producers face far more feed cost risk than in the past.

One of the more dramatic con-sequences of the ethanol boom has been its impact on by-product prices. As corn prices have risen to historic levels, prices of substitutes for corn in livestock rations have increased sharply as well. Anderson, Anderson, and Sawyer (2008) note that the price of major corn by-product feeds expressed as a percentage of corn price trended lower over the last twenty-five years, suggesting that by-products have gotten a little cheaper relative to corn. However, with corn prices at record levels by-products, in absolute terms, are more expensive than ever before.

If the market for by-products is efficient, by-products will be priced competitive with corn, based on their feeding value. In the long run, then, the advantage to feeding by-products will be mostly for those producers of ruminant animals that are situated close enough to an ethanol plant to realize a transportation cost advantage. In the cattle industry, this suggests a shift of comparative advantage towards Northern Plains and Corn Belt feeders with better access to wet ethanol by-product feeds than Southern Plains feeders.

With respect to the competitive position of various livestock species, prior to the ethanol boom, conventional wisdom held that increased availability of by-products would favor cattle, since ruminants are well-adapted to using these feeds. Additionally, the beef industry has the opportunity to use more forages to feed cattle and, while forage values are rising, the cost increase so far has been smaller than for grains and proteins. Longer term, however, if by-product feeds and forages are priced more competitively with corn, the beef industry's advantage could erode. With higher feed prices across the board, efficiency of gain again becomes the key determinant of comparative advantage. Thus, it is possible that, in the long run, the ethanol boom may actually enhance the poultry industry's comparative advantage derived from its greater feed efficiency.

What has been a boon to crop prices has had serious unintended consequences for livestock producers. In fact, the livestock industry has absorbed all of the costs of ethanol and the consequences of those costs are still to be felt in the rest of the economy. For example, through mid-year 2008, all major milk and meat supplies were still higher than during the same period in 2007. But as production of animal proteins decline in response to higher costs, consumer prices will increase and rural communities where livestock and poultry are produced and processed will experience down-sizing and loss of economic activity that these sectors created. The new equilibrium in agriculture will have both livestock and renewable fuels. The challenge for animal agriculture is to survive the transition from the old equilibrium based on grain prices driven by the demand for domestic livestock feed and exports to the new equilibrium where demand for grain is driven by government policy and energy prices, which is expected to result in an industry providing a smaller supply of higher priced animal proteins to consumers.

This article has been reproduced courtesy of Choices Magazine, American Agricultural Economics Association, John D. Lawrence, James Mintert, John D. Anderson and David P. Anderson

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