Corn, Oil and the Future of the Livestock Sector

Kevin Grier and Steve Meyer predicted a crisis in the North American livestock sector at the 2010 Banff Pork Seminar.
calendar icon 2 March 2010
clock icon 4 minute read

US biofuels policy is nothing short of a tsunami creating havoc with everything from corn to oil and the future of the North American livestock sector. The 'bell' of massive ethanol production cannot be 'un-rung' and needs a safety valve in the event of drought combined with low oil prices.

This was the picture painted by respected US-based livestock sector economist and market analyst, Steve Meyer, of Paragon Economics, in a key 'story inside the story' of his joint presentation with George Morris Centre's, Kevin Grier, on how the continent's pork industry will look after the dust settles.

Kevin Grier (left) and Steve Meyer

Here are a few of the key nuggets of information and perspective he delivered on a topic that is fast becoming 'the elephant in the room' for the future of the livestock business:

On the US blenders' tax credit and import tariff on ethanol. "These subsidise and protect the US biofuels ethanol business. Both are going to expire at the end of the year. There's going to be a lot of political wrangling on this. I would say the vote in Tuesday in Massachusetts would point to helping these expire and I think we're going to get some movement on this. But the analysis says even if you take these two things away it doesn't change the amount of ethanol we make very much, and doesn't change the price of corn or ethanol very much."

On the renewable fuels standard (RFS). "The RFS says it doesn't matter if it makes any economic sense, by god you're going to make this stuff and use it. That means 15.5 billion gallons of corn-based ethanol in 2015. The number for this year is 12 billion gallons. There are 193 plants currently operating. There are another 13 still being built or expanded. We can't un-ring that bell. Those plants will be operating."

On the corn-oil connection. "The relationship between corn price and oil price is a strong one. My observation so far is that anytime oil is over $70 a barrel this positive relationship is far stronger."

On the 'new normal' corn price. Corn at $4 is foreseeable within the year and unlikely to budge much, says Mr Meyer. Even if blenders tax, import tariff and RFS were removed research involving Texas A&M predicts the price impact would only be 0.50 cents lower. "They found if we remove the blenders tax credit, corn prices go down less than one per cent. So $4 corn that's less than four cents. Removing the tariff lowers the price about three per cent. Removing the RFS has a bigger impact of five per cent but we're not going to take the RFS out in my opinion. It's a question here what the impact is but the point is we're not going back to $2 corn. That's just not going to happen with those plants sitting there using corn, unless we can increase yield substantially."

On the need for a safety valve. "One thing we do need is an automatic trigger of some sort for the scenario where we get a drought and especially if oil prices are low. We can turn off ethanol plants relatively quickly. It's pretty hard to turn off the livestock sector. We could end up with $7 or $8 dollar corn and if oil is $50 dollars or even $70 a barrel, that scenario says burn gasoline in your car for a year and feed that corn to the livestock but our policy says 'Thou shalt use the grain to make ethanol'. I think we need something to set that aside," concluded the presenters.

Further Reading

- You can view other reports from the 2010 Banff Pork Seminar by clicking here.

February 2010
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