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From The MPC Newsletter
Friday, November 19, 2010

The Word of the Week Is "Ethanol;" An Opportunity Next Month to Add Rational Discussion to the Congressional Debate
By Rob Vandenheuvel, General Manager

Last year, the U.S. produced 13.2 billion bushels of corn – a record year.  This year is on pace to be the third-highest annual production.  This should be great news for dairy and other livestock industries, as corn is a major component of our animals’ diets.  Yet, here we are – with December corn currently trading at more than $5.22 per bushel (which has actually come down from almost $6 per bushel earlier this month).  The current price is almost 50% higher than it was just six months ago and almost three times higher than it was just five years ago!  So why the disconnect?

The issue of how our nation utilizes our corn supply is something that has a profound impact on our industry, yet so often, we get caught up in the price we receive for our milk that we forget about the factors that drive our input costs.  Corn is a major component in the diets of our cows.  It’s such a major component that as corn has risen about $2 per bushel over the past six months (and with soybean meal following suit with a $90 per ton increase in that time period as soybeans fight with corn for available land), we’ve seen our cost of production rise almost $4 per hundredweight, according to a recent analysis by Dr. Bruce Babcock from Iowa State University.  As every dairyman and his accountant knows, that is having a huge impact on your dairy’s current bottom line, to say the least.

A number of factors drive the value of corn, but a significant amount of that influence comes from something that should be completely unrelated to food: our nation’s energy policy.  Corn-based ethanol is certainly not new, but current government policies have made it the key talking point in the renewable energy discussion in recent years.  Through a government mandate that forces oil and gas companies to blend a specified volume of ethanol with our gas (12.6 billion gallons in 2011), these ethanol plants have a guaranteed “market” for their production.  And as if it wasn’t enough to force this demand, Congress also provides these oil and gas companies with a $0.45 tax credit for every gallon of ethanol they blend (which amounts to about $6 billion per year in tax credits).  Lastly, to ensure that these oil and gas companies don’t fulfill their needs with foreign ethanol (such as Brazilian sugar-based ethanol), Congress instituted a $0.54 per gallon tariff on imported ethanol.  In short, Congress has done more than its part to ensure that corn-based ethanol finds a home.

So how is our nation benefiting from this policy?  Are we less reliant on foreign oil?  Nope.  For starters, the diesel-burning farming equipment needed to grow, harvest and transport the corn certainly offsets any reduction ethanol brings.  Well how about environmental benefits?  Nope.  Again, since corn doesn’t magically grow without farming equipment, we still need to use diesel-powered engines to grow, harvest and transport the corn.  So what is the reasoning behind our national efforts to prop up this industry?  Two reports were published this month that help us get a glimpse into this question.  The first was a report by the Environmental Working Group – a well-known environmental organization in Washington, DC.  That report can be found at: http://static.ewg.org.s3.amazonaws.com/reports/2010/ethanol/EWG-ethanol-report.pdf.  The second was an analysis by Dr. Bruce Babcock from Iowa State University on the impact of these ethanol subsidies on livestock agriculture.  That report can be found at: http://www.card.iastate.edu/publications/DBS/PDFFiles/10pb3.pdf.  Both of these reports are well-worth your time to read.

So why is this issue coming up now?  While the federal mandate forcing ethanol to be blended with fuel is in place for years to come, the tax credit available to oil and gas companies that blend ethanol with their fuel and the tariff on imported ethanol expire on December 31st of this year.  Undoubtedly, there will be a push in Congress to extend these provisions before the end of the year, and the ethanol and corn lobbies are ramping up their efforts.  The question is: will there be a strong opposing voice that will add rational arguments to the debate, and hopefully convince Congress not to extend these provisions?

Last week, the board of directors for Milk Producers Council discussed this issue at length and voted unanimously to participate in the efforts to stop the extension of these subsidies.  To that end, MPC has reached out to the Environmental Working Group (which published the report linked above) to see what political efforts exist for opposing the extension of these subsidies.  To our delight, a coalition has been developing, made up of very diverse interest groups.  These groups include: livestock agriculture organizations, food processors and retailers, environmental organizations, and taxpayer advocates.  MPC has joined this coalition and will be co-signing a letter to the Senate and House of Representatives, signed by all the groups, and urging Congress to let the ethanol subsidies expire.  We’ve also urged our fellow dairy farmer trade associations – particularly in the western United States – to join this coalition in sending a unified message to Congress.

As I said, the ethanol and corn lobbies are strong and motivated.  It will take a coordinated effort by a broad coalition of groups to get through to Congress and convince them to look at the facts, rather than simply the politics.  While some might find it odd for a dairy organization to work with environmental advocacy groups, we’d be foolish not to take this opportunity to join forces on a common-sense issue that we’re all on the same side on.

So how much more support can we get from the dairy industry?  IDFA – the lobbying organization for the nation’s dairy processors – has also joined this effort.  So has the Idaho Dairymen’s Association.  That’s a great start, but we need the dairy industry groups from all over the country to add their voice to this debate.  Every state’s dairy association should be a part of this coalition.  If your trade association or cooperative isn’t active in this debate, you need to ask them why.  And if they want to know how they can join this effort, they can contact Sheila Korth at the Environmental Working Group at (202) 667-6982 or they can call Milk Producers Council at (909) 628-6018.

This could be one of the best opportunities we’ll have to slow down this irrational fuel-before-food policy.  Rarely, are we able to have such a huge impact on a major policy by simply asking Congress to do nothing.  Let’s not let this opportunity pass us by.

 

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