Effect that current interest in biofuels is having on animal feed industry.

Effect that current interest in biofuels is having on animal feed industry

The recent emergence of biofuels as important agricultural products has generated interest in their likely impact on the rest of agriculture. Questions such as how large the ethanol and biodiesel sectors will become and their impact on corn and soybean markets have increased in importance as these sectors have grown. The large run-up in corn and soybean meal prices will have important impacts on the livestock sector and will eventually filter their way down to the consumer. Recognition of these impacts has created interest in the impact of biofuels on the livestock sector and on wholesale and retail prices. (Klopfenstein 2008)

The purpose of this report is to provide an estimate of how large the biofuels sector in the United States could become and to estimate the likely impact of this sector on crop markets, trade, and on wholesale and retail livestock markets. (Shurson 2004)

This analysis builds on an October 2006 study by Elobeid et al. The fundamental insight in the Elobeid et al. study was that ethanol could be modeled like any other value-added agricultural product with investors willing to finance new construction so long as expected net returns are positive. This insight, plus the assumption that ethanol has a floor price at its energy value relative to gasoline, which is determined by crude oil prices, allowed calculation of a break-even corn price and the modeling of the impact of ethanol on the rest of agriculture.

For a $60-per-barrel crude oil price (as measured by the U.S. refiners cost of acquisition for crude oil), Elobeid et al. calculated a break-even corn price of $4.05. They then solved for the amount of additional U.S. ethanol production it would take to drive the U.S. corn price to $4.05 and provided a preliminary indication of how U.S. and world agriculture would adjust to this level of U.S. corn output and corn price. The results suggested an annual U.S. ethanol output of slightly more than 30 billion gallons, with major reductions in U.S. soybean output, U.S. corn for exports, and U.S. corn domestic feeding stock. (Elam 2006)

Other changes to the earlier study include a reduction in the ethanol yield per bushel of corn from 3 gallons per bushel to 2.8 gallons per bushel. Industry sources have indicated that while 3 gallons per bushel is possible, it will involve the use of the seed pericarp and that this technology is not yet economical. We have also inflated the costs of operating ethanol plants to reflect the expected increases in labor costs in future years. We continue to ignore direct state and federal construction subsidies and state and federal tax credits. This assumption is conservative and implicitly provides the investors with a return on the risk they face when investing in a facility that may not start operations for two years.

One assumption from the earlier paper that we maintain here involves the wholesale-to-retail markup on ...