By Jonathan Underhill
It is possible to be too cute about cause and effect, but America’s determination to reduce greenhouse gas emissions and bolster its fuel security ultimately benefits New Zealand beef farmers.
The Energy Independence and Security Act of 2007, which contains the expanded Renewable Fuel Standard known as RFS2, calls for 36 billion gallons of biofuels to be added to America’s transport fuel supply (excluding jet fuel) by 2022 from a target of 16.55 billion gallons in 2013.
Of the 2022 target, the amount from corn starch-derived ethanol is capped at 15 billion gallons. The drive for mandatory minimum volumes of biofuels began in 2005 and was a shot in the arm for corn growers. Ethanol from sugar cane and biodiesel from soy are also recognised by the Environmental Protection Agency which administers RFS2.
As a result, US ethanol production from American corn has risen from 7 percent of the crop in 2001 to 40 percent in 2011, a level it is likely to held at as the biofuel requirement grows, according to a paper on the RFS2 by the Congressional Research Service from January last year. Among the consequences is that animal feed costs “will likely increase with the price of corn.”
Widespread drought made that a certainty in 2012. Corn for March delivery was recently at US$6.8875 a bushel in Chicago, according to Bloomberg. That’s down from a record US$8.49 a bushel on Aug. 10 but still high by historical standards.
November prices were up about 20 percent on a year earlier and feed costs for American dairy farmers climbed 40 percent in October 2012 from a year earlier, according to research published by Westpac.
“Higher US cattle feed costs are creating opportunities for pasture-based and lower-cost producers like New Zealand,” Westpac said. The US takes 40 percent of New Zealand’s beef production, much of it destined for the ground beef, or hamburger market.
The rest of the world has more of a taste for corn-fed, feed-lot reared beef. The lean, pasture-based beef of New Zealand has always struggled to be accepted as a top-notch gourmet product by comparison.
Not everyone is cheering. The UN Food and Agriculture Organisation in August called for the US to amend its biofuel policy because of what it called the dangerous impact on world food supply. The sudden demand for biofuel has impacted land use in emerging markets and third world countries along with developed economies.
In Guatemala, with its corn-based diet, prices of tortillas have doubled as the price of corn spiked, Elisabeth Rosenthal wrote in the New York Times this month.
Guatemala imports nearly half of its corn and its own farmland has rapidly been converted to growing sugar cane and palm – pushing food-growing peasants to the margins.
In Europe the same concerns are being raised as in the US as the regional economic block rethinks the extent of its embrace of biofuels.
Reuters reported in September that draft EU legislation proposed limits on the use of crop-based biofuels and to end subsidies for such crops when current legislation expires in 2020.
Under the proposed changes, which emerged in October, the European Commission would cap food crop-based biofuels at 5 percent of total fuel used in the transport sector by 2020.
Westpac says the behaviour of US cattle ranchers is also underpinning beef prices. “With the US cattle herd already at its smallest in 60 years, US beef producers were in a stock rebuilding phase,” it said.
“US beef producers have not culled as they would normally following a drought.”
It looks like the drivers of US corn prices and supply aren’t going to change any time soon, with the worst American drought since the 1930s set to endure for longer.
“Unless there’s a sudden change to very wet conditions, it sure looks like drought is going to be a feature going into the planting season, spring at least,” Bryce Anderson, an agricultural meteorologist at DTN, told Bloomberg yesterday.
A Bloomberg survey of analysts last month showed corn may climb back up to US$8.25 a bushel this year while soybeans reach US$16.35.
Now if only the New Zealand dollar would weaken.
Apple will rise to $1 trillion in market value over the next 12 months, according to Morgan Stanley.