Renewable fuel relief

Corn and soybeans in the United States haven't been in such sad shape since 1988.

On Monday federal officials reported that less than a quarter of U.S. corn is in good to excellent condition as the nation continues to wither beneath the most widespread drought in five decades. Meteorologists the same day predicted another week or more of moderately dry weather throughout the Midwest. Meteorologists on Wednesday predicted light rains over the weekend but said hot weather would return to the Midwest next week.

The drought is impacting U.S. industries in unique ways: Barge operators on the Mississippi River are reducing load sizes to avoid scraping the bottom of the rain-deprived river. Crop insurers are preparing for what might be a record payout to farmers. And because of the high price of corn feed, livestock producers are sending pigs and beef cattle to market ahead of schedule-even slaughtering cows that still have years of reproductive potential left in them.

The demand for corn has positioned farmers and livestock owners on opposite sides of a dispute over biofuel. On Monday, 19 livestock and dairy industry groups asked the Environmental Protection Agency to waive a national biofuel production quota that requires billions of bushels of corn to be converted to ethanol each year. Reducing or eliminating the quota, the groups argued, would drive down the price of U.S. corn and make more of it available for use as animal feed.

"The predicted devastating impact on corn yields and resulting high prices for feed pose a severe threat to livestock and poultry producers," said the groups, led by the National Pork Producers Council, in an 18-page petition. "Many will choose to leave livestock farming altogether, and that combined with overall herd reductions across these industries, will cause significant job losses across all regions where livestock and poultry are raised."

The petition asks for a one-year waiver of the Renewable Fuel Standard, a program initiated in 2005 under President George W. Bush to promote nonpetroleum fuels for cars and trucks. Because of the program, about 40 percent of U.S. corn goes to ethanol production, while the second largest use of corn is for animal feed. The Renewable Fuel Standard mandates the production of 13.8 billion gallons of ethanol in 2013, which will require about 5 billion bushels of corn. At this point analysts only expect farmers to harvest about 11.5 billion bushels this year.

Ethanol advocates were quick to defend the biofuel quota. "Unfortunately, these large meat processing corporations feel they should be excused from participation in this natural disaster, and are trying to shift all of the financial impact of a drought to corn farmers and ethanol producers," said Brian Jennings, the executive vice president of the American Coalition for Ethanol.

Garry Niemeyer, the president of the National Corn Growers Association, said his organization would "strongly oppose" efforts to waive the Renewable Fuel Standard. "Now is the time for all of American agriculture to pull together and work together for solutions that benefit us all."

Christopher Hurt, an agricultural economist at Purdue University in West Lafayette, Ind., pointed out that corn farmers enjoy federally subsidized crop insurance to cover most of their losses-and those that avoid drought losses will make substantial profits when they sell their corn in this year's highly priced markets.

Ethanol producers, fulfilling the national biofuel quota, can pass on the cost of expensive corn at the pump, since gasoline normally contains about 10 percent ethanol. (This year's drought has raised the price of a gallon of gas about 6 cents so far, Hurt said.)

But there's no subsidized insurance or federal mandate for meat production. As a result, the drought is hitting the livestock industry especially hard in the form of expensive corn and soybean feed. Some cattle producers are feeding their animals spring hay now, but will face feed shortages this winter, Hurt said. In southern Indiana, where drought conditions are the most extreme, $4 bales of hay are selling for up to $15.

"Some of them are just going to have to liquidate animals. They just can't hold on," Hurt said. He guessed livestock producers could lose $15 to $30 billion because of the year's drought.

Researchers from the Center for Agricultural and Rural Development at Iowa State University estimated in a past study that if the federal biofuel mandate had been waived in 2011, the price of corn would have dropped by about $1.50 a bushel. (The current price hovers above $8 a bushel-up about 50 percent from six weeks ago.) However, an analysis of the upcoming marketing year by one of the researchers, Bruce Babcock, found that waiving the biofuel mandate might only lower corn prices 5 percent.

The EPA has never granted a waiver to the current version of the Renewable Fuel Standard since it went into effect five years ago. The only other time anyone petitioned the EPA to waive the quota was in April 2008, when Texas governor Rick Perry asked for a partial waiver on behalf of his state's livestock owners. The agency denied Perry's request.

Federal law explicitly allows the EPA to waive the renewable fuel quota in emergency situations, but there's no hint that the agency is currently inclined to do so. Agriculture secretary Tom Vilsack also said recently that he doesn't want to see the quota lowered.

"The whole waiver process, if not enacted now, has to be put into question," said John Burkel, vice chairman of the National Turkey Federation, one of the petitioners. Burkel told Reuters: "If we are not going to do this now, in a historic drought year, then when?"

It's unlikely the EPA will make a decision on the petition before fall, when it will have a better picture of the overall 2012 harvest. Hurt suspects the agency won't act until after the November election as a way of avoiding political repercussions. Its ruling on the biofuel mandate is likely to anger one interest group or another: Either ethanol and corn producers, who profit from the biofuel program, or livestock producers and consumers, who are paying for more expensive corn in the form of feed, groceries, gasoline, and taxpayer-subsidized crop insurance.

"These are billions of dollars that [will] float back and forth depending on what the government decides," Hurt said.