Who will ultimately come out on top in the food-versus-fuel battle over corn? It may not be who livestock producers think. With ethanol blenders receiving a tax credit of 45 cents for every gallon blended, conventional wisdom says ethanol producers have the upper hand over producers of poultry and other foods. But a prominent industry economist recently challenged this assumption, saying that poultry producers can eventually pay more for corn than ethanol producers.

"The real food-versus-fuel battle is just starting," Dr. Thomas Elam, president of FarmEcon, LLC, told listeners at the Chicken Marketing Seminar, in Hilton Head, S.C. Chicken producers, he said, can eventually pay more for corn than ethanol producers because the industry can shrink and prices will rise to cover higher costs. The prices that ethanol producers can command, on the other hand, are limited by oil prices, which may eventually come down.

Cost-price squeeze

Poultry firms are in a cost-price squeeze, for now, and so are ethanol producers. With ending global grain stocks trending down since 2001, it is clear that demand is growing faster than production. Corn acres won’t increase in 2008-09, after increased 2007-08 corn acreage caused a doubling of soybean meal prices, holding more acres in soybeans. What’s more, spring floods in the U.S. grain belt will hamper this year’s corn and soy production.

Potential ethanol demand for corn is around 3.33 billion bushels in calendar year 2008, Elam estimates, and will grow to 3.75 billion to 3.9 billion next year. This will set up a historic food-versus-fuel collision. With the number of bushels available for feed at a 20-year low, 2008-09 corn prices will range between $6 and $8 a bushel, he projects.

The new economic reality facing poultry producers, he said, is this: "We cannot produce enough corn to depress the price significantly below the level set by the value of corn-to-ethanol producers. If corn prices drop, ethanol producers will expand until the corn price increases enough to make further expansion unprofitable."

Meanwhile, ethanol producers also face problems. More than 10 ethanol plants in the United States are currently closed due to short corn supplies and the resulting increase in costs, and more closures are likely as the ethanol industry has overbuilt capacity. Several bankruptcies of ethanol production companies have occurred in the past two months.

Not going back to 2006

The bottom line: Costs to produce poultry will never go back to 2006 levels, and higher costs will be passed to consumers. Broilers, however, are cost-efficient converters of feed and will remain America’s No. 1 meat protein. The industry’s share of total meat production, in fact, may grow. The downside is that the transition to a smaller poultry industry will be economically painful.