California is a gold mine for Midwestern farmers. But the wrong kind of shaft may sink Left Coast markets through new biofuel regulations.
While beef cattle, dairy and other livestock depend on Corn Belt corn and soybeans for feed, California's mammoth demand for biofuels may dry up due to its new low-carbon fuel standard (LCFS).
California is among the five largest cattle-producing states, with an inventory of over 5.4 million head. About 500,000 cattle are fed there annually, and a single California steer will consume about 70 bu. of Corn Belt corn before heading to the packer.
Its dairy industry is the nation's largest, with over 1.8 million milk cows that calved in 2008. Virtually every fed steer or heifer and dairy cow eats a ration with corn shipped in from the Belt.
“We absolutely depend on Midwestern corn,” says Paul Cameron, general manager of Mesquite Cattle Feeders, Brawley, CA, a 35,000-head-capacity feedyard that ships in about 6,000 tons of corn a month, or about 215,000 bu.
Adds Ross Jenkins, a cattle feeder who also owns a grain company to help service the corn demand, “our company, Agri Feed Industries, ships in 15,000-22,000 tons of Corn Belt corn a month via 75-car trains. It's all Iowa and Nebraska corn shipped on the Union Pacific (railroad).”
CALIFORNIA'S NEAR catastrophic economic collapse has the state in dire dollar straits. Its reported $26-billion budget shortfall dwarfs the entire budgets of many states. But California cattle still must eat to gain, and millions of cars must run on fuel that meets the state's strict environmental standards.
That helps make California the largest importer of corn in the U.S., says Nathan Fields, director of biotechnology and economic analysis at National Corn Growers Association (NCGA).
“USDA says California produced about 38 million bushels of corn in 2008,” he says. “But it imported 332 million. That's about 3% of the total U.S. crop.”
He says the exact impact on the price of corn the California market offers corn producers is difficult to measure. “This would be a hard number to nail down, but if one were to assume a worst-case scenario of California stopping the importation of corn, in 2008 we would have then added 332 million bushels of corn to our yearly carryout,” says Fields.
“This would bring our total 2008 carryout to roughly 2.1 billion bushels, or a 16% increase in stocks (up from 1.8 billion bushels). This would have moved the U.S. stocks-to-use ratio from 15% to 18%. When stocks-to-use approaches 20%, corn price will show weakness.”
One reason corn production is held back is the state requirement that corn fed at a feedyard cannot contain more than 20 parts per billion (ppb) of aflatoxin, the same as corn used in dairy rations and for human consumption. That compares to other cattle-feeding states that see a 200-ppb aflatoxin limit. California heat, especially in the Imperial Valley desert growing area, helps incubate the toxic disease. “It's just too hard to grow corn here and not have aflatoxin over 20 ppb,” says Cameron.
California's unique and efficient irrigation canal system could certainly sustain corn production. But dozens of other specialty crops, from artichokes to almonds, are more profitable.
Jenkins is CEO of Phillips Cattle Co. in El Centro, a California orange's throw from the Mexican border. Like Mesquite Cattle Feeders, nearly all its cattle on feed are Holstein calves from the massive dairy industry. They are at home in the desert and perform well and are usually profitable — even with a corn basis of +$1.20/bu., says Jenkins, among those who faced close to $9 corn last summer.
“We have to face that high basis because we're restricted to buying Midwestern corn,” he says. “It's a good commodity, but the rail rates are high. In February, we could receive the delivered product for $1.22 over the futures price. You better be an efficient producer when you pay that kind of a price.”
Another source of Midwestern corn is dried distillers' grain (DDG) from the region's ethanol plants. “DDGs make up about 10% of our ration,” says Jenkins.
Some 30 million vehicles hit the road every day in California. That, along with its state- and federal-mandated requirement for cleaner-burning fuels, means the importance of ethanol to California goes far beyond DDGs. Even with an E6, (6% ethanol blend in its gasoline), the state's millions of motorists filled their tanks with blended fuels that contained an enormous 950+ million gallons of ethanol, according to the California Energy Commission.
WHEN THE STATE'S E6 program went into effect under California Air Resource Board (CARB) gasoline regulations in 2003, smog readings decreased by over 20% in less than two years.
In SoCal terms, “dude, that's awesome” for the state's green goals, which have Gov. Arnold Schwarz-enegger as a big backer.
However, this spring saw California enact its LCFS through CARB. The “California Dreamin'?” deal for Midwestern farmers looked more like a nightmare that could push the carbon credits theme to the limit.
It has Bob Wisner — longtime Iowa State University (ISU) marketing guru and biofuels economist, ISU Ag Marketing Resource Center — along with many others, worried. It creates “a collision course” between LCFS and the 2007 national energy bill “that requires a gradual increase in the volume of various biofuels to be blended with U.S. motor fuels in the next several years,” says Wisner.
Indirect land use is a key issue in both California and EPA greenhouse gas (GHG) assessments of biofuels. “Indirect land use stems from the presumption that when an acre of land is diverted from production for feed and food to biofuels, that at least a portion of that acre will be added to food and feed production somewhere else, either in the U.S. or abroad,” says Wisner, and assumes that additional cropland will be needed and likely would come from diversion of rainforest or pasture to food and feed production.
“The indirect land use measurement represents the estimated net change in GHG emissions or CO2 sequestering done by the change in land use somewhere else in the world,” he adds.
NCGA President Bob Dickey called the decision “bad news for farmers and the national economy, ignoring expert scientific testimony and modern agriculture trends.
“This new standard will hurt the domestic biofuels and related industries and increase our nation's reliance on foreign oil. This decision will also be harmful to our national economy. We may lose a tremendous opportunity to spur economic growth in agricultural communities,” he says.
Along with California, there are worries that 13 other states will adopt the LCFS measure. “If changes are not made, their different paths could slow or halt the growth of some parts of the biofuels industry,” says Wisner.
Meanwhile, Cameron and Phillips note that unlike many urbanites in San Francisco or L.A., the state's farmers, ranchers, feeders and dairy producers think a lot like those producers in the Corn Belt, South or other agricultural areas.
They just need Midwestern grain to make their operations work. And they deserve an Oscar from Iowa, Nebraska and other corn growers who depend on the Left Coast for big box office receipts.