Wednesday, June 06, 2007

Go figure...

The livestock industry asked some economists to estimate the effects of letting ethanol tax credits and tariffs expire in 2008. They seem to think it would be a good idea. So, equations were concatenated, models lovingly constructed, and serious hard-core economicking was done.

In the end, the cattle and pig folks perhaps didn't get the answer they anticipated.

An excellent summary is here at Farmgate. But lightly skipped over in the report and the study paper itself was this little gem.
Livestock producers pay lower feed costs, but their inclination to raise output in response leads to falling output prices as quantities move along an inelastic demand. [Full report]
Run that around in your mind for a while.

First lesson: it's your own fault. You silly producers and your "inclinations".

Second lesson: Lower feed costs are
actually bad for livestock producers, because when feed costs go down, producers put more cattle on feed and farrow more pigs. With demand inelasticity, livestock income then drops as more meat lowers the price.

Say what??

Reading this backwards, can we assume the new higher prices for corn are raising profits in the livestock sector? Those cowboys and hog producers should be rolling in the profits when corn hits $6!

I will be looking forward to some cattle economist reaction to this strange conclusion. My instinctive response is meat production expansion is more a function of higher sales prices rather than lower input prices. After all we had $1.80 corn and expansion livestock numbers did not explode.

[Update: As I was driving to South Bend (3 hrs 9 min best time) I had one of those "poster-regret" moments. The report shows "livestock receipts" which I believe to be gross sales - not gross profits as I had alluded to above. Hence lower feed costs should provide larger margins. However, looking at net farm income numbers lower down the table, it's hard to separate out the livestock/crop differences. It seems to show both sectors are net losers to me. My questions still stand.]

Science - it's stranger than truth.

One other assumption that caught my eye is that the mandate (RFS) stays where it is. I think it is reasonable (politically) to suggest that number is going to rise. I made this case previously. In which case, the loss of tax credits and tariffs mean much less, I would think.

Reading carefully, I also note that the world very likely will not end without biofuel subsidies. (Well, they can't be absolutely certain of course)

The rest of the conclusions are pretty predictable. Ethanol production slips, ethanol expansion slows, and farmers lose about $3B in gross receipts.

Oh yeah, taxpayers save about $6B. As if we care.

Still, it kinda makes you wonder where the other $3B goes each year, doesn't it?

[The report does not note what the income implications for economic research organizations are if the tax and tariff weren't around to study.]

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