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Food Producers Caught In Ethanol-Tariff Crossfire

Posted: May 07, 2008 15:42 PM by Mark Whistler

Tickers in this Article: IBA, TSN, PPC

Chicken producer Pilgrim's Pride (NYSE:PPC) announced a second-quarter loss of $111.5 million per share ($1.67 per share) on Monday; this is nearly three times the loss of $40.1 million (60 cents per share) one year earlier. Some of the loss can be attributed to almost $18 million in restructuring charges, but when you dig deeper into the earnings report you'll find the hidden culprit: protectionist trade policy by the U.S. government

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Uncle Sam Props Up Corn Prices
"Our financial results in the second quarter of fiscal 2008 reflect the crisis facing our company and industry from record-high feed costs caused by the federal government's deeply flawed ethanol policy." Pilgrim Pride's CEO Clint Rivers said in the earnings report. "The federal government has helped spark a growing worldwide food crisis by mandating corn-based ethanol production at the expense of affordable food."

He predicts that American consumers have only felt the tip of sharply rising food prices, and the problem will get worse as more food producers pass along high input costs to the consumer. "Meanwhile, the government is using tax dollars to provide generous subsidies to big oil companies for blending ethanol, and stiff duties on imported ethanol help protect domestic ethanol producers at the expense of end consumers."

One of the items Rivers is alluding to is the 51-cent per gallon tax subsidy bestowed to U.S. corn producers for ethanol. But there's even more to the story. Sugarcane ethanol is a cheaper, more efficient source of ethanol, but its not made in America. It's made in Brazil.

To block Brazil from competing in the corn-based U.S. ethanol market, America has a 54-cent per gallon tariff in place for Brazilian sugarcane ethanol. (To learn more, read What Is International Trade? and The Globalization Debate.)

Capitol Hill: Business as Usual
The simple fact of the matter is the U.S. sugarcane-ethanol tariff does nothing whatsoever, other than artificially prop up corn prices and the U.S. corn-ethanol industry. The problem is U.S. agriculture and oil companies have already invested so heavily in corn-ethanol that an immediate change is unlikely, even if the tariff is one of the main catalysts for elevated food prices globally. Really, it's just big business superseding global hunger, supported by the U.S. government.

The Brazilian sugarcane-ethanol tariff is set to expire on December 31, 2008. Sadly, Senator John Thune of South Dakota introduced a new bill in April 2007 that would extend the tariff until 2011. The bill has now been referred to the Committee on Foreign Relations.

Oddly - or perhaps not - South Dakota currently has 16 corn ethanol plants operating, or under construction, with corn ethanol capacity of 650 million gallons and another 278 million gallons under construction. Every single plant in South Dakota produces corn ethanol. Not one produces sugarcane ethanol.

Bottom Line
It's truly a sad state of affairs when fuel and profit supplant food prices, something Pilgrim Pride's CEO already is aware of. What's more, other meat producers like Tyson Farms (NYSE:TSN) are likely feeling the pinch of higher feed prices in the current quarter, something that may surface in July's earnings report. Moreover, Mexico's poultry producer Industrias Bachoco S.A.B. de C.V. (NYSE:IBA) is likely feeling profit pressure too.

To read more on this subject, see The Biofuels Debate Heats Up.

By Mark Whistler

Mark Whistler is a trader, author and analyst. He is the senior market strategist at TradingMarkets.com and heads the Forex Trading Service Forex Force.

His books include "Trade With Passion and Purpose" (2007), "Trading Pairs" (2004), "Profit from China" (2006) and "Profit from Uranium" (2006). Mark's newest book, "The Swing Trader's Bible", co-authored with CNBC/Fox News regular guest Matt McCall, will be on shelves in the summer of 2008.

Whistler is also the founder of WallStreetRockStar.com and writes regularly for TraderDaily.com. In his spare time, Whistler operates an art gallery in Baltimore, Md., along with Eats For The Streets, a growing organization - dedicated to helping the homeless across America.

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