“The world in which you operate has
fundamentally changed. How have you changed your business?”
That’s a question John Lawrence,
livestock economist and director of the Iowa Beef Center posed
to participants at the BEEF Quality Summit (BQS) presented by
BEEF magazine in November.
Lawrence pointed out the cattle and beef industry we’ve known in
our lifetime has been built upon relatively cheap feed and cheap
energy. With exponential increases in those costs, which are
expected to be the new norm, why would the same industry still
be appropriate?
In a word, ethanol has changed
everything. More specifically, the nation’s choice to subsidize
ethanol production as a means of reduced dependence on foreign
oil has turned the world of agriculture upside down.
Increased corn demand and corn
prices, fueled by that notion and subsidy, have pulled acres
away from other crops; 93 million acres of corn were planted
last year, the most since 1944. In turn, prices for other crops
such as wheat and soybeans are going through the roof in an
attempt to buy acreage back from corn production. On both
counts, acres are being taken away from forage production.
That’s before you talk about the downstream effects of increased
input costs and shifting demand.
“It’s the most dramatic change in
my lifetime; it’s probably the most dramatic change in
agriculture since WW II,” says Barry Dunn, Executive Director
and Endowed Chair at the King Institute for Ranch Management.
Dunn provided the summary for the BQS.
According to Dunn there are
currently 129 ethanol plants operating; by the end of this year
they will have churned out about 7.9 billion gallons of ethanol;
12.3 billion gallons is expected next year. Another 85 plants
are under construction, planned or earmarked for expansion.
When you account for plants currently in production or being
expanded, Lawrence says ethanol production capacity is 11.5
billion gallons. Throw in the new plants that have already
broken ground and he says you’re talking 14 billion gallons. Not
coincidentally that’s how much ethanol the U.S. would need if
all of its gasoline was sold as E10—gasoline blended with 10%
ethanol.
Now, think about what’s happened
in the past couple years, how high and volatile feed and fuel
prices have been. Remember that during this time there has been
no drought in the primary corn-producing states. Keep in mind
the changes have been wrought with about 8 billion gallons of
ethanol production. During his State of the Union address last
year, Bush called for 35 billion gallons of renewable fuels by
2017.
So, prices have more opportunity
to climb than not. Incidentally, Dunn points out that a 1%
change in supply of a commodity typically spawns a 6-8% change
in the price of the commodity. And, that’s before you consider
how ethanol production changes the complexion of rural
communities and the amount of money that flows through them.
“Rural communities need both
livestock and ethanol production,” says Lawrence. But, livestock
production is worth more jobs. According to studies at Iowa
State University, using a 50-million gallon ethanol plant as an
example, 18.5 million bushels of corn is required. The plant
accounts for 35 workers directly, as well as 98 created and
induced jobs, or 133 jobs all together. Funnel that same amount
of corn through a feedlot and you’re talking 140 jobs before
considering the employment created further down stream in
packing and processing.
“Ethanol production is a low labor business; livestock
production is a high labor business,” says Lawrence.
Along the way, an already
depleted national cow herd is finding both incentive and
resources for expansion tough to come by.
“The total number of beef cows is
declining, and I think it will for a couple of years,” says
Lawrence. “I think we’ll lose a lot of cow habitat in this part
of the world (Iowa, Nebraska, the Dakotas, etc.), so I think
we’ll have a hard time rebuilding the cowherd in this country.”
At the same time, ethanol is increasing food prices, further
pressing consumer billfolds. For those who argue the point,
Lawrence explains the cost of corn as a percentage of total
retail beef, hide and offal value ran about 7.4% between 1991
and 2006. It rose to 9.0% between January and June of this year.
Though domestic beef demand has
been strong—even stronger than beef demand indices, according to
some—there are limits. “As an industry we can’t eat our way to
profitability,” says Dunn. “As a nation, we’ve eaten or way to
obesity.” Spun differently, presupposing increasing domestic
beef consumption, even when allowing for population growth, is
not a sound strategy.
Worse, Dunn points to the
unintended consequences of ethanol policy. In Latin American
counties, the consumer cost of corn—the staple of their diet—has
doubled.
“It would be arrogant and insensitive not to recognize that,”
says Dunn.
Undoubtedly the ethanol industry will change—it has already
undergone consolidation—but betting against its existence for
the foreseeable future is becoming more and more a fool’s wager.
Change is Certain—Lots of It
“The mosaic of American agriculture will be very different,”
emphasizes Dunn. “There’s a battle for resources between
cow-calf producers, stockers and feedlots. The marketplace and
price discovery will be very different. It will all happen
faster than we’re used to. But, there’s something else going
on.”
At the risk of paraphrasing one
of the most insightful, eloquent lines of thinking you’d ever
hope to share, Dunn believes it boils down to this:
By definition in a capitalistic
economy, industries reinvent themselves in order to survive,
meaning parts and pieces of industries are destroyed, making
room for the new. At the same time, those industries in flux and
the markets serving them are trying to find balance.
“It’s that conflict between
trying to reinvent itself and finding balance at the same time
that creates confusion, frustration and opportunity,” says Dunn.
For instance, Lawrence points to
opportunities more producers are finding in the Distiller’s
Grains (DGs) that are a byproduct of ethanol produced with corn.
He says that source of energy can be used to stretch grazing
with supplemental feeding, used to creep feed. Total mixed
rations can make it cheaper than feeding hay, meaning in some
cases weight can be added cheaper in a dry lot situation than in
the pasture. Imagine that.
There’s plenty that’s not known
about using DGs at this point in time, though. How much can be
used in a given situation without negatively impacting cattle,
carcass or retail cut performance? Research in all of these
areas is underway.
Jay Wolf, president of the
Nebraska Cattlemen’s Association also spoke at the BQS. He says,
“The livestock industry needs a huge educational effort to help
producers, especially small and mid-sized operations, adjust to
new economies that have resulted when corn is priced as energy
instead of food and feed.”
As Lawrence says, “The world
isn’t predictable anymore.” |
