 There’s
no longer any doubt. America—at least its policy makers—has
decided energy is more important than food, at least for now.
This certainty arrived in December
when President Bush signed into law the Energy Independence and
Security Act of 2007, which doubles the amount of mandated,
subsidized grain-based ethanol production, from the 7.5 billion
gallons by 2012 (mandated in 2005 legislation) to 15 billion
gallons by 2022.
“We support efforts to increase
U.S. energy security, but this bill takes a myopic approach by
mandating grain-based ethanol increasing demand for corn even
further than the record levels we’ve seen in the last 12 months.
The net effect of this bill will be to increase the cost of meat
and poultry to consumers.” That’s what President Patrick Boyle,
president of the American Meat Institute said before Bush signed
the bill.
Shortly after, Iowa State University economists in Iowa, the
epicenter of corn-based ethanol production, reported that
farmland values in that state grew a whopping 22% ($700 per
acre) last year to a record high $3,908 per acre, according. The
average value per acre in 2000 was $1,857.
When 2007 began farm real estate
values—a measurement of the value of all land and buildings on
farms—averaged $2,160 per acre, up 14% from 2006, according to
the National Agricultural Statistics Service. That was record
high and $260 more than a year earlier. Cropland and pasture
values rose by 13% and 16%, respectively. As indicated by the
Iowa figures, the national increase for 2007 will likely be more
significant.
“Each sector of the livestock and
poultry sector is negatively impacted in varying degrees by the
new and higher price plateau for corn. The sector of our
industry that is most susceptible to the adverse impact of a
sharp increase in corn prices is the cow/calf sector,” explained
Andrew Gottschalk Senior Vice-President, R J O’Brien &
Associates and Owner, HedgersEdge.com, LLC during December’s
biennial Range Beef Cow Symposium (RBCS).
“The price of fed cattle is ultimately determined by the amount
of money consumers are willing to spend on the finished
product—beef. Since there is a limit to consumer expenditures
for beef, the price of fed cattle is determined by those
spending limitations,” explained Gottschalk. “Simply put, if the
price of fed cattle cannot increase to offset the increase in
feeding costs, the necessity to ensure a profit margin to the
fed sector will force the price of other inputs to be adjusted
lower. Thus, the higher price of corn or feed grain will
ultimately limit the price level that the fed sector will pay
for calves and feeders. This condition is currently being masked
and minimized due to a historically low calf crop and the lack
of any expansion in the U.S. cattle inventory.”
On the other side of the coin,
the same increasing feedlot costs that demand pressuring the
price of cattle coming in obviously squeezes cow-calf producers
from the other side.
In round numbers the Livestock Marketing Information Center (LMIC)
estimates returns over cash costs plus pasture rent for a
commercial cow-calf operation in the Southern Plains have
declined more than $100 per cow since 2004. Economists there say
cow-calf returns for 2007 were about $38 per head, the lowest
since 2002 and the second lowest since 1999.
“The upswing in production costs for cow-calf operations has
been across the Board, including winter feedstuffs, pasture,
fuel, and labor,” say the folks at LMIC. More specifically, they
point out in January last year USDA reported that costs for
production items were 2% percent higher than a year earlier; by
July the increase was 7% and in December the annual increase was
11%.
Advantage is Where You Find It
That’s the view from orbit. Closer to home the impact is more or
less, depending on where home is.
“The livestock industry in the
Midwest is the direct beneficiary of the regional concentration
of ethanol production. The cost of transportation and concerns
regarding potential spoilage and unloading problems limit long
distance shipments of DDG’s (Distiller’s Dried Grains). The
immediate result of the ethanol industry’s concentration in the
Midwest is the attraction of more cattle feeding into that
region. This is following decades of decline, as cheap feed
grain prices and relatively cheap transportations costs had
encouraged the growth of cattle feeding in the south plains,”
says Gottschalk.
Cattle on feed inventory numbers
certainly bear out the fact that more cattle are being fed in
the Corn Belt and fewer in the Southern plains, though that’s
where the lion’s share of the nations fed cattle inventory still
originates.
He estimates corn cost $4.11 per
bushel in the Texas Panhandle in September, while the average
price in the Corn Belt was $3.37. That 74-cent differential is
about a third more than what existed a year earlier. “This
advantage can reduce feeding gain costs by as much as
$10.00/cwt,” says Gottschalk. However, Producers in that part of
the world are also bidding away some of their economic advantage
to purchase cattle.
He notes the flip-side of that is
that regional premium will continue to grow for Southern plains
cattle versus those in the Midwest because of a lack of packing
capacity in that part of the world. “This trend will be
maximized only when the price premium in the South Plains
exceeds the cost of transport of fed cattle from the Midwest
into the South Plains,” says Gottschalk.
History is Hard to Come By
The shifting paradigms wrought by sustained high corn prices in
a commercial cattle feeding industry predicated on the opposite
means there’s little from the past to predict how economic
relationships should pan out over the long haul.
“Good forecasting models for
feeder cattle prices that are based on corn price are limited.
Historical relationships do, however, suggest an inverse
relationship between feeder cattle and corn prices occurs up to
the point where feeder prices are bid high enough to result in a
forecasted finished breakeven price,” said Terry Klopfenstein,
ruminant nutritionist at the University of Nebraska (UN). At the
RBCS he presented analysis conducted by him and other
researchers, examining yearling versus calf-fed production with
higher corn prices. With $90 fed cattle, their model determined
a 650-weight steer could be purchased at a breakeven price for
the feedlot at $131.07, $121.24, and $112.31/cwt. when corn
prices are $2.50, $3.50, and $4.50/bu, respectively.
On the Internet you can find the
details behind the yearling and calf-fed scenarios they
assembled at:
http://www.rangebeefcow.com/2007/images/newsroom/proceedings/KlopfensteinTerry.pdf.
“Overall the yearling production system was more profitable than
the calf-fed system,” reported the UN researchers. “However,
increasing corn price had little effect on the profitability
advantage of yearlings. This is counterintuitive but likely the
market adjusts. The slide (650 lbs. to 550 lbs.) declined from
$5.60 at $2.50/bu corn down to $2.95 at $4.50/bu corn. Overall
prices that would be paid for calf-feds declined by $19.36/cwt.
Price of calves to produce yearlings decreased $24.66/cwt. The
smaller slide with higher prices of corn logically suggest the
extra weight of calf-feds was being valued more at higher priced
corn.”
So, they say, it’s not clear that there will be large profits
for backgrounding cattle — putting more of the weight on with
forages, residues and byproducts. “We just don’t have good
historical data at high corn prices to make predictions because
we haven’t had high corn prices,” they say. “At current crude
oil prices and government subsidies, ethanol plants can afford
to pay $4 to $5/bu. for corn. We as a cattle industry need to
prepare for the eventuality of that corn price.” |
