Des Moines Register
01-26-07
Ethanol fuels discussion at Iowa Pork Congress
Hog producers fear soaring corn prices amid Bush's call for more renewable
fuels
By JERRY PERKINS
REGISTER FARM EDITOR
The subject of this year's Iowa Pork Congress was supposed to be swine, but
ethanol was the talk of the two-day show.
As President Bush was calling for the production of 35 billion gallons of
renewable fuels such as ethanol in the next 10 years, many hog producers were
wincing at the rapid run-up that would mean for already-high corn prices.
Ethanol's unquenchable thirst for corn threatens to derail a record-breaking run of
profits, hog producers were told. And consumers should expect to pay higher
prices for pork.
Also, an Iowa State economist said, the sky-rocketing price of corn might even
reach a point where investment in the ethanol industry itself is choked off.
Agricultural lender Mark Greenwood, vice president of commercial lending at
AgStar Financial Services in Mankato, Minn., said higher corn prices have raised
the cost of producing pork enough that hog producers probably will lose money
this month for the first time in three years.
Hog producers will receive $115 to $120 for every hog they sell this month,
Greenwood said, but it will cost them $120 to $125 to raise that hog to market
weight.
In 2006, Iowa State University estimated the cost of producing a 260-pound
market hog rose 10 percent from January to December, mostly because of
higher corn prices.
Higher prices for corn mean hog producers will have to lower production costs in
other areas if they want to stay in business.
Producers have used their profits of the past three years to pay off debts,
Greenwood said.
Hog producers should think about investing some of their profits into an ethanol
plant instead of expanding their hog operation.
"Most of them can do what they want and accept that risk," he said.
Bruce Babcock, director of the Center for Agricultural and Rural
Development at Iowa State University, said Thursday that ethanol has become
so crucial to the price of corn that the grain is now considered an energy crop.
The rapid rise in corn prices since October has been caused by a frenzy of
ethanol demand, he said, and is a one-of-a-kind rally.
"We've never seen a corn price increase like this that has not been driven by a
short crop," Babcock said.
Assuming that the price of a barrel of crude oil stays between $50 and $60,
Babcock said, economic models show that corn prices will range from $3.36 to
$4.05 a bushel.
Any corn price that rises above that ratio of crude oil-to-corn will make ethanol
production unprofitable and shut off investment in ethanol plants, he said.
Higher corn prices are already cutting into ethanol plant profits, Babcock said.
Ethanol profit margins are expected to keep dropping for another year.
Higher corn prices to meet increased ethanol demand will entice farmers to grow
more corn, Babcock said, and increase the cost of production for livestock
producers.
Consumers eventually will pay 7 percent more for pork at the supermarket,
Babcock said, as producers cut the number of hogs they raise because of
increased costs of corn.
"That's a relatively modest increase," Babcock said.
Greenwood expects higher supermarket prices would occur late this year or early
in 2008.
The impact of high corn prices will mean an increase in the amount of corn acres
planted, he said, but that increase acreage will go to ethanol production. There
will be reductions in the use of corn for livestock feed, exports and food, he said,
as ethanol soaks up more and more of the corn crop.
During the next two to three years, livestock producers can count on corn prices
ranging from $2.65 to $4 a bushel, depending on the size of the 2007 and 2008
corn crops and the price of ethanol, Babcock said.
That range of corn prices will lead to lower profit margins for livestock producers
and higher prices for consumers at the meat counter.
Farm Editor Jerry Perkins can be reached at (515) 284-8456 or
jperkins@dmreg.com