Iowa Farmer Today
01-31-07
$4 corn?
By Jeff DeYoung, Iowa Farmer Today
DES MOINES -- As hog producers continue to compete with ethanol plants for
corn, Dermot Hayes believes the industry could be the competitor to blink first.
“We’re going to have to get used to $4/bu. corn,” Hayes, an ag economist at
Iowa State University, said during the recent annual meeting of the Iowa Pork
Producers Association.
“It’s not a temporary thing unless foreign energy prices plummet for some
reason.
“We can grow up to 16 billion bushels of corn by having larger yields and fewer
soybeans. We need to get used to continuous corn.”
For the pork industry to survive, Hayes said hog production will have to
decrease.
“Pork producers can only pass along the higher production costs if they
collectively reduce production,” he said. “The market is going to require a long
period of losses.
“This industry is very good at exporting pork, but if our costs increase annually
more than our competitors, we could lose some of that market.”
Hayes said ethanol plants can afford to pay up to $4.05/bu. for corn and still
break even. Those prices, he said, make it tough for hog producers to make
money.
“We’re in need of 2 billion bu. of corn annually for ethanol demand, and we
estimate that will double by the end of the next crop year,” Hayes said. “We
further expect that to double again, to 8 (billion) to 10 billion bu.
“Nationwide, the ethanol industry is following the pork industry because ethanol
likes cheap corn. That makes it a very tough competitor for the pork industry.”
Hayes said the corn market has responded accordingly due to the increased
demand from the ethanol industry.
He noted the cost of production for pork producers has increased by up to 20
percent in the past few months, and said that percentage could climb as high as
40 percent in the near future.
Soybean meal prices also have begun to increase because of fewer soybean
acres expected to be planted this year.
Estimates indicate the carryover of corn stocks this year will be similar to 1996
levels, when Iowa had to import corn to meet demand.
“We expect a scarcity of corn in 2007, and if farmers do not meet the additional
demand, we could have a similar situation in 2008,” Hayes said. “The July
(futures) contract is where will be able to see this.”
He said ethanol production will continue to increase.
In his recent State of the Union address, President Bush called for ethanol
production to increase to 35 billion gallons by 2017, about seven times the
amount produced last year.
Hayes expects U.S. farms to grow up to 16 billion bu. of corn to handle the added
demand. Alternative sources would have to be used in order to meet
expectations, he said.
Additional corn could be imported, Hayes said. Currently, the U.S. exports about
2 billion bu. annually, and domestic demand will require most of that corn stay
home, he noted.
“It costs as much to grow a bushel of corn as it does to move it, so if we import
corn, we have to add that cost to it,” Hayes explained, adding he expects corn
imports to increase once ethanol production requires 8 billion bu. annually.
He said the price of dry distillers grains with solubles (DDGS) have followed the
corn market upward.
Since hog producers can use DDGS in much smaller amounts than cattle and
dairy producers, Hayes said the ethanol effect will be much greater on the pork
industry.
“Because of that, the beef and dairy industry is going to be able to bid you up on
DDGS prices.”
Hogs need corn, Hayes said, but added 5 to 10 years of corn imports could
prompt the pork industry to shrink.
“You are going to lose your competitive advantage for raising hogs. Other places
will have lower production costs,” he said.
This will make pork less expensive in those markets and perhaps stimulate pork
production at the same time.
“You are probably looking at the industry being 10 percent smaller than it is now,
and if ethanol production continues to grow, further adjustments will be needed
by the industry.”