Farm News, IA
08-24-07
Ethanol production gives cattle feeders competitive edge
By Kristin
Danley-Greiner
Farm News staff writer
Iowa livestock producers are not taking as big of a hit in the pocket from higher
feed costs as farmers elsewhere in the country, and beef producers in particular
are not feeling the heat fueled by higher corn prices.
Bruce Berven, executive vice president of the Iowa Cattlemen’s Association, said
that the availability of co-products from ethanol production as a cattle feed allows
Iowa cattle feeders to have a competitive advantage over feeders in areas where
co-products are not available, or where the freight to deliver them to feedlots is
excessiveit’s inefficient to transport a high moisture product.
“Higher priced corn tends to keep feedlots more current in their marketings of fed
cattle, thus limiting carcass weights,”î Berven said. “There is an adage that cheap
corn makes for cheap cattle. Perhaps that is why cattle feeders are not
expressing their dissatisfaction with the higher corn prices. With cheap corn,
cattle can be overfed and higher carcass weights add to beef supplies. Also, with
cheap corn more farmer-feeders elect to feed cattle also adding to beef
supplies.”
“Typically, when grain prices are high, feeder cattle drop in price hurting the cowcalf and stocker operators. Feeder cattle prices have remained amazingly strong
in recent months. Strong demand for beef seems to be having a very positive
and somewhat puzzling impact on cattle prices,”î Berven continued. “Texas cattle
feeders and other feeders in areas where corn is not produced in abundance
may have concerns about higher prices, as do pork and poultry producers. Iowa
and Midwest cattle feeders may be an anomaly.Ӕ
Kevin Carstensen, a small feedlot operator in northwestern Iowa, said that pork
and poultry producers are ’’a lot worse off than cattle producers.î
“We’re able to use by-products of ethanol,”î he said. “But what we’re worried
about is how much pasture ground is being converted to corn to keep production
levels up. That’s a bigger concern for us than the price of corn, which won’t stay
high forever. You just make adjustments as you go.î”
John Lawrence, director of the Iowa Beef Center and an agriculture
economist at Iowa State University, said that Omaha cash corn prices the first
week of August were $3.19/bushel.
“Compared to the lowest price last fall of $1.94 (mid-August and again in midSeptember) it is $1.25/bushel higher. Compared to the high price this spring of
$4.15 (third week of February), it is $.96/bushel lower,”î Lawrence said. “If a
livestock producer is buying grain, a $1/bushel increase in corn price adds about
$4.50/cwt live weight basis to the cost of the finished hog for the farrow to finish
hog producer or $4.80/cwt live weight basis to the cost of the finished steer for
the feedlot. For the farmer raising his or her own corn, it doesn’t change their
whole-farm picture, but they did forgo the opportunity of selling corn at higher
prices.Ӕ
Dave Miller, research and commodity services director with the Iowa Farm
Bureau Federation (IFBF), said that cash corn prices today are about $0.80 per
bushel higher than this time a year ago, but that they are more than $1 lower
than the peak prices seen in February of this year. Furthermore, December 2007
corn futures are only 60 cents higher than they were at this time a year ago.
“Corn prices have been in a general downtrend since February,î” Miller said. “In
the short run, higher corn prices have increased production costs for livestock
producers, but livestock prices have also been adjusting to the price signals in
the market place with cattle, hog and egg prices moving higher. All three sectors
are operating at profitable levels, although near term profit margins have not
been a good as they have been over the past three years.î”
Darrell Good with the University of Illinois said that he’s seeing corn prices
reducing feeding margins, but not causing liquidation.
“Disease problems in the Chinese hog herd has supported demand and prices
for U.S. hogs,”î he said. “Milk prices are going through the roof and cattle prices
at an all time high.Ӕ
Elaine Kub, DTN commodity market analyst, said that while corn prices are
currently trading near their 2007 lows, the long-term picture has indeed changed
for the corn market, due to the changing landscape of corn demand.
“While producers and end users used to watch the market bounce between
roughly $2 and $3.50, that range has shifted higher in response to the increased
competition,”î she said. “We can reasonably expect oscillations to occur between
$3 and $4.50 on the futures market throughout the next three to five years.”
“Whereas the historical price ranges and fewer sources of local competition used
to favor livestock producers’ feed purchasing strategies, the paradigm has now
shifted. Marketing plans need to change in recognition of the long-term shift in
corn prices. And even the feeders who are willing to lock in ‘bargain’ corn around
$3.50 per bushel now face new challenges in their marketing strategies: namely,
increased futures volatility that drives up margin risk and increased option
volatility that increases the cost of calls,î” she continued.
Miller said that the market is responding to increased demand for corn for
biofuels.
“The market signals sent to producers have resulted in a significant increase in
corn acreage and production is increasing sufficiently to satisfy all of the market
demands. Resource allocations are being affected on a global basis. Higher
prices for corn, soybeans, wheat and other crops will stimulate increased
plantings and higher production levels,”î he said. “Given annual production
cycles, the market is doing a great job of sending the appropriate signals to
stimulate production and investment in new production capabilities and
generating appropriate resource allocation results.Ӕ
In the short run, producers have responded to higher feed costs by decreasing
market weights, adjusting feed rations and decreasing the ‘‘days on feed’’ for
cattle, Miller said.
“In the longer term, overall market prices are responding and marketing margins
are returning to normal with an adjustment to higher corn prices,”î he said. “It is
already getting better for livestock producers. Corn prices are falling, production
levels are increasing and livestock prices are adjusting. Producers are already
increasing fed cattle weights back to last year’s levels and hog slaughter
numbers are running above year ago levels.”
“The latest USDA supply and use projections indicate a slight build up in corn
stocks for the 2007-2008 marketing year. The U.S. is not running out of corn,Ӕ he
added.
Lawrence noted that short-term, if a producer is buying corn, he or she should
look for opportunities to buy on market declines.
“Given the large crop that is in the field, there is expected to be a weak basis at
harvest and a buying opportunity for producers with storage,î” he said. “Feedlots
may want to consider placing heavier cattle to reduce the amount of corn they
feed. Both cattle and hog producers should evaluate if feeding distillers grains
and solubles to livestock. Particularly cattle feedlots that are near a source of wet
corn co-products.”
“Longer-term, step back and think strategically about your operation,”î Lawrence
continued. “Are the strategies that work when corn was under $2/bushel the ones
that will be most successful when corn is over $3/bushel? Factors for Iowa
producers consider include raise versus buy corn, how much storage, forward
pricing purchases, placement and marketing weights of hogs and cattle,
alternatives to corn and others.Ӕ
Good noted that keeping feed prices in check will require a continuation of ’’very
large crops.î
“Near term, large corn crop will keep prices modest, lots of distillers grain
available, soybean meal prices are still modest,î” he said.
Kub said that livestock producers may have to be more proactive in their
purchasing strategies.
“There are seasonal trends in not only feed prices, but futures market volatility,
and a watchful buyer may still find some opportunities to hedge needs at
seasonal lows within the new range of prices,”î she said. “That may protect them
on a year-to-year basis, but from a longer-term perspective, this higher shift in
corn prices may be here as long as ethanol is demanded by the U.S. consumer.”
“Alternative feeds - like DDGs, barley and wheat - can be monitored in
anticipation of bargain opportunities,”î she continued. “However, buyers of small
grains in the U.S. find that international demand for those grains makes even
stiffer competition than local ethanol plants. From a historical standpoint, the
prices of wheat futures are much farther off average than corn prices are. The
market could get better as market participants become more confident of what
range of prices is reasonable to expect. Reduced volatility will make hedging less
risky.Ӕ
Kelvin Leibold, ISU farm management field specialist, said that livestock
producers have to get attain better feed efficiency through artificial proteins and
get better conversion on feed to help with the current situation.
“They need to find ways to feed by-products and other feed stocks to their
animals, but that will be very hard to do, as we are already doing a good job of
this,î” he said. “The other solution and one that I think is occurring in the dairy
industry is that the producers need higher prices for their livestock and livestock
products. However, as U.S. livestock prices increase, we will find increased
pressure from low cost producers from other places in the world like Argentina
and Brazil.”
“On the other hand we will find some places will drop out of production, like
western Europe, as the total costs get too great. Environmental costs of raising
livestock vary a lot around the world and so if we have places with lower cost
grain production and lower environmental costs and lower processing costs and
lower shipping costs—you start to get the idea—someone else will be producing
it,î” he added.