Farm Futures, IL
06-06-06
Ethanol Demand Projected to Soak Up a Third More Corn This Year
Rising corn prices might boost hog breakevens $6 to $7 on a liveweight basis.
Farm Futures staff
Rapid growth in corn use for ethanol will impact corn prices and hog profitability.
Corn is typically the single greatest cost in raising hogs. Higher corn prices mean higher breakeven prices for hog producers.
"Low-cost corn helped the U.S. livestock industry grow to record levels over recent years," says Ron Plain, University of Missouri economist. "From 1999 through 2005, U.S. corn prices averaged $2.07 per bushel."
John Lawrence, Iowa State University economist calculates the average breakeven price for barrows and gilts during those years was $39.59 per cwt. live. During the previous 7 years (1992-1998), U.S. corn prices averaged $2.55.
Breakevens averaged $44.43 per cwt. live.
Kiss cheap corn goodbye?
USDA forecasts ethanol plants will use 2.15 billion bushels of corn during the
2006-07 marketing year. That's a third more than this year. December 2006 corn futures contracts are around $2.80 per bushel. December 2007 corn futures are trading around $3.10.
"During the coming 7 years (2007-2013), U.S. corn prices could average $3 per bushel, or higher," cautions Plain. "How much will $3 corn hike hog breakevens?
Based on past relationships, a $1 per bushel rise in corn prices typically boosted in hog breakeven prices $10 per cwt. However, in the past, high protein prices usually accompanied high corn prices."
Ethanol plants produce feed, distillers dried grains, as well as ethanol. Since
DDGS are a high protein feed, rising ethanol production may boost corn prices with little impact on protein costs. Thus, a $1 per bushel hike in corn prices should hike hog breakeven prices by less than a $10 per cwt.
"How much less? Perhaps $3 to $4 less for an overall increase in the live hog breakeven price of say $6.50 per cwt," says Plain.
Livestock, particularly cattle, substitute DDGs for soy meal. "Declining domestic soybean meal demand and rising soybean oil demand for bio-diesel may eventually result in oil demand rather than meal demand driving the soybean

crush," says Darrel Good, University of Illinois economist. "If so, soybean meal prices may remain relatively low, providing producers of soybeans and livestock the best of both worlds - low-priced meal and soybean prices supported by high soybean oil prices.
"But if biodiesel production continues to expand, production may have to shift away from soybeans to crops with a higher oil yield," he notes.
How much might pork consumers be asked to pay? "Retail pork prices would need to rise by a bit over 4% to fund a $6.50 per cwt. higher live hog price," says
Plain.
Normally, the supply of pork would need to drop about 3% to generate a 4% hike in retail pork prices. However, since higher corn prices also will negatively impact poultry and cattle, competing meat supplies will likely fall. Thus, maybe only a
2.5% reduction in the swine herd will be necessary to restore profitability from a
$1 per bushel hike in corn prices.
Given the large positive margins for turning corn into automobile fuel, the ethanol industry will likely keep growing rapidly. This will mean higher corn prices and higher breakeven costs for livestock producers and a smaller livestock industry.