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Grain tug of war intensifies
The drought-stricken 2012 U.S. harvest ignited a blowtorch beneath simmering supply concerns.
As ethanol and its coproducts surpass feed as the top use of the U.S. crop, producers of livestock, dairy, and poultry are struggling to cope with higher and more volatile feed costs.
Preliminary estimates are for about a 10.7-billion-bushel corn crop, setting the stage for an end user tug-of-war over the next year. If recent short crop years are an indication, livestock producers will bear the brunt of the rationing.
“The livestock sector faces another year of extremely high feed costs and reduced availability of corn,” says Corinne Alexander, Purdue University ag economist. “The sector will be negotiating a period of sizeable losses, looking forward to a future period of profitability after the 2013 harvest.”
Many livestock producers are making short-term decisions that will cast a long-range shadow over the future of their operations. This includes three historic herd cutbacks.
- The October 19 cattle-on-feed report pegged feedlot placements down 19% from 2011, and U.S. beef cow numbers are at the lowest point in 50 years.
- Dairy cow slaughter was 12% higher between July 1 and mid-August this year than in 2011. The industry suffered severe losses in 2009-2010 due to rising feed costs and reduced exports. In California, where large dairies buy and truck in all of their feed, significant producer equity has been drained.
- Hog slaughter in September was the highest in 4½ years. Pork producers have been in the red for the past six months and losses in the next six months may be around $30 per head. Costs of production are expected to be about $72.29 per live hundredweight through the winter.
“Family operations with a sizeable land base have land equity to draw upon,” says Chris Hurt, Purdue University ag economist. “Larger hog producers with minimal land base will need to draw on corporate equity and then their lenders.”
Drought impacts ethanol producers
The Renewable Fuel Standard (RFS) mandates 13.2 billion gallons of renewable fuels in 2012, mostly from corn. As livestock sectors flounder, industry leaders and food manufacturers have called for a partial temporary waiver of the RFS mandate.
But the drought's impact on this year's corn crop also is battering the ethanol industry. The Renewable Fuels Association projects ethanol use to be down 10% from last year. Production has been reduced by 12%, as 25 plants have been idle.
“Last summer's high corn prices generated deeply negative margins for ethanol plants and caused many to reduce production or to shut down,” says Darrell Mark, South Dakota State University adjunct ag economics professor.
Ethanol advocates point out that almost one third of every bushel of corn used in ethanol returns to the feed market as dried distillers' grain (DDG). They say that this expanding supply has blunted the impact of cattle and hog feed costs. But DDG prices reached record-high price levels last summer as producers substituted it for drought-scorched pastures, hay and corn at record-high prices, and other limited feedstuffs.
“Reduced ethanol production also lowers distillers' grain production because ethanol fuel and distillers' grain are produced in fixed proportions,” Mark says. “The supply of ethanol coproduct feeds declined last summer and is expected to be lower for the next several months.”
In fact, recent research indicates that waiving the RFS mandate may have a smaller-than-expected impact on the price of corn or bushels of corn available for feed, says Darrel Good, University of Illinois ag economist.
Iowa State University ag economist Bruce Babcock agrees. His research shows the price of corn would drop an average of only 28¢ due to a full waiver.
A new Food and Agricultural Policy Research Institute analysis estimates that corn prices would fall less than 1% with a full waiver, and ethanol production might only dip 1.3% in 2012-1013. Corn for livestock feed might increase 0.6%.
“My big concern is keeping the RFS,” says Nevada, Iowa, farmer and cattle feeder Bill Couser. “We need the feed here in the Midwest to be competitive. I tell cattle producers to hang in there. We'll have big crops again.”
Uptick in corn silage
The degree of rationing will depend on the final size of the 2012 crop, and the supply of old-crop corn stocks.
Many producers anticipating low yields harvested corn acres in August as silage. Of the corn acreage in the 18 major-producing states, 6% was harvested as of August 26.
“The nearly $20-a-ton decline in South Dakota distillers' grain prices in September and early October likely was due to availability of silage cut in large quantities because of drought and typical harvest-price pressure,” Mark says.
The September 1 estimate of old-crop corn stocks is less informative this year, since it reflects both the total magnitude of consumption during the quarter and the degree of substitution of new-crop for old-crop corn in August.
“That mystery will be at least partially solved by the December 1 stocks estimate released in January 2013,” Good says.
In the meantime, some demand destruction is going on, as cost of gain drives feed decisions. One strategy is reduced market weights. The average hog market weight in September dropped 3 pounds. To date, cattle slaughter weights are continuing at higher-than-expected levels.
Livestock producers also are feeding unconventional salvage feedstuffs, ranging from canola meal to bakery products and culled potatoes. In some areas, discounted aflatoxin corn is an alternate feed for hogs and beef cattle.
The outlook for distillers' grain prices hinges on the corn market. “Prices are uncertain and highly volatile, and will remain so until final yield estimates in January,” Mark says. “It appears that a harvest low might have been posted the first week of October, supporting DDG prices at current levels.”
He adds, “Contracting distillers' grains makes sense for producers concerned about procuring the physical supply for rations. That's particularly true if current prices offer acceptable feeding margins. It looks like DDG prices will trade at a higher value relative to corn than in the past, reflecting relatively tight supplies.”
Grain Shortfalls Raise Freight Tab
The past 18 years have provided Darwin Hall (shown left) with a good vantage point on the ups and downs of the hog industry. As production manager for Hintzsche Pork, he oversees operations in Iowa and Illinois. Hintzsche operates one feed mill, and purchases feed from six other mills located in Iowa and Wisconsin.
“Yields are down, but there's enough grain overall,” Hall says. “The problem is the added freight costs of getting it to feed mills where local supplies are tight.”
He watches margins closely and locks in feed prices when an opportunity arises. “One year ago, the price of corn was $7.25,” he says. “By the end of this August, it was $8.50. We've had big swings in distillers' grain prices – from 50% to 300%.”
Hall says Hintzsche is making a concerted effort to expand its energy/protein feed alternatives, using DDG, bakery products, and wheat mids. “DDG produces a wholesome product,” he says. “You have to watch how long you feed it at high levels, because it makes for a softer carcass. You have to back off in the final finishing phase.”
He says supplies are tight, especially with the worldwide demand for corn and soybeans. Despite predictions that hog production may return to profitability in midsummer of 2013, Hall is looking at the third quarter of 2013. “We can handle this year by shrinking market weights and, at the same time, by reducing demand for feed ingredients,” he says. “But we need to replenish subsoil moisture by next spring.”
He isn't seeing major liquidation. “Some operators are taking animals that aren't producing and selling them off to lower their costs of production,” he says. •
Livestock producers who persevere through the 2013 harvest will be positioned to profit from better markets.
During the next three to seven years, corn supplies are likely to be more adequate than in recent years, according to a 2012 report, Future Patterns of U.S. Grains, Biofuels, and Livestock and Poultry Feeding. This projection is based on the assumption that yields will return to their long-term upward trends.
The ethanol blending mandate will rise annually until 2015, but at a much slower rate, capping at 15 billion gallons. The beef sector may benefit as more ethanol plants remove corn oil from DDG to provide feedstock.
University of Illinois ag economists Darrel Good and Scott Irwin argue, however, that the RFS is poised to collide with market realities. “The blend wall becomes much more problematic in 2014 and beyond,” Good says. He suggests that biodiesel would have to be used to meet renewable mandates.
“It underscores the importance of implementing E-15 by 2014 or 2015,” Good says. “Otherwise, a new and even larger conflict between food and fuel use of crops is in store, due to the huge potential draw on vegetable oil feedstocks.”
Urges Cattle Producers to Hang Tight
Bill Couser (shown left) is a Nevada, Iowa, farmer and cattle feeder who also is past president and current member of the board of Lincolnway Energy, LLC, a dry mill ethanol plant near Nevada.
“This is my third drought. The first was in 1977; the second was in 1988,” Couser says. “We need to let this thing play out. Ethanol producers don't have any tax credit, and farmers don't have any [indirect] ethanol subsidies. The free market is working. We're standing on our own two feet. When I go to Washington, I tell them to leave the RFS alone.”
Couser acknowledges that ethanol producers are struggling. “Ethanol plants continue to run. Some may be throttling back a little,” he says. “I put on my farmer cap and haul the corn I grow to the plant for ethanol, and then I haul it back as coproduct.” He says a bushel of corn sold to the ethanol plant produces 2.85 gallons of ethanol, 0.4 pound of corn oil, 15 pounds of DDG, and 16.15 pounds of carbon dioxide.
Since Couser feeds all of his own corn, he's cushioned from the worst price shocks. But he points out that cattle can thrive on many different feed sources. “The drought has unleashed new technology,” he says. “Cornstalks are more palatable and nutritious. I look at the costs of available feed ingredients week to week and then decide the rations. I'm making least-cost decisions.”
Couser adds, “Cattle producers are doing their job. We've downsized the momma cow herd. We've got our genetics up. We're using less water and feed. We're very efficient. I don't want to see beef prices so high it become a specialty source of protein.”