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.