farmgate: The Livestock Industry's Reaction To Higher Feed Prices
Agriculture has many visionaries and out of the box thinkers, but were they all at the top of their game when it came time to predict the impact of high grain prices on the agricultural economy? The catch-phrase du jour is “unintended consequences,” and the impact of the grain market may have fed some of those rations to the US livestock industry.
Crystal balls are valuable, if they produce a clear picture of the future, but in the case of the pumped up grain market, a foursome of agricultural economists says the impact on the livestock economy was not foreseen. Writing in the current issue of Choices Magazine, the economists say livestock and poultry producers have absorbed significant losses from high feed costs, since they have been unable to pass along those costs to the consumer. The economists are John Lawrence of Iowa State, James Mintert of Kansas State, John Anderson of Mississippi State, and David Anderson of Texas A & M. However, they contend the consumer will ultimately feel the impact as producers adjust to higher feed costs, and many of them elect to leave the industry. And the speed of that adjustment will correlate with the production cycle of the various livestock species, meaning the first impact will be felt in poultry, which has the shorter cycle.
For the record, feed costs are 60-70% of the cost of livestock production, and they have increased 40-60% in the past two years. Corn prices alone rose 266% from the first quarter of 2006 to July, 2008, at Omaha. When corn prices increased 179% in the early 1970’s the swine breeding herd declined 15% and beef inventories decreased 19%.
Beef industry: Kansas State currently estimates the cost of gain for feedlot cattle has increased from 54¢ per pound in 2006 to 74¢ in 2008. Iowa State estimates cattle feeders have experienced a $167 loss per head, which was the largest since their records began in the 1960’s. The Kansas Farm Management Association documents feed costs per cow at $287 in 2006, and will approach $450 this year, pushing returns below variable costs and causing either liquidation or herd reduction. Consumer demand for beef has weakened and economic pressures will delay any recovery. Export demand has improved, but with exports 36% below 2003 levels, more meat is flooding the domestic meat case. The industry is expected to shrink with higher prices facing consumers, but allowing remaining producers to cover costs after several more years.
Pork industry: Profitability existed until 2007, in part due to disease problems that kept slaughter rates down; and when a vaccine was developed pork supplies increased 10%. The result was a drop in pork prices to the lowest level in 4 years at the same time feed costs were reaching record highs. Iowa State estimates producer loses from Oct. 2007 to Apr. 2008 exceeded the profits of the prior 13 months. Feed costs were 75% higher than April 2006. Breeding herd liquidation is underway in the US and Canada and pork supplies are continued to decline through the end of 2009. Demand growth in the export market will offset some of the economic problems. However, it will take possibly a 10% cut in production to cause prices to return to profitability.
Poultry industry: Producers were concerned about competing for corn, since they had few feed alternatives that were satisfactory. The initial price surge in 2006 saw poultry operators curtail production, and with the 2007 moderation in grain prices, the poultry industry responded with increased production, and feeding the overseas poultry market to help keep prices high. Despite seemingly high market prices, producers are cutting production in response to continued high corn prices. Feed accounts for 65% of the production costs and corn prices have increased 35% since the end of 2007. A 20% increase in production costs would result in a 2% decline in quantity offered to the market and a 6% increase in consumer prices.
Dairy industry: During the decade milk prices have hit two record highs separated by a record low; but were on the increase in 2006 when feed prices began to rise. As feed costs continued upward, milk prices began to fall from declining demand overseas, but producers have remained profitable. In the past two years, production costs have increased $2/cwt, and such an increase usually causes a production decline of 2% or more. But current demand domestic and foreign has continued to support prices. Increased production will be required to depress prices, but high feed costs will speed that shift.
Part of the ethanol argument is that it provides an abundance of co-products that make good livestock feeds, such as wet corn gluten, corn gluten meal, or distillers’ dried grains. But one of the unintended consequences is that the rising market price of corn has pushed upward the price for those co-product feeds. Due to their nutritive value, they are priced equivalent to corn, and while their overall price has declined over time, the rising price of corn has pushed up the cost of the co-products to the livestock industry. To take the best advantage of the co-products, livestock operations need to be located as closely as possible to ethanol plants. While conventional wisdom says cattle would most benefit from that, the economists believe that with higher feed prices the determinant would be efficiency of gain, which defines the poultry industry.
Summary:
Supporters of the biofuels industry pointed to the potential abundance of inexpensive feed from co-products as a boon to the livestock industry. But the livestock producer has to buy that feed at prices equivalent to the nutritive value of corn, and with skyrocketing corn prices that is pushing up production costs rapidly for the livestock producer. This is particularly challenging to the beef and pork producer, both of whom are losing money because of high volumes of meat supplies.
If you have been a producer, what has your reaction been? What is your threshold for taking action and what action is that?
Posted by Stu Ellis on July 14, 2008 12:50 AM to farmgate