If you are a pork producer, how are you going to survive the ethanol onslaught? Cowboys can feed distillers’ grains with a less expensive ration to send beef to market. That is not an opportunity for the pork industry, which has to buy corn, and will have to bid for it against ethanol plants where prices are buoyed by the price of oil. So the question is, how will the pork industry survive competing against ethanol for corn? It may be the pork industry that puts up some major challenges to US ethanol policy.

Distiller’s grains are a challenge in a hog ration. There is a sufficient amount of energy, with lower phosphorus content, but amino acids pose a problem and there is a quality variation among suppliers. So most pork producers will opt for the corn constant and have to pay the bill to get consistency. At Purdue, Livestock Marketing Specialist Chris Hurt says our current pork market environment will collide with the ethanol bandwagon and it will not be pretty. It is all summarized in his latest marketing letter, HOGS VS. ETHANOL: ETHANOL WINS!

In that current environment, Hurt says weights will drop (that is a price plus). But corn costs will rise, (that is a price minus). Hurt says there will also be some expansion with the herd up 1% and the breeding herd up 2%. With US population growing at the same pace, there will be more mouths to feed more pork, so the per capita ratio remains even.

The issue of corn availability is worsened by the fact that ethanol users, benefiting from federal blending subsidies, can bid an additional $1.38 per bushel for corn, raising its price 50 to 66% without a detriment to the ethanol industry, but to a major harm to the pork industry, says Hurt. He says the traditional corn user will have to adjust to the new realities of the corn market, and some may be unable to do so. On the other hand, Hurt says a family pork operation, raising its own corn, will be able to capture an increased value, “Family farms that still raise much of their own corn and also produce hogs will tend to be the least affected by the bio-fuels era. They will have available supplies of corn, a natural hedge between high corn prices and hog prices. If they own land, the federal ethanol subsidy and profits from ethanol will be partially capitalized into their land values.”

Chris Hurt says the demand for ethanol, particularly in the western Cornbelt where there are more ethanol plants, has increased both demand and prices of corn. Comparing values to corn prices in Indiana, Hurt says Minnesota corn bids have increased 15¢ per bushel compared to Indiana, and comparing years before and after the explosive expansion in ethanol plants. He says there is a 13¢ increase in relation to South Dakota and Indiana, as well as a 10¢ improvement in Iowa corn prices versus Indiana, all since the ethanol plant construction era.

So what will Cornbelt prices be for corn, if pork producers have to bid higher for it? Hurt says for the past year, corn has averaged abut $2 per bushel, but more recently that has been at the $3 mark, and may be for the next year. He says hog production costs will rise up out of the high $30 range into the mid-$40’s. “Expected returns, then, are only $2 to $3 per live hundredweight this fall and winter and $4 to $5 next spring and summer.”

How much can an ethanol plant pay for corn and still make money? That is the question a lot of pork producers will be asking each other, if they have to raise hogs on $3 corn very long. Hurt says with $60 crude oil, and the current price for distillers’ grain as an income stream, the ethanol plant could pay up to $5.50 per bushel, but only $4.12 if the current ethanol subsides are eliminated, which is a function of the $.51 blenders tax credit and a yield of 2.7 gallons of ethanol per bushel of corn.

Hurt contends the financial benefits to the ethanol industry will compound problems for pork producers and others, who need to buy corn, “If the ethanol industry continues to receive these large subsidies, there is little to constrain the increase in capacity until corn prices are bid up to, or beyond, their breakeven levels. Of course, it is never clear just where this is because the single most important factor in the determination of ethanol producers' corn breakeven will probably remain the price of crude oil.”

If there are challenging days ahead for pork producers, what would be an action plan to avoid difficulty? Chris Hurt offers several opportunities:
1) Curtail expansion to avoid a pork surplus.
2) Adjust rations to increase protein levels, look for alternatives, adjust feeders to reduce waste, and learn the process of incorporating distiller’s grains into a hog ration.
3) Look for supply contracts to manage the risk of supply and cost.

Hurt says the pork industry will be able to compete, since their product is as important as fuel. But he expects a leaner industry, one that is no longer expanding, and one that can rely on itself.

Summary:
Growing demand for ethanol, which is pushing corn prices about $1 higher than an 8 year average price, will make life difficult for pork producers, until it become easier to feed distillers’ grains to hogs. While it is possible, the ration needs closer monitoring and adjustment. But ethanol subsidies, which have benefited the corn economy and the ethanol industry, will hurt the pork producer if corn values continue to rise. The pork industry is left with little choice but to halt any planned expansion as well as manage risk a bit better.