Feed Fight

By Charles Johnson

5/16/2008

By Charles Johnson, Farm Journal National Editor

Henry Moore III enjoys flying his Air Tractor over Bobcat Farms, which he runs with his dad, Henry Jr., and long-time friend Alan Williams. It gives him a sweeping view of the barns housing 4,800 sows and 8,800 head of finishing hogs near Clinton, N.C. These days the farmstead looks good; the future, though, appears dismal due to high feed costs.

“Corn is 70% of our diet. When corn price is over $5, it really hurts. We’re trying to decide how long we can afford to put more money into the business to keep it going,” says Moore, a National Pork Board director.
That situation, bad enough, may not be the worst of it.

“I can see a time coming when corn availability becomes an issue, not only an economical issue but an animal welfare issue if the farmer can’t get the feed, let alone pay for it. That could happen with any industry that feeds animals, as ethanol pushes us further toward turning our food source into energy,” Moore says.

Today’s high feed costs put a big hurt on livestock producers. The pork and chicken sectors stagger under a double whammy of costly inputs and an oversaturated market capping product prices. Beef, too, reels under the price pressure, and dairy producers watch nervously as milk prices come down while feed goes up.

“The high corn, as well as soybean, price is having a dramatic impact on all livestock producers, most significantly on poultry and pork. Feed costs are up 30% to 40% compared to a couple of years ago. At the same time, increased supplies in the marketplace result in lower prices. There’s a significant amount of red ink,” says Mike Boehlje, Purdue University ag economist.

Livestock feeders place their anguish squarely at the feet of ethanol. Barely a blip on the corn-use market a few years ago, ethanol will snap up about 30% of this year’s corn crop, Boehlje says.

“It’s the fastest increase in utilization ever, in terms of proportion of the crop, even faster than when we saw the big export growth in the 1970s. This trade-off of ethanol and feed use is much more dramatic in terms of speed and use,” he explains.

“The expectation was that it would come at the expense of exports, but because of the declining value of the dollar, we have strong exports to India and China. It resulted in a strong fracturing of relationships between the livestock and crop sectors globally,” Boehlje adds.

As a result, farrow-to-finish hog operations will lose an average of $27 per head in 2008, says Chris Hurt, Purdue Extension ag economist. In the worst year to date, 1998, average loss ran $15 per hog, Hurt says.

Beef producers also will fare poorly.

“It’s a major stress on the cattle feeding sector. January was the worst month on record for cattle feeding on the Southern Plains, going back to the 1970s. For cow-calf producers, 2008 will be the first year of losses in several years. We’re going to see more impact in 2009 both on the industry and in what consumers pay, and we’re going to see more adjustment in other countries than in the U.S. livestock industries,” says James Robb, director of the Livestock Marketing Information Center in Lakewood, Colo.

At Pilgrim’s Pride Corporation, headquartered in Pittsburg, Texas, federal support for ethanol rates as the No. 1 whipping boy for the company’s problems. The largest-volume poultry producer in the U.S., Pilgrim’s Pride recently announced plans to close its Siler City, N.C., processing plant along with six of 13 U.S. distribution centers.

“Our feed costs rose $600 million in 2007 and will rise another $700 million beyond that in 2008. That’s $1.3 billion in two years for a company with $8 billion in annual sales,” says Gary Rhodes, a spokesman for the company.

“The bulk of our business is in food service distribution. Many of our customers are on long-term contracts,” Rhodes adds. “Grain prices are so volatile we can’t raise prices fast enough to hit that moving target.”

Edwin Carter, Pilgrim’s Pride senior vice president of commodity risk management, says the company calls for changes to correct what he terms, “the government’s misguided policy on ethanol.” They would like to roll back the ethanol mandate included in the recent renewable energy law, rescind the tariff on imported Brazilian ethanol and remove the 51¢-per-gallon ethanol blend incentive.

“Let it be a free market. If the market demands ethanol, let it flow naturally,” Carter says.

Gregg Doud, chief economist for the National Cattlemen’s Beef Association, says neither he nor his group oppose ethanol. “Our membership policy is that we oppose mandates. We oppose the blender’s credit. The tariff needs to expire,” he says.

“We want to have the ability to compete with ethanol on a level playing field for that bushel of corn. If the market drives it and ethanol wins, so be it. We’ll deal with it. This policy we have today is nowhere near market-driven. It’s a government contract, and it’s not exposed to the vagaries of supply and demand. If you believe in ethanol, what’s wrong with letting it be market-driven?” Doud says.

Meanwhile, cattle feeders expect to lose $100 to $150 per head for the first half of this year, Doud predicts.

“That’s the biggest number ever seen,” Doud says. “Feedlots have lost money 34 of the last 48 months. Show me any business, any farm, that can withstand that. We’re also seeing a realignment of the beef processing industry in this country. They’ve lost money the last three years. Cow-calf producers are also in the red. We haven’t seen this kind of red ink flowing since Moses was at the Nile.”

Red Miller, manager of Miller Feedyard in Satanta, Kan., says there’s little he can do to become more efficient, other than pay less for cattle.

“Really and truly, the only thing that can change is feedyards are going to have to buy feeder cattle cheaper. Ultimately, the cow-calf producer is going to be affected. With these corn prices, feeder cattle have got to get lower than fat cattle,” Miller says.
Many feedlots cope by operating at far less than capacity.

“Fewer cattle are being placed on feed in a large number of feedlots. There’s a lot of excess capacity and there will be more as things progress,” says Bob Josserand, who owns three feedlots near Hereford, Texas, totaling 127,000-head capacity.

Feedlots now prefer cattle in the 800-lb. range, rather than lighter cattle requiring more feed to finish. “That indicates feeders are taking advantage of lower-cost gain on pasture before putting them in the feedyard,” says Ted McCollum, Texas AgriLife Extension beef cattle specialist.

Hog farms, however, cannot hold animals off high-priced feed. All they can do is liquidate sows, which might at least help market prices. Smithfield, the big integrator, says it will sell off as many as 50,000 sows. Any positive results from sow liquidation won’t show up until this fall, says economist Hurt.

Impact on the pork industry could be large—and permanent.

“It’s going to cause consolidation of livestock production. I have neighbors with 150 sows who are very good farmers, who got caught thinking $3 corn was too high, so they got caught short. They’re leaving the business. Several others I know are leaving, too, and not because of poor management,” says Randy Spronk, National Pork Producers Council board member who raises hogs and grain in Edgerton, Minn.

“It’s a cost issue. The revenue the historical market is giving you is not enough,” Spronk says. “The decision producers have to make is whether they can buckle down and make it to 2009, when prices may be higher, or exit quickly.”

The dairy industry, too, could see consolidation as a result of the current feed situation. “Those with their financial house in order should be able to weather it, but it’s going to accelerate consolidation, not just here but in other areas, too,” says Wilson Gray, Idaho Extension ag economist.

Currently, milk price is good, which helps the situation, says Mike Hutjens, Illinois Extension dairy specialist.

“But producers need to be very, very careful. If the price of milk continues to drop, they’re going to have to really look at the relationship with feed inputs. They’re making decisions now for months ahead,” Hutjens says.

High feed costs affect every livestock producer. Hearley Dockham of Pavillion, Wyo., says it’s forcing him out of the fed lamb business. He blames the government’s ethanol policy.

“I don’t mind anyone making a living in a free enterprise system, but when the government gets involved, it is no longer a free system. They have taken my tax dollars and created a monster that has destroyed my business,” Dockham says. 

Canada’s Hog Buyout

Attempting to reduce its sow herd 10% or more, Canada is offering its hog farmers a breeding animal buyout. The deal, put together by Canada’s federal government and the Canadian Pork Council, will pay $225 per sow or boar slaughtered. Producers must empty at least one entire barn and can’t restock the barn for at least 3 years.

The Canadians expect 150,000 animals to be slaughtered in the program, which is about 10% of the national swine breeding inventory. Meat from the animals will not be sold for human consumption, only for pet food or other purposes, or disposed on-farm.
The Canadian Pork Council will administer the program and is tweaking the final details. “It is going to happen,” says Gary Stordy of the council. “We’re hoping that in the long run it will help out on price, one way or another.”



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You can e-mail Charles Johnson at cjohnson@farmjournal.com.