Drought, rising corn demand lead to increasing prices

By CAROL RYAN DUMAS

Capital Press

A number of factors have converged to increase corn prices, making things tough in the cattle feeding industry.

The worst Midwest drought since 1988 caused corn prices to shoot up, which in turn caused soybean and wheat prices to rise. Increased feed prices had a dramatic effect on livestock margins, said Bill Lapp, president of Advanced Economic Solutions, an Omaha-based consulting firm specializing in assisting food companies with risk management and other economic and commodity issues.

Corn yields, off 24 percent from trend levels, were the second worst in 52 years, Lapp told cattlemen at the Idaho Cattle Association annual convention in Sun Valley on Nov. 14.

"A lot of uncertainty and volatility in the market, and prices go straight up," he said.

Corn prices, at $5 a bushel in June, shot up to $8 and peaked at $8.49 on Aug. 10, he said.

But even without the drought, corn prices are moving to a new plateau, he said.

Poorer countries are now the big users of corn and have been driving the demand in growth. Corn prices that used to average about $2.50 a bushel are now over $5, he said.

There have been four plateaus in corn prices in the last 150 years, he said, and no one's sure what the next price plateau will be.

Corn averaged 43 cents a bushel until the early 1900s, then averaged about 83 cents until World War II, rose to $1.24 after the war, and to $2.50 in the early 1970s, he said.

The increasing price of corn raises the breakeven in livestock production and output prices on fed cattle and meat.

Feeders are going to have to deal with high corn prices, likely adjusting production downward, until the next crop is harvested. If yields are decent next year, Lapp is forecasting corn prices at $6.26 a bushel next fall.

For now, cattlemen will continue to liquidate the herd, despite heifer retention and a herd rebuilding effort that began last fall, said John Nalivka, owner of Sterling Marketing, a Vale, Ore., consulting firm for the red meat industry.

A lot of cattle were liquidated last year as a result of drought in the Southern Plains. The herd started the year at about 90 million head, the lowest since 1952, and another 1 million will likely come out this year, reducing the Jan . 1 count another 1.5 percent, he said.

Any effort to rebuild the herd won't be realized until 2015, he said.