Posted: Thursday, October 14, 2010 10:00 AM
James Brosher/Peoria Journal Star via AP
Mike Schachtrup watches out the windshield as he combines a field of corn on Monday, Oct. 11 near Peoria, Ill. Schachtrup farms about 6,000 acres in Peoria, Tazewell, Knox and Warren counties with his brothers, including this 70-acre field northwest of Peoria.
Feed price increases could erase profits for many operations, livestock producers
By TIM HEARDEN
A drastic downgrade in the U.S. Department of Agriculture's expectations for this year's corn yield is a game-changer for livestock producers -- and not in a good way.
The government on Oct. 8 projected a national corn yield of 12.7 billion bushels, down 4 percent from the September forecast and down 3 percent from last year's record production of 13.1 billion bushels.
Soybean production is forecast at a record 3.41 billion bushels, down 2 percent from September's prediction but up 1 percent from last year.
Tighter grain supplies invariably mean skyrocketing input costs for farmers who raise cattle, chickens, hogs and other animals. That can turn a profit into a loss for many a rancher, lamented Gregg Doud, the National Cattlemen's Beef Association's chief economist.
"We've gone probably eight of the last nine months in this industry where everyone from the rancher to the retailer was making a little bit of money," Doud told the Capital Press. "Now that's probably not going to be the case any longer.
"This was an all-time record, history-making reduction in the (anticipated) corn yield from one month to the next," he said. "This is an unprecedented case of whiplash. I've been doing this for 20 years ... and we've never quite seen anything like we've seen out of the USDA in the last nine days."
Input costs up
The report pushed input costs up immediately. On Oct. 8, corn prices rose 30 cents to settle at $5.2825 a bushel; soybeans for November delivery rose 70 cents to $11.35 a bushel, and wheat for December delivery rose 60 cents to settle at $7.1925 a bushel.
Stocks for farm equipment manufacturers and other agribusiness companies rose on prospects that grain farmers would have more money to spend, but meat and poultry companies such as Tyson Foods and Pilgrim's Pride were lower in early trading.
The nation's most ubiquitous farm commodity, corn plays a key role in the raising of just about all food animals -- from Thanksgiving turkeys to farmed fish, which are fed a sort of cornmeal, noted Richard Lobb, spokesman for the National Chicken Council.
Feed accounts for more than 60 percent of the cost of producing a chicken, and about 65 percent of the feed consists of corn, Lobb said.
"The price of everything else goes up with corn, so yes it's a matter of great concern," he said. "Just some weather problems knocked something off the harvest. Demand is very strong and supplies are very tight. We really can't take any shocks here, so ... it's got everyone's attention and people are very concerned about it."
Escalating corn values in the last two years have pushed the normally stable price of a whole chicken up 6 percent, Lobb said. Livestock groups have blamed the demand for corn in ethanol production for much of the increase in cost.
"The only thing that changed is the cost of corn," he said. "We don't know what the impact will be, but we are pretty sure there will be an impact over time. Sooner or later, consumers end up paying for this."
For the recession-weary dairy industry, the unexpected drop in anticipated corn supplies could spoil -- or at least complicate -- a budding recovery, said Michael Marsh, chief executive officer of Western United Dairymen.
"Just as our milk price has started to respond to increasing global demand," Marsh said. "That's on the positive side, but if it's simply the revenue being overwhelmed by the additional cost for feed, we clearly haven't gained any ground back because we've lost so much over the last two years."
For Elk Grove, Calif., hog farmer Steve Weaver, purchasing grains for feed accounts for about 60 percent of his cost of doing business, he said. He has about 60 sows on his 20-acre ranch, and they produce about 1,200 piglets a year.
The pork industry "just got back into making a profit for a change in January, and it's looking like it's going to push that right back on the other side, or to a minimal profit if anything," said Weaver, a past president of the National Pork Board.
Weaver's operation has tried to brace itself by selling into a roaster pig market -- a niche product that uses young hogs weighing 60 or 70 pounds. Roaster pigs are popular in South Pacific island and Southeast Asian cultures, he said.
But "a good portion" of his hogs still go into the general trade, he said.
"It still affects me," he said of the rising corn price.
The USDA often revises its harvest estimates with several reports in October, but the Oct. 8 report carried extra impact because it builds on longer-term worries that a corn supply pinch is in the offing, said Darin Newsom, senior analyst with Telvent DTN.
With overseas grain supplies down because of drought and other factors, the U.S. harvest is increasingly stretched by demand from ethanol distillers as well as from livestock producers, Newsom said.
Because of those deeper issues, the price of corn likely hasn't reached its peak this year.
"The indication is that we'll just continue to move up from now," Newsom said. "There is literally nowhere else in the world to turn to fill these supplies."
The USDA's report followed expectations earlier this summer of a record corn crop. The problem with the agency's sudden change of outlook, the NCBA's Doud said, is that its magnitude caught the livestock industries off guard.
"A lot of people have gotten caught flat footed here," Doud said. "What this means in general for the cattle feeding industry is it's going to take us from a position of being in the black and put us back in the red. That money is going to come right out of the rancher's pocket.
"That means it's going to be a very, very difficult situation in terms of expansion of the U.S. cow herd now," he said.
The Associated Press contributed to this report.
U.S. Department of Agriculture: http://www.usda.gov/wps/portal/usda/usdahome
National Cattlemen's Beef Association: http://beefusa.org/