June 11, 2008

Ag Forum Speaker Raises Prospect of Corn Rationing for Livestock

By: Blair Fannin, 979-845-2259  
AUSTIN – Record corn prices are creating major concerns for the livestock feeding industry, and if the run-up continues, corn rationing for animals may be an option, according to one expert at the 2008 Texas Ag Forum in Austin this week.

Cattle feedlot operators are becoming less tolerant of record corn prices, and some feedlots are on the brink of putting themselves up for sale or going out of business, speakers said.

Gregg Doud, chief economist with the National Cattlemen’s Beef Association, explained in economic terms this is the result of an “inelastic demand function” where there’s no replacement for a good or commodity. For the livestock industry, that commodity is corn.

“The producer picks up the tab,” he said. “The feedlot folks right now – their red ink will flow at some point into the laps of the cow-calf producers.”

Corn futures continue a big rally on the Chicago Board of Trade at more than $6.50 a bushel, heightened by excessive rainfall in the U.S. Corn Belt. By comparison, corn was trading at just over $4 a bushel a year ago.

There’s even concern there could be rationing of corn supplies for livestock if prices continue to escalate, Doud said.

“Can you imagine what will happen to the livestock industry?” he said, noting it would be the death blow.

Texas Comptroller Susan Combs told attendees some national meat companies have either scaled back production or have closed processing facilities due to high corn prices and continued losses.

“They are saying these prices are extremely high,” she said. “The energy cost to the farmer – obviously it’s having an impact on you.”

While corn farmers are receiving record prices, Texas’ livestock industry continues to suffer the consequences with increased feed costs. The solution, Combs said, is for Texas agriculture to become unified.

“When you look at where the state is going, agriculture must come together,” she said.

She said it’s even more important during a time when Texas continues to become more urbanized in population growth.

“We never ever want to be dependent on another country for our food supply,” Combs said.

The state can also build off its industrial strength. Texas is the top energy producer in the U.S. and the No. 2 agricultural producer behind California.

Texas Gov. Rick Perry recently requested a waiver of the Renewable Fuel Standard program in response to ethanol’s effect on the state’s livestock industry. The program will increase the volume of renewable fuel required to be blended into gasoline to 7.5 billion gallons by 2012.

During his address, Toby Baker, a governor’s advisor for budget, planning and policy, said the state’s largest independent pork producer was forced to go out of business after a 50-percent increase in feed from the year before.

That producer’s letter of complaint to the governor heightened efforts to submit the waiver request, Baker said, and poses an even bigger question – “what’s happening to smaller (cattle) producers?”

Baker said further investigation revealed the state’s cattle feeding returns have been in the red since June 2007. January cattle feeding losses were at $168 per hundredweight and $170 per hundredweight in March. Hog returns this year through April averaged a loss of $31.60 per head, he said.

“There’s belief that we will have more feedlots for sale than ever before,” he said.

Baker said Gov. Perry’s request for waiver was “the only one lever for the state to pull to get a handle on things.”

Experts speaking at the Ag Forum said that Texas, as the nation’s largest cattle-feeding state, was the logical choice to submit a waiver request.

Meanwhile, the nation’s corn supply is being watched with a close eye. Pat Westhoff, co-director of the Food and Agricultural Policy Research Institute at the University of Missouri, said corn supply and use is much tighter than months ago.

“The news is not ethanol …what has happened is we’ve been planting a lot less corn,” he told attendees.

Corn planting this year is projected at 86 million acres, down 7.6 million acres from 2007, according to U.S. Department of Agriculture estimates. This week, USDA lowered corn yield projections from its previous May outlook due to poor growing conditions. According to economists, weather, high-priced fertilizer and other commodities fetching record prices have created a decline in overall planted corn acres.

With less corn, that’s leading to smaller profit margins for ethanol plants, Westhoff said. Another factor has been the sub-prime mortgage crisis, which “may have come at the right time,” Doud said. Ethanol plants depend on credit to purchase corn, and with credit markets tightening, that has weakened purchasing power, he said. That prevented a boom-bust situation for some ethanol plants.

The Texas Ag Forum is as an association of agricultural leaders and representatives from across the Texas food and fiber system. It was founded more than 20 years ago to provide a forum for open and public discussion of the problems and emerging issues in agriculture. It is a stakeholder-driven program in partnership with Texas AgriLife Extension Service.

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