From China to America, monumental forces are driving global demand for food, feed and renewable fuel. Faced with a worldwide credit crunch, demand will probably take a breather, but the long-term trends are still strong.

Feed Costs Squeeze Producers
Your best customer for corn and soybeans isn’t going away, but livestock and poultry producers are taking a few hard knocks as they adapt to volatile feed costs.
By Barb Baylor Anderson

"We can't say ethanol hasn't affected corn prices. It is hard to quantify, given strong corn exports, feed demand and a weak dollar," Brown says. "Knowing what crude oil prices are going to do is critical to corn price direction. But producers still must reduce risk, use futures to lock in revenue and costs, and protect margins in these volatile times."

Here's how three operations are handling their risk.

Cattle Feeder Changes Strategies

Don McCasland has changed the way he operates his diverse cattle business. The Clovis, N.M., rancher says the cost of corn and fluctuations in the market have wreaked havoc on his feedstuff purchases, cattle marketing decisions and even his line of credit at the bank.

"We buy a lot of feed," McCasland says. He operates Wheeler Feedyard in the Texas Panhandle, owns one ranch and leases two others in Texas, and farms 9,000 acres in New Mexico. "Corn before ethanol was $2 per bushel plus basis. It went as high as $7.50 plus basis. Our cattle lost $150 per head, and our industry lost billions of dollars.

"Corn is king," McCasland continues. "When the price goes up, so does everything else. Our other feed ingredients have at least doubled in price and are not coming down yet."

To protect his investment, this summer McCasland started buying cattle and grain at the same time and then hedging the cattle immediately in the futures market. The change, he says, has cut into his cattle marketing flexibility and profit potential.

"Distant cattle futures prices are high enough that there is some incentive to place cattle on feed. But having to lock in prices affects my line of credit at the bank. We have more than double the line tied up with more dollars in inventory than usual," he says.

McCasland blames a 440% increase in fund money that has flooded into commodities. He says it creates a greater margin call threat and higher volatility. And while he is not anti-ethanol, he believes the federal mandate is partly to blame.

"We will have more excess capacity as feedyards close down and cattle feeders keep animals outside the yards longer. It's hard for some guys to survive, and it is devastating to our industry," he says. "We need a level playing field to survive. Corn prices are tracking crude oil prices, which is proof we've become a food, fiber and fuel industry."

Randy Blach, executive vice president of Cattle-Fax in Centennial, Colo., says profit opportunities exist, but calls this a "period of rapid change and thin margins." FAPRI says high corn prices force feedlots to lower what they can pay for feeder cattle. As a result, the window for beef cow inventory expansion has likely closed. FAPRI does not expect expansion for at least the next five years, according to its most recent outlook.

"It is amazing to talk about lower beef cow numbers with near-record feeder cattle prices, but costs have just exploded for them," says Scott Brown, FAPRI analyst.

"No one is making money. But if beef demand stays relatively strong and cattle feeders operate near break-even, production cutbacks next year should not be extreme," adds John Harrington, DTN livestock analyst.

"We can put enough in the lot to see only 1 to 2% lower beef production in 2009. The cow factory is getting smaller, but the slow decline in calf crop size will only gradually impact the available supply of beef. On the other hand, expensive feed may encourage us to finish cattle to lighter weights."

Harrington says recent beef exports have been decent, given a growing world middle class and weak dollar, but the market is still in post-BSE recovery.

"Exports will improve at a slow pace with high beef prices and limited penetration into Asian markets," he says. "We are slowly winning back foreign customers, which is critical since domestic beef has topped out."

Pork Producer Seeks Greater Efficiency

Cutting costs in innovative fashion may be the best place to start for pork producers who want to stay in business. But even then, smaller producers may end up liquidating sow herds if they can't hang on to the promise of better returns in 2009.

The Maschhoffs, a Carlyle, Ill., pork production company, is using alternative feed ingredients and fine-tuning efficiencies to remain profitable.

"We rely heavily on our own research into alternative ingredients and other feeding strategies that help deal with feed costs," says Dr. Aaron Gaines, director of nutrition and production services, who oversees the feed production system. "We are working with biofuel coproducts, mainly dried distillers grains and glycerin."

The Maschhoffs has economies of scale on its side. The family-owned production network has 300 family farmers who produce more than 2 million pigs per year.

"We are addressing feed transportation costs by utilizing more toll mills that are closer to our production sites. At the same time, we are working on making our feed mills more efficient so our company becomes leaner," says Gaines. "We are committed to remaining competitive, and have recently taken on 20% more growth."

In fact, Gaines says the goal in 2008 was to reduce diet feed costs 2% below their 2007 standard formulations. The company has actually cut costs more than 3%.

Not every producer will experience black ink for 2008. In fact, data from John Lawrence, Iowa State University economist, estimates losses per head for selling 50-pound feeder pigs from an Iowa farrow-to-finish operation rose from $3.13 in October 2007 to a peak of $29.44 per head in July 2008. This came as corn and soybean prices rose to their highest levels.

Surprisingly, FAPRI's Brown says the data shows few cutbacks in hog numbers so far. Instead, producers are focused on the futures market, which appears to offer some opportunity to lock in 2009 feed costs and hog prices, and reduce the risk of severe losses.

Exports are the saving grace, he adds. FAPRI notes pork exports have grown every year to offset pork supply increases. Pork production was 10% higher in 2007 than in 2003, while pork exports increased 84%.

"Pork exports were up 60% the first half of 2008 on strong Chinese demand," says John Harrington, DTN livestock analyst. "Demand in the second half will not be as big, but we've already exported as much as we did in all of 2003. That's a tough act to follow."

Harrington says the outlook hinges on the amount of red ink for the rest of 2008. "If we stay close to break-evens, there is little incentive to cut back.

When corn prices dropped this summer, break-evens fell from 74 to 63 cents. That's not as bad as we earlier thought," he says.

"If corn goes higher, we could see farmer feeders rethink the wisdom of marketing hogs versus corn and see a good decline in pork production of 4 to 5% in 2009."

Poultry Producer Insulates Against Losses

While poultry profitability is affected by high feed costs, many producers are insulated from a direct hit. Production contracts with large poultry processors and diversified operations have softened the blow.

Matt Lohr operates Valley Pike Farm Inc. in Broadway, Va., with his wife, Andrea, and parents, Gary and Ellen. He says both tactics have limited the impact of high corn prices on their bottom line.

"We are in a great location for poultry production, but also a great spot for agritourism. We are always looking for new ways to profit from our 250 acres," he says. Valley Pike Farm has four broiler houses, sells sweet corn and pumpkins and grows barley, hay and soybeans. "We personally have not felt as much effect from high corn prices," Lohr adds.

As a contract producer for Pilgrim's Pride, Lohr says the company carries the bulk of corn market risk. It tries to manage that risk by forward pricing feed grain. But the company still lost $111 million in the second quarter, Lohr says, and stock fell 6 to 7%. As a result, the company cut placement numbers and extended downtime between flocks.

For Lohr, that meant reducing from six to seven flocks per year to five to six flocks, with 16 to 17 days between flocks rather than 12 days. One flock represents about $25,000 in potential profit for Lohr.

"Pilgrim's Pride is the largest poultry producer in the country, so you know if they cut back, feed costs are having a negative impact," he says. "Turkeys are affected too. Our local turkey co-op recently announced they were cutting 25% of their birds."

According to FAPRI, producers have rapidly adjusted chicken production since 2006. Four consecutive quarters of production declines, resulting from low chicken prices in early 2006, led to strong growth by the end of 2007 as returns improved. Long-term production growth is expected to be 1 to 2%, says FAPRI, but high feed costs will need historically high poultry prices for producers to remain viable.

"If high feed costs continue, companies like Pilgrim's Pride will probably eliminate their least productive plants. That will increase prices and hurt consumers," says Lohr.

Lohr, who is also a Virginia legislator, supports alternative fuels production, but feels some ethanol policy has affected profitability. "The federal mandate to use corn has had unintended consequences," he says. "We need to ease the impact on end users."

The National Chicken Council (NCC) agrees that maintaining the mandate while the corn supply shrinks drives up the cost of corn for poultry producers and affects consumers. NCC points to a recent study by economist Bill Lapp which estimates that food prices will rise in reaction to higher input costs.

Lapp says egg prices would rise 84% and chicken prices 80%, comparing expected prices from 2008 to 2012 to actual prices in 2002 to 2006. Broiler chicken companies bought 1.3 billion bushels of corn in 2007, and NCC says the added cost of corn since October 2006 has been more than $5 billion.

• For additional livestock coverage and more go to about.dtnpf.com/livestockdemand.