Out of cattle, out of feed
It sure seems that the Environmental Protection Agency (EPA) has missed the entire point in granting the livestock and food industries a waiver regarding the government’s production mandates for ethanol outlined in the Renewable Fuels Standard’s legislation.
They claim that the waiver would have little effect on corn prices. Livestock and food service industry groups were disappointed with the agency’s decision that indicated EPA didn’t understand what is at stake for the food industry and what little effect it would have for the ethanol industry.
The ethanol industry now consumes roughly a third of the nation’s corn production, using roughly 4 billion bushels of corn to produce ethanol. The ethanol industry was quite small in 2006 before the government decided to subsidize the industry and require production levels that would expand over time. This government effort to support the ethanol industry has made it very costly for livestock producers to produce their respective meat protein.
The beef industry and other meat producers have built the meat industry around ample supplies of $2 corn vs. today’s $7.50 corn. The ethanol industry is also having a difficult time with high corn prices and many ethanol plants are temporarily closing down. This current drought has made all feed stuffs more expensive. The part of this story that has bothered me all along is that we have been exporting lots of surplus ethanol, over a billion gallons last year. This issue appears to have little to do with national energy security in the U.S. Government-mandated demand has no place in a free and open market.
Ironically, the demand for corn may be reduced with changes in the market place. Going forward, the cattle industry will have 1,400,000 fewer cattle to feed this next year, which has some industry pundits saying that we’re running out of cattle. The last Cattle on Feed report said October placements were down 12.5 percent from last year. This is the third straight month that placements have been below a year ago. Beef prices are moving even higher and we will be asking consumers to pay even more for the beef they love, creating a challenge for beef to compete with the other meats. The Canadian Cattle on Feed report showed that their placements of feeder cattle were down 22 percent from last year.
So where are the feeder cattle going to come from to fill up feedlots? Cattle feeders have a problem with too much capacity and too few cattle to feed and have chased feeder cattle to unseen price levels. According to Darrell Peel, Oklahoma State University Extension marketing specialist, the 2013 calf crop will be the lowest since 1942. Also, Mexican feeder cattle imports are expected to decline 600,000 to 800,000 head in 2013, which is about half of normal imports.
He also said that feedlots have not only placed fewer cattle, but recent placements have been heavier weight and will move through the system faster.
It will be increasingly difficult to find replacement cattle to follow current feedlot inventories. A significant decrease in cattle slaughter and beef production is unavoidable in 2013 and 2014.
Current supplies and future supplies of feeder cattle will certainly keep the markets at high levels.
But you have to wonder what these high prices will do to beef demand. How high can beef prices go before demand craters? Consumer buying power has certainly declined and the economy remains a bit shaky. Let’s hope that they don’t quit spending on beef.
Andy Gottschalk at HedgersEdge said that the only period to see beef sell at a premium of more than 105.5 percent of the combined value of chicken and pork was in the 1979-1980’s period. During that period, beef priced itself out of reach of the average consumer and what followed was an almost two-decade-long decline in beef demand. Consumers do not know, nor do they care, about this industry’s supply issue. Their only concern is, do they have sufficient income to purchase your product?
Feeders and packers have some challenging times ahead; there is little to no profit margin in those sectors at this point. The high price of feeder cattle will be with the cow/calf operator for a while. However, the government hasn’t done much to help cattle feeders and missed an opportunity to give them a hand by reducing the ethanol production mandates. But, then, this Obama administration clearly thinks fuel production is more important than food production. We can get along without ethanol, but we can’t get along without meat protein. — PETE CROW