Four-dollar corn works well as long as you're selling it. Others in agriculture have a problem with the sudden spike in #2 yellow prices. Count the cattle industry among those.
“Pound for pound I've spent more time talking about corn prices, ethanol and cattle than any other issue I can remember,” says Gregg Doud, chief economist for the National Cattlemen's Beef Association (NCBA) in Washington, D.C. “You want to know the immediate impact? We've seen a 20% drop in feeder cattle prices. There's an inverse correlation between corn prices and cattle prices that you can set your watch by.”
From a legislative standpoint, NCBA is already applying pressure in D.C. At its annual meeting in February, NCBA passed a resolution calling for the “sunsetting” of fuel-blending tax credits and tariffs on imported ethanol.
“With alternative fuel production growing at an astounding pace, cattlemen do not consider it appropriate for Congress to renew these mechanisms in their present form when they expire near the end of the decade,” explains an NCBA press release.
The 54¢/gal. tariff on imported ethanol is set to expire in January 2009 while the 51¢/gal. fuel blending tax credit expires in 2010.
That's a start, but there will be a lot more changes made throughout agriculture, according to Doud. “This is an historic transition. The switch from feeding grains to the ethanol industry instead of animals is one of the biggest structural shifts in cattle feeding in 50 years,” he says. “There will be no status quo in either the livestock or grain industry. Period. These higher grain prices aren't all negative. But it will force a lot of change.”
That fact hasn't gone unnoticed by the hog industry either. In recent testimony to the Senate Ag Committee, Webster City, IA, hog farmer Gene Gourley said, “Until recently the pork industry was very optimistic about its future. Last summer, however, the optimism began to fade in large part because the principal source of the industry's competitiveness, abundant feed grains, was being diverted to ethanol production.
“While the entire pork industry supports the development and use of alternative and renewable energy sources, the explosion in ethanol demand has raised concerns and fears among pork producers about feed grain availability and price, the transition time and about the ability to use DDGS,” he adds.
“The pork industry will adjust as it always has. High production costs will reduce profitability, and at first many producers will try to ride it out, hoping that other producers will blink first,” Gourley told the committee.
“Eventually bankers will be forced to foreclose on some operations. Some producers will simply decide to retire early. Over time, production will fall by enough to bring the market to its new equilibrium,” he adds. “Some industry experts predict pork production would need to decline by 10-15% to allow the industry to recoup the higher production costs. The adjustment could take years.”
From the grain side of the equation, folks are worried about how $4, and testimony like Gourley's, will affect attitudes toward the 2007 Farm Bill in Washington.
“When you have prices far above target and loan rates, it drives down the spending baseline. So, you've got a Congress that's looking at a much lower spending baseline, coupled with a fiscal environment focused on reining in deficit spending,” says Sam Willet, senior director of public policy for the National Corn Growers Association in Washington D.C. “Our case is we need a farm bill that contains an adequate safety net and, with these price levels, we need to start looking at revenue protection rather than price protection proposals.
“We're in the rare situation where we're being criticized for growing too much corn by some and at the same time others are criticizing us for not growing enough. But that's better than having $1.60 corn,” Willet says. “What some folks don't understand is growers face a lot more risk at these price levels. Land prices and cash rents go up, input costs go up, crop insurance costs are likely to increase at least 50% and there's the likelihood of greater price volatility
“It's wonderful to have $4 corn if you have a crop. But there are holes in the safety net under the current farm bill,” he says. “At these price levels those are problematic.”
Prices take care of prices. That's one point it seems everyone in agriculture can agree on. Predicted acreage shifts for 2007 make the point. The estimates are that corn acres will increase by 10-15% this year. Soybean and cotton acres are the likely losers that just can't keep up with the profit level that $4 corn offers.
And the push for better-producing hybrids that are more ethanol friendly will bring new products to the market at a surprising rate, according to Doud. “What happens when we increase corn yields by one-third?” he asks. “For one thing, we won't have $4 corn.”
Farmers have to hope that $4 corn won't drop as quickly as land rents have been bid up. It hasn't taken farmers long to start squeezing profit out of higher-priced gain. “The norm in Illinois now is $200/acre cash rent. You don't have to look very hard to find some ground going for $300,” says Richard Brock, Brock Associates, Milwaukee, WI.
Brock's predictions for continuing $4 corn? “For the next 12 months it isn't an issue. Beyond that, I don't think anyone can see,” he says. “The number one factor will be whether Congress renews the 54¢/gal. tariff on imported ethanol. That would end $4 corn,” he says.
“Beyond that, it's a question of how long it will take the industry to come up with enzymes so chickens and hogs can consume DDGS and how long it takes corn companies to increase yields by 10 bu./acre,” Brock says. “I don't know exactly which factors will drive the price of corn back down. But it will inevitably happen.”
That inevitability has some farmers pricing grain three years out to take advantage of today's prices, according to Todd Gerdes, Grains Origination Manager for Aurora Co-op, Aurora, NE. “We've already booked about 30% of the corn we anticipate for corn marketed pre-harvest in 2008 at $3.50/bu. and $3.35 for 2009,” he says.
Farmers will need those kinds of prices the way they're spending money right now. “I don't even know where you'd peg land prices right now,” Gerdes says. “(Nebraska) cash rents are pushing $200 for irrigated ground. Land that had been selling for $2,700 an acre now is above $3,000, and the best ground is at $4,000.”
The Aurora Co-op has made a significant commitment to Identity Preserved (IP) grains, and $4 corn is reshaping that market as well, says Gerdes. “Companies always pay the least amount they can to get grain to go their way. Now we're going to find out what these IP traits are really worth to them,” he says. ”In the past, a quarter premium was about all you had to pay farmers to grow an IP corn crop. With higher corn and soybean prices they're asking themselves, ‘Why take the added risk for low premiums?’”
Some of the IP market has been quick to respond. “White corn premiums, traditionally in the 25-35¢/bu. range, have jumped to 60-70¢/bu. High-fermentable corn premiums have gone from the 0-5¢/bu. premium range to 10¢/bu. Vistive soybean premiums went from 35¢/bu. two months ago to 55¢/bu. in mid-February just to compete with corn,” Gerdes says.“We'll struggle with IP crops other than white corn.”
Gerdes shares others' concerns about how current crop prices may affect the 2007 Farm Bill. “I think it may be the biggest potential victim of $4 corn. Farmers used to have the image of hard working, honest folks who feed the world,” he says. “Today the public has this image of a guy who gets million-dollar payments from the government and can afford to pay hundreds of thousands of dollars for equipment he only uses a few weeks a year.
“If the 2007 Farm Bill gets as much publicity this year as the last one did, watch out,” Gerdes says.