With the 2011 corn crop not likely big enough to meet demand and as prices continue to rise, livestock producers soon might be facing a critical decision: whether they should reduce their use of corn for feed.
Purdue Extension Agricultural Economist Chris Hurt says the livestock industry probably would cut back when 2012 crop prices rise above $7/bu. – a level the market has now reached.
The USDA's August World Agricultural Supply and Demand Estimates (WASDE) report forecast the average U.S. farm corn price between $6.20 and $7.20/bu. The corn futures market prices have surpassed the $6.70 mid-point of USDA's range and are now pricing in the low- to mid-$7 area for 2011 average cash crop prices.
For the pork industry specifically, Hurt estimates producers could pay, on average, about $6.85/bu. for corn and still meet other operating costs.
"Corn prices will have to move to new record highs on a marketing year basis to get animal industries to reduce corn use, and they are doing that now," Hurt says.
Livestock producers will compete for short corn supplies with other users, such as biofuels producers and export markets, Hurt says.
"The largest competitor for corn in the coming year will be the ethanol industry where USDA analysts currently estimate 5.1 billion bushels of corn use," he says.
About 4.7 billion bushels will go to meet the mandated domestic Renewable Fuels Standard, with the additional 400 million bushels used to make ethanol for export, Hurt says. That means that according to USDA, 39% of the 2011 corn crop will go to ethanol production.
"Mandated corn use was troublesome to the animal industries when corn was abundant," he says. "Now with short corn supplies, the concerns are even greater.
"The short supply also increases the odds that some end users, including the animal agriculture industries, will appeal to the Environmental Protection Agency to reduce ethanol mandates for 2012."
If mandates aren't reduced, the cutback in corn usage will have to come from non-fuel sectors, such as animal agriculture and corn exports.
"There has been a general assumption that foreign customers would reduce consumption as prices rise; however, in 2007 and 2008 foreign customers increased purchases," Hurt says. "Given the low value of the dollar and strong desire of many foreign governments to do what they can to moderate food inflation, the question remains whether the foreign sector will cut their imports of U.S. corn this year."
The difference between 2007-2008 and now, Hurt says, is that just a few years ago the livestock industry couldn't afford to pay more than $6/bu. for corn. As per-capita supplies of livestock have shrunk in the last four years, prices farmers receive for animal products have increased. But even with those increases, Hurt says the limited corn supply and market volatility have caused most pork producers to put expansion plans on the back burner.
"Those decisions appear fortuitous now with the small corn crop becoming a reality," he says. "Estimated farrow-to-finish margins for the 2011-2012 corn marketing year now appear to be negative, with an average loss of $7/head. This potential loss likely will cause some reduction in the size of the industry"
Hurt says he expects domestic consumer meat demand to be weak because of modest income growth. But there is a bright spot for pork producers in the form of strong economies in China and South Korea.
"Greater pork exports would stimulate hog prices and enable the industry to pay more for feed," he says.