Market Advisor

Effect Of Ethanol Supports On Ranchers – Part I

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The nation’s ethanol program kicked into high gear in 1996, dramatically impacting corn prices and changing the economics of the beef cow sector in its wake. The result has created a new economic ballgame for beef cow producers that I refer to as the “new normal.”

This dynamic has advanced sufficiently that we can study the beef cow sector’s transition from the “old normal” into the “new normal.” This month, I’ll present the current average total direct costs (TDC) of Northern Plains beef cowherds for 2009 and 2010. I will then use the average TDC from 1993 through 2009 to study the long-run economic performance of Northern Plains beef cowherds. This study includes the last 13 years of the “old normal” and the first four years of the “new normal.” Thus, a total of 2,622 herd-years, averaging 154 herds/year over 17 years, comprise this study.

I will break a beef cowherd’s cost structure into three components – TDC, overhead costs and female replacement costs. This month, I’ll focus only on TDC, and cover the other two cost categories in detail in my August and September columns.

Figure 1 presents the 2009 and 2010 average TDC for the Northern Plains herds studied. TDC on the study herds averaged $400/cow in 1999 and $394/cow in 2010. This TDC can be broken down further into three general cost categories – feed costs, vet & medicine, and livestock costs. Study Figure 1 closely to become familiar with the cost items included in TDC.

One cost item – breeding fees – needs more explanation. This is the average AI fee for all herds. Since most herds don’t utilize AI, this average fee is very low. Natural breeding costs are included in the cowherd costs.

Figure 2 presents the study herds’ average annual TDC from 1993 through 2009 and a calculated statistical trend line. The trend line is clearly rising over these 17 years, statistically confirming the general perception of ever-increasing direct cost.

The power of a statistical trend line comes from two things.

• The TDC trend line is statistically increasing at the rate of $8.72/year for the 17-year study period. That suggests that, on average, TDC has increased $87 in any 10 consecutive years during this 17-year period.

• We can graphically identify both the years below trend and above trend. While 1998-2005 were years below trend, direct costs were still growing, but at a slower annual rate than the trend line.

Further study of Figure 2 indicates the trend for the last decade (2000-2009) appears to be increasing even faster than the total 17-year period. A second statistical trend line calculated for the last decade (2000-2009) confirmed this observation. The statistical trend for years 2000-2009 increased $14.10/cow/year. This implies that TDC went up $140/cow during the last decade.

The beginning years of the biofuel era – 2006 to 2009 – were also above the trend line. I felt, however, that I didn’t have enough years of data in this “new normal” time period to calculate a unique statistical trend. Visually, TDC appears to be increasing even faster in the “new normal,” though I can’t prove this statistically.

I used the second statistical trend line to project TDC data for years 2011-2015, and then calculated a five-year projected average. Projected TDC increased from $421/cow in 2011 to $478 in 2015 for a five-year average projection of $450/cow/year. This compares to an average cost of $281/cow in year 2000. Figure 3 presents these projections along with the 17-year history.

Total feed costs (TFC) are a major component of TDC, accounting for 76% of TDC in 2009 and 74% in 2010. It’s important to note these feed costs are based on the “fair market value” of farm-raised feeds fed and not the “costs to produce” them. This is correct enterprise economics.

Figure 4 presents the long-run analysis of TFC on the study herds. A statistical trend line calculated for TFC shows an upward trend of $6.41/year over the 17-year period. That’s a $61/cow average cost increase in a decade.

Further study of Figure 4 suggests that 2001-2009 feed costs increased at an even faster rate. A statistical trend line for 2001-2009 (Figure 5) confirms this last decade’s trend value for TFC increased $11.50/year, a $115/cow increase during the decade of the 2000s.

In summary, TDC trended upward $141 in the last decade, while TFC, the biggest cost component, accounted for $115 of the last decade’s overall cost increase. This suggests that non-feed direct costs increased $26/cow in the last decade.

Figure 5 also indicates that feed costs for the “new normal” years (2006-2009) are right on the 10-year trend line. This, then, doesn’t confirm my previous perception that average TFC for the beef cow sector accelerated during the “new normal” era. Yes, feed costs did increase, but didn’t rise any faster than the first half of the last decade.

This suggests that the biofuel era’s main impact on beef cow producers is on the revenue side of the profit equation rather than on the cost side. I believe the prices received for feeder calves have been dramatically reduced in the “new normal.”

Harlan Hughes is a North Dakota State University professor emeritus (701-238-9607 or harlan.hughes@gte.net)

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Harlan Hughes has spent a professional lifetime helping U.S. beef producers better manage the business end of their beef cow operations.

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Harlan Hughes

Harlan Hughes is a North Dakota State University professor emeritus and author of the monthly "Market Advisor" column that appears in BEEF magazine. He also consults and lectures widely,...

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