Cattle feeders have another year of high feed costs in front of them. Adapting to that environment will force structural change in the industry.
Cattle feeders, a segment of producers more familiar with challenge than they likely want to be, have little relief in sight beyond what they can find in a bottle of antacid.
“There obviously is a huge issue between now and the middle of next year for feed costs,” says Mike Sands, Informa Economics economist. “We have nine months or a year of some pretty stiff feed costs to get through.”
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Speaking at a recent Feeding Quality Forum co-sponsored by Certified Angus Beef®, Sands told cattle feeders to expect corn prices to stay in the stratosphere until the 2013 harvest. Back in 2008, corn spiked above $7/bu., but then retreated. That won’t happen this year, he says.
“The difference this time, if we’re going to get 96-98 million acres of corn planted next year, is that corn can’t give up much ground to beans, or anything else. As a result, it’s got to stay high relative to alternative uses of that ground if we’re to ensure that acreage gets planted.”
He thinks there’s little downside opportunity in corn prices. “Regarding ethanol, there’s not much doubt about the quantity of corn it will absorb,” he says. Ten years ago, livestock accounted for 60-65% of corn usage. “That has now dropped to around 35%. In contrast, ethanol usage has expanded from around 5%, with most of the growth beginning in 2007 with the Renewable Fuel Standard (RFS), to 45% or better.”
However, Sands expects ethanol usage to level out now that the 10% blend wall has been reached. So the livestock industry can expect ethanol demand to stay in the area of 4.5-4.7 million bu. of corn. And if corn prices should see a setback, he predicts that commercial users will step into the market pretty aggressively.
The chance that the RFS will be repealed or waived is small, he says, so ethanol production will continue. That feed cost advantage will continue to favor feedlots closer to ethanol plants.
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“Now take that into account when we’re looking at shrinking the size of the pie” in terms of cattle numbers, he says. The Midwest, specifically Nebraska and Iowa, are seeing increased cattle-on-feed numbers, while the Southern Plains – Kansas and Texas – are seeing fewer placements.
“What does that suggest? Well, at least on the surface, if there are going to be some empty pens, they’re probably most likely to show up in the Southern Plains than up north,” Sands says. “At least that’s some of the early indications. And that’s something we’re going to have to confront.”