The pesky boll weevil, long a scourge of the southern cotton industry, sent many cotton producers scurrying for a safer crop in 1998. Some chose corn.
A few years ago, with federal crop subsidies in place, cotton producers had an incentive to stick to cotton. Now, as the subsidies disappear under the Freedom to Farm Act, cotton producers have an incentive to go hunting for the most profitable crop. One year it may be corn. The next year they may be back to cotton. Or they may pick a third crop.
In fact, no one knows what they'll do. That's the problem. Freedom to Farm has given farmers the option to switch crops, and crop switching is expected to send corn prices gyrating in ways that could unsettle cattle feeding and ranching businesses.
"It will increase the risk of feeding because the cost of corn can be more variable," says Dwight Aakre, Extension farm management economist at North Dakota State University.
But ranchers are also at risk. If the price of corn rises as a result of Freedom to Farm, feeders are going to look for someone else to take the financial hit. That could translate into lower calf prices.
"A $1 increase in the price of corn per bushel will cause a $10-12 per hundredweight decrease in the price paid for a 500-lb. calf," says Ernie Davis, professor of livestock marketing at Texas A&M University.
Of course, Freedom to Farm could lead to lower corn prices, and ranchers and feeders would benefit from that. Or, it could lead to higher corn prices one year and lower prices the next as the market flip flops. In that case, Freedom to Farm could disrupt the cattle price cycle in ways no one can predict.
These disruptions could put ranchers in a financial squeeze. "I wouldn't say they would be more likely to fail, but I would say they would be more likely for some unpleasant surprises," says Len Mertz, a West Texas rancher.
The bottom line is that the end of subsidies will undermine stability in the grain production system. "For several decades we've had farm programs that provided income support to crop producers," says North Dakota State's Aakre. "But, livestock producers received an indirect benefit by being assured a constant source of grain at a relatively favorable price. The outlook is that if the government pulls out of the support program, the supply will be more variable and so will the price."
A Change For The Better? Some critics of the old system welcome the change. They believe agriculture fares best in a system free from government interference. Others think the phase-out of crop subsidies will cause hardship. They have dubbed the Freedom to Farm Act the "Freedom to Fail Act," and they want the legislation modified or scrapped.
That isn't likely given the free market bent of many Congressmen. For now, farmers, feeders and ranchers can only try to predict where the phase-out of crop subsidies will lead. Already, some farm specialists are forecasting changes that will reshape the agricultural landscape.
"I believe we have marginal land in corn production that will no longer be productive without government subsidies," says Aakre. "The land won't necessarily be idle. The first attempt will more likely be to put grass or some other forage crop on it. We may even see greater hay production in alfalfa or native grasses."
In addition, farmers may switch production on their higher quality land to more profitable crops. "Corn has been the biggest recipient of federal subsidies," says Aakre. "Even with the subsidies, it tends to be a relatively low value commodity. Producers may look on corn as unattractive with the removal of subsidies and look for a higher value crop to grow in place of it. One example might be minor oil seeds such as canola, sunflower and flax, or soybeans. We could very well see a switch to those crops at the expense of corn."
The price of corn will probably rise as less of it is produced and the price will probably be more volatile, he says. The higher price could, in turn, squelch demand and encourage more production.
"That's why you get more volatile prices and volatile production without a government program," says Aakre. "The government subsidies tend to curb swings in both production and price. If the program disappears we'll see wider swings in production and the price."
"We will have to adjust to the fact that supplies will be determined by demand," says Jay Gray, general manager of Graham Land & Cattle Co., a feeding operation in Gonzales, TX.
It's also possible that corn prices may begin to move in a cycle just as cattle prices do. That could mean corn prices may be volatile, but at the same time follow a repetitive pattern.
"The cattle cycle typically operates in 10-year cycles of highs and lows," says Greg Ruehle, executive vice-president of the Nebraska Cattlemen's Association. "I could see a similar level of predictability coming to the grain market.
"In the long run, moving toward greater market orientation will be better for all of agriculture," he says. "In the short run, it presents several challenges, not only to grain farmers, but also to those agricultural industries that rely on grain, such as cattle feeders and hog farmers."
It would be easy to blame the Freedom to Farm Act for future volatility in corn markets. However, the reality is much more complex. Many factors influence grain prices and Freedom to Farm is just one.
Others include fluctuations in the corn export market, and changing demands for corn by cattle feeders and ethanol producers. If exports fall, or ethanol producers buy less corn because the price is too high, corn prices will react.
If the beef industry is in a liquidation phase and feedlots are full, the price of corn will react. If the weather goes haywire, and corn production plummets or skyrockets, the price of corn will react.
To see how volatile corn can be, look at the three-year price swing in Nebraska. "In the summer of 1996, we saw corn in the Lincoln area at greater than $5 a bushel," says Greg Ruehle, executive vice-president of the Nebraska Cattlemen's Association. "Now it's less than $2." Good growing weather in the Midwest pushed up production, which in turn helped lower the price.
"Corn is always volatile," says Jay Gray, general manager of Graham Land & Cattle Co., a Texas feeder. The phase-out of subsidies will just make corn prices more volatile, he adds.
The other thing to remember is that price fluctuations brought on by Freedom to Farm cut two ways. One year Freedom to Farm may help ranchers and feeders. The next year, it may wreak havoc. Perhaps the only thing certain about Freedom to Farm is that it will add a new layer of uncertainty to a very uncertain business.
When Congress changes the ground rules for business, someone usually gets hurt. But it's not always obvious who will suffer the most.
For instance, when Congress slapped a luxury tax on large pleasure boats, common sense said the rich would suffer.
But the rich didn't suffer much. Many wealthy people saved money by not buying boats because the tax made them too expensive. Who suffered? Boat builders suffered because they lost business, and their blue-collar production workers suffered because they lost their jobs.
But who would expect ranchers to suffer? The reality is that ranchers are at the bottom of the food chain with no ability to influence calf prices. When the price of corn soars, feeders are likely to pass the financial pain downward.
"We're price takers," says Len Mertz, a West Texas rancher. "We're not price setters. You're looking at the cattle feeder passing higher costs down. If his prices go up, he's going to be looking to pay a cheaper price for calves."
Preparing For Change The change to a free market grain system will force feeders and ranchers to become better business managers or face financial hardship. Here are some ways to prepare:
* Ranchers and feeders should adopt a strategy of low debt combined with savings for low profit years brought on by grain price fluctuations. Low debt drops the breakeven point, a critical ingredient when sudden corn price swings crimp feedlot profits or lower the price feeders pay for calves. Savings provide a cash cushion to cover debt payments, maintenance and other expenses if profit margins fall.
* Feeders can ease the potential damage from corn price volatility by forward contracting for corn, locking in both supply and price. By locking in the price in advance, feeders can base the price they charge for custom feeding with the price they will have to pay for feed. "We contract four, five or six months ahead," says Jay Gray, general manager of Graham Land & Cattle Co., a Texas feeder.
* Feeders can also cover wild swings in market prices by hedging - obtaining an offsetting position which should cancel out losses if the market turns volatile.
"There's a greater need for managing risk for a feedlot," says Greg Ruehle, executive vice-president of the Nebraska Cattlemen's Association. "In the past we've managed risk for cattle. Now we're going to have to manage risk on corn."