The cattle industry is still learning to deal with the new reality of ethanol subsidies. As livestock producers, we can't compete with the subsidized ethanol industry for corn, and globally the declining value of the dollar makes us even less competitive for the crop with other countries. Many have pointed to the fact that energy demand for corn outpaced feed demand this year, but that really wasn’t a landmark event, as mandates dictated that ethanol demand would grow. We also knew that we couldn’t compete.
The truth is that corn is now an energy market, livestock is secondary. Price is determined by calculating export and ethanol demand, and then we absorb the remainder at whatever price level is determined. Ultimately cattle prices will rise to justify whatever price level is established or, to say it another way, the industry will shrink to whatever size necessary to raise prices to where we can compete with corn and other energy sources.
The industry has been debating just how much profit cow-calf producers must experience before herd expansion is triggered. While the drought alone impeded any chance for expansion, if you want to know whether the cattle industry will expand or contract, you just need to look at the price of corn. When the trend line for corn prices stabilizes or moves lower, the cowherd will expand.
Looking at the traditional 10-year cattle cycle, we should have begun to expand in 2005 or 2006. But just overlay the corn price graph onto the trend in cowherd numbers and you can see why we continue to shrink numbers.
Ultimately, we will have to answer how much profit is required to trigger expansion given the increased risk and cost associated with running a cow. But, the larger macro question is how big of a cowherd can be justified given the new dynamic of subsidized ethanol.
What we now know is that, with today’s dynamics, corn is going to be rationed or allocated between ethanol, exports and feed; the sector that will bear the brunt of the rationing will be the beef industry. In effect, even with record harvests, supplies are likely to be reduced for cattle.
Five to 10 years ago, when our industry made the statement that we were the lowest-cost producer of high-quality, corn-fed beef in the world, that looked like a long-term competitive advantage that positioned us for global dominance. After all, that was the beef product of choice among consumers. But, the new price structure means that market is considerably smaller than anyone imagined it would be.
I’ve heard others argue that the beef industry will merely transition out of corn. They may be correct, but that means an even smaller industry, because our industry does not enjoy a competitive advantage over the world relative to grass-fed beef production.