Certainly, ethanol is an issue that isn’t universally opposed; after all, lots of cattlemen also grow grain, and the benefit to the grain market for those producers will far override any negatives it creates on the cattle side. Also, if you operate in an area where ethanol byproducts are abundant and cheap, it provides you some competitive advantages over producers not so blessed, and helps negate the impact of higher grain prices.
Over time, however, that argument is becoming tougher and tougher to make. Sure, it will create shifts in competitiveness among regions, but as byproducts are incorporated more and more into rations, they are increasing in price to reflect whatever value they can bring into a ration.
Now add that factor to growing export demand. Then couple it with the impact that ethanol is expected to have not only on land values, but also other grain and hay prices as land is shifted into grain production and prices for hay are bid up to keep hay ground in hay production vs. grain production.
So, in essence, if we raise the price of corn by $3/bu. due to the demand by ethanol, the by-products are offsetting that price increase somewhat but the impact is significant and undeniable.
Ironically, it was the cow-calf producer who felt these impacts the most quickly and have adjusted. In fact, this sector has reduced numbers beyond what many would consider healthy if this industry is to maintain market share and its position at the center of the plate.
For the packing and feeding sectors, we’re looking for continued consolidation to bring capacity in line. This could be big news for certain areas, if you are in one of the areas where packing or feeding capacity is reduced. Many folks speculate that the feeding and packing industries will shift toward the Corn Belt. This may happen, but it’s difficult to imagine any significant shift while excess capacity is being eliminated. With transportation costs growing, the question of regional advantages will be determined by balancing the cost of building new infrastructure and moving feeder cattle, feedstuffs, fed cattle, and beef products.
What we can say is that the cow-calf industry has responded to the era of ethanol by downsizing. Hopefully we’ve overshot the reduction, and profitability will allow for some expansion of cow numbers as export demand continues to improve. The riddle for the feeding and packing industries, which have excess capacity, is to figure out at what level the U.S. cow-calf industry will stabilize.
-- Troy Marshall