Jim Lochner, Tyson’s chief operating officer, recently addressed the J.P. Morgan Global Protein Conference in New York about the fundamental shifts we’re seeing in the market. He spent quite a bit of time discussing the implications of covering the cost of $7/bu. corn, and the supply and price relationships that have been significantly altered as a result. For perspective, five years ago, 12% of the corn we produced was used in ethanol; today that amount is 40%.
Ethanol supporters would say that the use of byproduct feeds generated from the ethanol production process in effect lessens that 40% figure considerably. That may be true, but there’s refuting the fact that the hyped demand for grain caused by ethanol mandates greatly alters the price structure for grains.
In fact, I think it’s hard to comprehend just how significant of a shift energy has made in the marketplace. Every market-wise cattle producer has been forced to figure out how to reprogram their smart phones and iPads to add crude oil to the futures prices they look at every day.
Ultimately producer profitability and producer margins determine meat availability, but with increased grain prices and increased input costs, we also have to have significant increases in prices to merely maintain profit margins. Then there are the dynamics in terms of growth and maturity levels, feed efficiency and the like. Feeders and packers are still talking about shrinking meat supplies and concerns about losing feeding and packing infrastructure if supplies don’t increase soon.
While the marketplace is trying to buy additional cows into production through higher prices, the increased prices for running cows has largely been offset by the higher costs. The change in corn price levels means a significantly reduced cattle industry in terms of size. The question is how much smaller will the U.S. cattle industry be because of ethanol?
Right now, cattle feeders and packers are trying to tell the cow-calf industry it needs to expand, but can they provide sufficient incentive to entice ranchers to do so?