Energy impacts livestock production in many ways, not just the direct impact of its use on the farm. Imagine that energy prices remain high in coming years (not exactly a stretch). We've seen an early and immediate reaction to high energy prices this year when corn growers said they'd cut acreage by 5 percent. It looks like it might end up around a 2 percent to 3 percent reduction.
Now, imagine that a short corn crop occurs in 2007 or 2008, resulting in the need to drastically ration corn usage for feed-- another easy-to-imagine scenario.
"The corn surplus will be gone with the 2006 crop, as expected total corn use may exceed production by about 1 billion bushels," says Chris Hurt. "Thus, the supply-crunch year appears to be the 2007/2008 marketing year.
"Of course, a weather-related small crop this summer could bring the supply crunch and much higher corn prices this summer," he adds.
Agriculture is setting up to contribute to the energy industry in a much larger way in coming years, through ethanol and other bio-diesel production.
"Agriculture's traditional role as the foundation of the food industry will experience increasing competition as more corn is used for fuel," he notes. Animal agriculture will feel tremendous impact as it is the largest current user of corn.
The livestock industry has had the advantage of low-cost feed in recent years. For example, U.S.corn prices for farmers from the 1998/1999 through 2005/2006 marketing years averaged just $2.05 per bushel and high-protein soybean meal just $180 a ton at Decatur,Illinois.
Feed is often the largest single cost factor in pork, beef, chicken, turkey, lamb, milk, and egg production. "In the 1960s, nearly 80 percent of the total use went to feed animals," notes Hurt. The export boom of the 1970s added dramatic, new demands-- for the decade, feed use averaged 67 percent of the corn total.
In the 1990s, growth of industrial uses of corn-- especially high fructose corn syrup-- drove feed usage down to an average of 60 percent. Given the ethanol expansion, feed use is expected to drop to about 51 percent for the 2006 crop, giving the livestock industry a new major competitor.
American consumers and politicians are signaling they want to use more corn for fuel. Ethanol market prices now exceed $3 per gallon, and ethanol producers could pay near $7 a bushel for corn and still have positive returns.
"Today's ethanol futures prices average $2.58 for the coming 12-month period, high enough to pay an average of about $6 per bushel," says Hurt. "Politically, there is support to stimulate the use of corn for fuel even more."
Hurt says the recent era of low-priced feed may well be over for the animal industries, especially for corn prices, but many uncertainties remain.
"Corn for fuel can currently bid much more for corn than the livestock industry," he adds. "However, ethanol prices in the future will depend on overall energy prices, on whether federal and some state incentives continue, and on the value of ethanol as an oxygenate."
Corn costs for ethanol plants will likely increase as well.
The warning for the livestock sector is that when feed prices move to new higher levels, it will likely mean period of losses-- sometimes severe-- as herds and flocks are reduced.
"Then after one or two years, varying by species, retail prices and farm prices will adjust higher and positive returns can be generated even with the higher feed prices," says Hurt.
The strategic message is that managers in the livestock industry need to anticipate such a condition in the coming years, and more importantly, begin planning how to survive the transition years until product prices can eventually cover the higher feed prices.