Prices for feed and fuel are as intertwined as ever for the U.S. livestock industry, and producers such as Howard Hill don’t like what they’re seeing lately.
Corn futures have doubled since the middle of last year, hitting a 32-month high at $7.32 ½ a bushel earlier this week. Meanwhile, crude oil last week reached the highest levels since September 2008 amid concern over supply disruptions in the Middle East, signaling escalating costs for gasoline, diesel and heating fuel.
Hill, veterinarian and director of external affairs for Iowa Select Farms, said hog producers are being increasingly squeezed by soaring feed costs, which he attributes in large part to stepped-up corn use by the ethanol industry. As oil rallies, prices for ethanol rise accordingly, providing incentive to blend the corn-based additive into gasoline.
“The food-versus-fuel issue is alive and well when it comes to profitability of swine,” Hill said. His Iowa Falls, Ia.-based company raises about 3 million slaughter hogs a year. “As oil goes up, it increases the price of ethanol. Right now we have good hog prices, but margins are narrowing.”
Many analysts expect oil prices to climb further, reflecting recovering economies in the U.S. and Europe and strong growth in China. The corn market holds a similarly bullish outlook, analysts say. That’s brought back unpleasant memories of 2008, when oil and corn both soared to all-time highs, precipitating a deep slump for beef, pork and dairy industries. Corn accounts for about 30 percent of the cost to raise a pig to slaughter weight.
The average break-even hog price for producers has risen for at least six consecutive months, reaching $58.75 per animal during January, according to estimates from Iowa State University economist John Lawrence. Producers lost $6.73 per head on average during January, the fourth consecutive month of losses.
While cattle and hog prices have also climbed, worries have grown over the sustainability of recent lofty market levels, livestock analyst Steve Meyer said. Cattle and hog futures slipped this week from highs reached last month.
As oil rises above $70 a barrel, it is “pretty closely correlated” with corn prices, Meyer said. And although energy costs are still a small fraction of the overall costs for raising hogs, the greater impact is reflected in corn prices, he said.
“I don’t think there’s any question this will increase the value of corn used in fuel,” Meyer said, referring rallying oil prices. “It was already a problem, and this is going to cause it to be a bigger problem.”
The federal government’s subsidy for fuel makers using ethanol, in the form of a tax credit of 45 cents a gallon, effectively allows a livestock industry competitor to pay more for corn, Meyer said.
While oil futures fell today on signs of easing tensions in Lybia, it remains to be seen whether consumers will receive any relief from rising fuel costs.
In trading today, April crude futures in New York fell 32 cents to $101.91 a barrel, after reaching $103.41 on Feb. 24, the highest price for a closest-to-expiration contract since September 2008. Still, oil is expected to be even more expensive later this year, based on futures prices. Oil for July delivery is trading around $104.25, while December futures are trading near $105.19.
New York futures reflect West Texas Intermediate crude, the U.S. benchmark.
Gasoline and diesel follow crude higher, with a move in oil prices typically taking two to four weeks to be completely reflected at the pump. That means the effects of the recent crude surge have yet to completely filter down to U.S. motorists.
Earlier this week, regular-grade gasoline at retail averaged $3.43 a gallon nationwide, up 27 percent from $2.70 a year earlier, according to AAA, the motorist association. Diesel averaged $3.78 a gallon, up 31 percent from a year earlier.
In July 2008, regular-grade gasoline and diesel pump prices hit records at $4.11 a gallon and $4.85, respectively, according to AAA.
Rising oil prices affect a broad spectrum of energy-related inputs for livestock producers, boosting costs to ship animals and feed. Also, propane prices have risen, making it more expensive to heat hog barns, Hill said.
As the outlook for feed and fuel costs grows increasingly concerning, livestock producers are bracing for a scenario similar to 2008. That year’s surge in feed costs, combined with recession, led to at least two years of producer losses and sparked widespread herd contraction.
“That is a fear in the industry,” Hill said, referring to 2008. “We are definitely concerned about feed costs. Every producer is. It’s the subject of every conversation.”