There’s an old adage among farmers in the Midwest that when corn is cheap you have to “walk it to market," writes Chris Hurt, extension economist at Purdue University.
The concept of “walking corn to market” is not some new genetic modification, but rather the simple principle of adding value to corn on your farm by feeding it to livestock. And so, “walking to market” simply means feeding your corn to livestock rather than selling it as cash grain. That principle worked well when corn was $2 per bushel, but what about $4 corn?
Hurt compared a period when corn was $2 a bushel to more recent corn prices. From the 1999 crop to the 2005 crop, U.S. farm prices for corn averaged $2.06 per bushel. The value of the same corn fed to hogs was about $3.78 per bushel. This calculation is based on the value of corn after deducting all hog production costs including full depreciation and family labor costs. It can be argued that the “profits” should be a return to the family management rather than corn, but this serves to make the point.
For the 2007 and 2008 crops, the average U.S. farm price of corn was $4.13 per bushel. If fed to hogs, corn would have generated only $2.63 per bushel. In this period, the financial losses from pork production reduced the value of corn sharply below its cash value. This seems to suggest the strategy of “walking corn to market” has been replaced by the philosophy of “just haul corn to the ethanol plant,” but we have to look closer.
An escalation of corn prices from $2 to $4 could be described as an economic shock for the livestock industries. In the initial phases of the shock, feed prices move up rapidly, but livestock producers cannot pass those higher costs on to wholesale and retail prices for livestock products. This results in a period of severe financial loss and discouragement for livestock producers.
Eventually, livestock supplies are reduced through cutbacks in herds and the supply reduction ultimately results in higher livestock prices that can cover the higher costs of feed. The beef, pork, and poultry sectors have all been through this cycle and now have product prices high enough to cover $4 corn.
Recently, corn prices have moved higher. How much can hog producers pay for corn given the current outlook for hog prices this year and next? Right now, profits are not threatened with live hog prices at $60 per hundredweight. In fact, hog producers could pay near $6 per bushel for corn.
The outlook remains optimistic through next summer, with prospects for live prices to be near $53 this fall and winter, return to $57 in the second quarter of 2011, and to $54 in the third quarter. These hog prices would imply producers could pay a bit over $5 per bushel for corn and still cover all costs.
What’s the outlook for corn prices over the next 12 months? The midpoint of USDA’s Aug. 12 forecast of the U.S. average farm price was $3.80, while the current futures market is suggesting an average closer to $4.05 per bushel (with December 2010 corn futures at $4.33).
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Source: The PigSite.com