Know Your Market
Feed Insights for Dairies for 2012
Jan 23, 2012
A closer look for dairy producers at the role of DDGs, corn, wheat and weather in the coming year.
By Ron Mortensen, Dairy Gross Margin, LLC
Many ethanol plants are starting to extract corn oil before grinding corn for ethanol production. This makes the DDGs lower in fat and more acceptable for swine and poultry feed. Therefore, inclusion rates for swine and poultry feed can increase. USDA reports inclusion rates for swine now moving to 30%. The change in DDGs by these plants means inclusion rates moving towards 50%. This higher inclusion reduces the need for both soybean meal and corn by these segments of the feed industry.
In addition, DDG exports have been on a downward path ever since China accused the U.S. of dumping. Therefore, for two reasons, there are more DDGs available domestically. The recent USDA reports have had trouble communicating how this ethanol byproduct is getting put back in the feeding system. There are shifts going on, and it is hard to get data to understand the changes.
Given reductions in meal demand, Cargill announced the Des Moines, Iowa soybean processing plant will close. They will stop crushing soybeans but still take deliveries, shipping them to other Cargill crush plants. Crush industry officials indicate that most plants have been grinding for oil. This is another indication of the excess crush capacity in the industry in the U.S.
USDA’s Jan. 12, 2012 report puts some light on the feeding rates. Better quality corn has improved feeding conversions and reduced use. Warmer temperatures may have also been helpful to reduce feeding rates. The latest Feed Outlook from USDA indicated grain consuming animal units are projected to be up 0.7% from last year. The grain only (no meal, DDGs, etc.) feed rate per animal unit is estimated to be down 1.5% in 2012 to the lowest level ever.
Higher quality corn has improved ethanol plant grinding conversions. However, USDA may still need to increase ethanol grind in the supply/demand tables. Ethanol grind was huge for the first four months of the marketing year in an attempt to capture the last of the tax credits. Now, in order to get to USDA’s 5-billion-bushel use for ethanol, the grind will need to be reduced by 10% immediately (versus December). If immediate reductions in weekly production do not occur, look for the USDA to raise this category of corn use.
World wheat production has rebounded after the Russian drought. Increased wheat supplies and prices similar to corn have given wheat feeding a boost worldwide. This has reduced U.S. corn exports.
The U.S. soft wheat industry has a storage system developed by the CME that allows for excess returns to store wheat. Commercial entities can buy wheat, receive the storage payments and hedge it in future months for big guaranteed returns. This is holding some wheat off the market that could be feed. The Southeast feeders (hogs and poultry) apparently have imported wheat for feeding and this could continue.
The last few weeks have been all about Argentine weather. Argentina is having a drought at least equal to 2009 when corn and soybean production were reduced significantly. In 2009, it stayed dry until June and reduced wheat plantings in Argentina. This drought could impact world feed prices because Argentina is the world’s second largest corn exporter. The weather in the U.S. is too wet in the East and too dry in the West. Planting conditions and late summer weather will have a big impact on corn yields.
If you need to manage feed risk, look at a variety of option strategies. Contact your broker or feed supplier to see if you can use one of many option strategies to be long feed but benefit if it does move lower later in the summer.
Ron Mortensen is one of the founders of Dairy Gross Margin, LLC, which was formed in 2006 to sell Livestock Gross Margin Insurance to dairy producers. Mortensen’s firm is now licensed in 23 states. He is also president of Advantage Agricultural Strategies, Ltd., which he founded in 1985, to provide individual risk management advice for farmers and agribusiness using futures, options and cash trading strategies. Contact him at 515-570-5265 or firstname.lastname@example.org.