Ethanol and Fed Cattle Breakevens
Mar 07, 2011
Ever since Washington fell in love with ethanol, there has been talk about the cattle feeding industry moving back to the Corn Belt because that’s where the distillers grains are.
I wrote a piece for AgWeb last week talking about cost-of-gain (Can Cattle Break $1.20?), based on ration costs in the Texas Panhandle. I heard, quickly, from some distillers grain feeders who said their costs were well under that—including a fellow in Iowa who said the custom yard where he had recently placed 530-lb. cattle was projecting gains in the .82-.85 range.
The costs of gain in Texas on cattle that size were projecting at more like $1.05. That sort of range—a 10-cent advantage in gain cost would translate to $80 per head on 800 lbs. of gain—would suggest a distinct advantage for the Iowa feeder.
So why aren’t all the cattle being fed in that part of the country? Why hasn’t the industry moved east faster?
Iowa feeders do have more cattle on feed than they did a few years ago. But they’re still well under the numbers of the 90s. Twenty years ago, there were over a million head of cattle on feed in the state. That fell below 400,000 early in the 2000s, and has since climbed back to—as of the February cattle on feed report—660,000. That reflects a lot more feeding in the state, but is hardly the wholesale shift many expected.
Kansas and Texas—the most ethanol-deprived of the major feeding states—had 45.5% of the cattle on feed in the U.S. in February 2001 and 44.5% this year. Iowa cattle on feed were up 10% over last year—meaning there were 60,000 more cattle on feed in the state. Kansas and Texas were up less, percentage-wise, but still added 210,000 head in the same period.
So, while there is generally growth in feeding in the ethanol regions, it is hardly the wholesale shift we saw during the 1960s and 70s, when the commercial feeding industry picked up and moved to the Great Plains.
Makes you wonder why, doesn’t it?
So I called around last week and talked to some smart guys.
For one, feeder cattle are priced at a premium in the Corn Belt. They tend to feed “better” cattle, and the market hasn’t been paying much of a premium for that kind of finished carcass.
For another, the rails provide a cheap way to transport grain and dried distillers grain, so not all locals are going to get too good a deal on the co-products. (I found nobody else talking bout 82-cent cost of gain.)
How much cheaper one yard can get his distillers grain depends on where he sits. The closer to an ethanol plant and the less local competition from other feeders, the cheaper.
And that makes the current situation interesting. Ted Schroeder at Kansas State University has done a lot of work on that sort of thing. He points out that with corn and gasoline prices both high, the value of distillers grains is apt to gain, relatively, on non-distillers grain rations—thus providing the ethanol area feeders with a bit more advantage.
The higher the price of fuel, then the higher the price of ethanol. As the plants push harder, the “salvage value” of the distillers grains lose some importance. There is more a tendency to “push them out the door,” and for some nearby feeders, that offers a nice advantage. Higher fuel costs also make it more expensive to dry the byproducts, making it a bit more advantageous for them to ship wet product to the nearest feeders. The higher fuel also adds more cost to longer distance shipping for corn—providing another advantage to the locals.
It’s hard to say how much advantage all that adds. It is too variable. For some Midwestern feeders, the benefit is substantial.
But, so far, there is little indication that all the benefits associated with ethanol are substantial enough to reverse the geographical shift of the feeding industry.
I’ll be surprised if it ever does. It’s not just my bias against ethanol, although when Al Gore and Bill Clinton both express doubts, you’ve got to think of rats jumping off a sinking ship.
That makes me think the ethanol industry has built its house upon the sand. But even if it stays forever, there are many differences in today’s climate and that of the 60s.
The shift to the Great Plains involved more than cheap feed. For one thing, new paradigms in packing plant technology and management—think boxed beef and union-busting—were rendering the stockyard towns’ processing facilities all at once obsolete. That’s not the case now. Packers are way over built and hardly of a mind to start building hundred million dollar facilities in the Midwest.
In those days, the locals were pleased to see the feeders and packing plants come. We said they smell like money. Nowadays, if you want to build a feedyard, you’ve got permits and neighbors and nuisance laws and mad county commissioners. It’s going to be hard to find new places to put 10 million head of poopy new feedyards. All that is going to break growth in the Midwest.
So the ethanol byproducts are a great thing for some cattle feeders. It gives them a competitive leg up, and all the more so when feed prices are high. In fact, since cattle are the main beneficiaries of the products, they give beef a competitive advantage over pork and poultry. To the extent those distillers grain feeders pay up for feeder cattle, that’s also good for cow-calf producers. In fact, there’s little doubt that the availability of cheap distillers grains is one of the props under the current calf and feeder cattle market.
But the cost of gain is just part of the equation in the regional competition. Markets, weather, facilities, expertise, feeder calf availability—those elements are just as important.