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Kay's Cuts

August 1, 2008
By: Guest Editor, Farm Journal
 
 

Corn Crisis Continues

Oil and corn prices continue to shake the markets and are threatening to downsize the meat and livestock industry. Cattle feeders and hog producers are losing huge amounts of money and there appears to be little relief in sight. Meanwhile, food inflation could accelerate if and when the cost of producing beef, pork and chicken is fully passed to consumers.

A portion of these added costs is corn-related. Just "how much" has been hotly disputed in recent months. But denials about the impact of high corn prices on food prices and about the impact of ethanol's influence on corn prices are wearing thin. USDA and the White House are finding it harder to defend their position on both counts, in light of current prices and what critics are saying. Keith Collins, USDA's former chief economist, now believes biofuels are becoming "a significant factor" in higher food prices. That's an almost total reversal from what he said before he retired from the job six months ago.

Not enough corn. Another brick on the pile comes from the World Bank. A confidential, unpublished report by one of its most senior economists says biofuels have forced global food prices up by 75%. The report was apparently completed in April but only disclosed the second week of July, just before leaders of the G-8 industrialized nations met in Japan. Despite this, it seems unlikely the Bush administration will accede to a request (from the governor of Texas) for waivers of the biofuels mandate, or to demands for ending ethanol's 51¢/gal. subsidy or the 54¢/gal. tax on imported ethanol.

So, the pressure on corn prices will remain. Forecasts for this year's weather-damaged crop vary, from 11 billion to 12 billion bushels.  Analysts agree the size of the crop won't be known until harvest is finished. Meanwhile, cattle feeders are grappling with cash corn prices over $7.50/bu. (Texas Panhandle basis in early July), versus $3.64 a year ago. Hog finishers face similar  increases and soymeal prices are nearly double those of a year ago.

Prices rise. As if this wasn't enough, the doubling of gas and diesel has increased the cost of transporting food, from live animals to vegetables. Oil and corn have sharply increased retail prices of food staples. For example, the price of a dozen eggs rose 28% from May 2007 to May 2008. The price of a gallon of milk rose 15%, a pound of cheese nearly 11% and a turkey 10%.

The big story, though, is the way meat and poultry prices increased only marginally or not at all. Apart from turkeys, the only increase was a 3.5% climb in chicken breast prices.

Producers and processors have almost totally absorbed the increased cost of feed until now. This has caused huge financial losses. More than 80% of U.S. beef is grain-fed. Once cattle enter a feedlot, feed accounts for 60% to 70% of the cost of production. That compares to 60% for chickens and more than 50% for hogs.

Big losses. Put the dollars on paper and cattle feeders could be losing $80 million per week while pork producers are said to have lost $2.8 billion since last summer.

However, passing on the higher costs of producing meat to the consumer is double-edged for the industry. It would drive up consumer cost of beef and pork, impacting domestic and global sales.

At press time, the futures market suggests live cattle prices in February 2009 will be 30% higher than last year. For beef processors and grocery chains to keep their margins, retail prices will need to be 20% higher than they have been so far this year. That's one reason why economists forecast food inflation could top 9% annually from 2008 to 2012. Such inflation hasn't been seen since the 1970s. The huge difference is that today, Americans are paying twice as much for petrol as they did then.

Steve Kay is the editor and publisher of Cattle Buyers Weekly (707) 765-1725; www.cattlebuyersweekly.com.

Top Producer, Summer 2008

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FEATURED IN: Top Producer - Summer 2008

 
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