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Higher Risks, Greater Awards

published: October 14th 2008
by: Jeff DeYoung
source: Farm and Ranch Guide

AMES, Iowa - Feed costs will continue to drive the livestock market for the foreseeable future, a group of analysts said at a recent livestock risk conference here.

But, with that higher risk could come greater reward.

“We have an opportunity to build on the feeding advantage we have had in the past,” said John Lawrence, director of the Iowa Beef Center and Extension livestock marketing economist at Iowa State University.

“But, we also need to be able to look past the next six months. We are going to have higher livestock markets, but it's going to take some time.”
 

Lawrence said higher hog slaughter numbers have helped create a “mountain of meat,” adding chicken and turkey production also are up.

Sow slaughter is increasing, which should help boost prices as the inventory shrinks, he said.
 

“The losses we saw in the hog industry from October 2007 to April this year were the largest we have seen since 1998. We did have a short rally in May, but that has backed off.”

The good news is pork exports continue to grow, Lawrence said. Exports from January through April were up 52 percent over a year ago, partially due to increased trading with China.

“Japan is still our biggest customer, and we still export a lot of pork to Canada, Mexico and Russia. I don't think we can expect exports to continue to be this good, but certainly we do expect to see them stay strong.”

Because of rising corn and soybean prices, Lawrence said producers will continue to lose money for several months.

For example, if corn is $7 per bushel and soybean meal costs $350/ton, break-evens approach $90 per hundredweight on a carcass basis, he noted.

Lawrence said smaller fed cattle numbers should result in strong prices over the coming months, and liquidation of the cow herd continues.

Beef exports continue to grow. Lawrence said a resumption of trade with South Korea will provide a major boost.

Higher feed costs also will hit cow/calf producers, he said, but added excess feedlot capacity could keep bids high for calves.

A wet spring and recent flooding won't do livestock producers any favors, said Chad Hart, an economist with the Center for Agricultural and Rural Development at ISU.

He said the USDA is forecasting an average price of $5.80/bushel in 2008. The USDA expects soybean meal to average about $325/ton this year.

The driving force is energy prices, Hart explained.

“We are tied very closely to the energy industry, and their risks are now our risks,” he said. “The tremendous volatility we have seen in the energy sector has been transferred to the ag sector.”

Ethanol prices continue to move upward with crude oil prices, he said, meaning ethanol plants can pay more for corn.

“We have strong demand from a variety of sectors, including the ethanol industry,” Hart said. “Because of this, I expect feed costs to stay high for quite some time.”

Despite the increased demand, Iowa will not run out of corn, said David Miller, director of research and commodity services for the Iowa Farm Bureau Federation.

“Iowa will be a major net exporter of corn in 2008,” he said.

“We have really slowed down on biofuels growth. The livestock sector needs to know we are not going to run out of corn.”

Miller said yields will be down because of flooding this past month throughout much of the state. He said about 14 percent of Iowa's land is within a mile of the state's major river systems, many of which came out of their banks in June.

“We estimate 3.3 million acres were affected by flooding,” Miller said. “That is going to have an impact at harvest.”