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December 1 , 2006
Editor's Note: The following is the opinion of Dan and Marilynn Dierschke, who recently attended a U.S. Meat Export Federation convention in Cancun, Mexico. It is based on facts and figures delivered by speakers at that meeting. Dan is TFB District 8 state director. Marilynn is Travis County Farm Bureau president.
By Dan and Marilynn Dierschke
The recent dramatic increase in corn prices—even as a large Midwest corn crop is being harvested—signals a new era in many sectors of agriculture.
Corn producers are optimistic as they sell this crop for excellent prices and look ahead to a more profitable future. Budget watchers observing expenditures under the farm bill are relieved to see future countercyclical payments plunging. And those who have struggled to increase energy supplies from renewable resources are celebrating as 105-108 corn- based ethanol plants have gone on line, with another 45-65 either under construction or awaiting backlogged contractors to begin building.
Economists evaluating the economics of ethanol plants—considering the projected value of the ethanol and byproducts produced, the tax credits for alternate energy and factoring in the expense of construction and operation of the plants—conclude even more plants will continue to be added until corn prices cross the $4.05 bushel threshold. Their calculations are based on oil at $60 a barrel.
As everyone recognizes, there is usually another side to the story—$4 corn would seriously impact animal agriculture. A study at Iowa State University projects corn at this price will increase cost of pork production by 30 percent, impacting not only domestic demand but also the tremendous export market pork has enjoyed. Randy Blach of Cattle Fax projects 500 lb. calf prices could drop to $92 CWT with $4 corn as compared to $125 with $2.50 corn. Similar concerns are being raised in the poultry and dairy industries.
As beef producers, we are especially attuned to effects of higher corn prices in all sectors of our industry. Already we are seeing feeders—hammered by rapidly increased cost of gain—reducing what they are willing to pay for our calves. Stocker operators, who purchased calves at very high prices, will be facing challenges as their calves come off winter grazing and they have to sell to feeders who are seeing red ink in their closeouts.
Texas feeders are very concerned as they see a competitive advantage moving to feeders in the Midwest since they are nearer the source of byproducts coming out of the ethanol plants. New models of feedyards are developing as yards are being built next to the ethanol plants so that wet distillers grains can be fed without having to dry them or transport them long distances. Waste from the cattle is then used to produce methane gas to power the ethanol plants. This represents a closed looped system that maximizes the potential of each step of process.
Traditionally, Texas feeders have imported from the Midwest a large percentage of the corn they utilize. With the demand from the ethanol plants, some of these states will utilize all of their corn production and will even have to import from other areas. Some are suggesting land be taken out of CRP to increase land available for grain production; however, these are usually marginal lands. Others would curtail our exports which are currently in excess of 2 billion bushels annually; however, as the major corn producing country in the world, we are the primary supplier. To disrupt that trade would create far ranging questions about our reliability. Some are suggesting we buy ethanol from Brazil, which is able to produce the product from sugar cane at about half our cost from corn.
Even with these challenges, we anticipate opportunities for Texas producers. As the largest supplier of calves, we have the potential of raising the bottom line by holding our calves longer and adding weight by using grass rather than grain. As calf prices decline, there will be substantial opportunities for stockers with the large amount of land we have available in our state for winter forage and grass production.
Alternate energy producers will intensify their research into developing ethanol plants to utilize alternate feedstocks such as switchgrass and even that hated mesquite tree. It will be necessary to expand our willingness to produce alternate crops for renewable energy as the next decade brings an abundance of new options and applications for alternative fuel. We must recognize there will also be an abundance of questions with no ready answers.
The hope is that whatever evolves will have balance for all participants and that the processes used will be ecologically sound with a minimum of unintended consequences. Everyone needs to come out a winner; no one should profit to the detriment of another. It may be difficult to see our customer base considerably expanded with the advent of biofuels and more profitability in adaptation when we have to change our whole frame of reference for doing business in the future.
