Is the corn balance shifting?

The livestock sector, particularly pork and poultry, is not looking forward to an ethanol induced price rise for corn. "Feed security is what we need," said Joy Phillippi, a Nebraska hog farmer and president of the National Pork Producers Council when I interviewed her last month at the World Pork Expo in Des Moines. She, like many pork producers, sees few good things coming from the headlong rush to turn corn into ethanol. No one's talking about a glut of cheap soybean meal as more of that crop is crushed to make biodiesel but pork producers are worried about the higher price for corn and that distiller's dried grain (DDG), the major byproduct of ethanol production, is not very suitable for hog feed. Only about ten percent of a hog ration can be DDG before it gets out of balance.

The agricultural sector is rarely in balance except when times are really bad. Then everyone is at the bottom and foreclosure seems to be the only way out. When times get better, all sectors recover but some get ahead of others. To even it out, the long standing government grain production policy has subsidized overproduction directly to the grower and indirectly to the user. It appears that the pork and poultry production model is built on a continuation of that premise. Growers of both species are concerned about higher costs and unsuitable byproducts but the cattle industry is poised to cut its costs with the new feedstuff.

Cattle can do well with the expected glut of DDG because it can make up as much at 40 percent of beef and dairy rations. However, economists say the feedlots have to be within close proximity to the ethanol production to keep transportation costs down. Much of the corn belt, especially Iowa, is viewed as unfriendly to expanded livestock feeding as the regulatory agencies often challenge current numbers and practices and the general population does not want another feedlot in their back yard. Could it be that the railroads will make the most money from DDG's?

Before you count your increased profit for future corn production, consider that this year most farmers got a fifty cent Loan Deficiency Payment (LDP) because the Mississippi River shipping was messed up at harvest and the crop was very large. Next year, the cash price may be high enough that farmers won't get the LDP or counter cyclical payments. The government is going to avoid paying about 20 billion in subsidies before the corn farmer starts making any additional revenue. Those of you who want to get your money from the marketplace will learn why babies cry when they are weaned.

But really, can the corn market go sky high with capitalism and greed jumping in? The petroleum industry doesn't like ethanol and wants to find a cheaper, proprietary additive to boost octane and meet clean air standards. The ethanol producers will abandon corn if they can find a cheaper feedstock for their distilleries and farmers want to produce more of any crop that is profitable. Remember that Brazil is just a cargo ship-ride away and multi-national grain companies have no moral problem importing grain or ethanol.

If the price of corn goes up, the cost of every input for corn production will also go up. The end result may be higher prices but not higher profits. All these factors together make it likely that the market can't hit and hold record levels.

In fear of a runaway corn market, you can bet hog producers from Ms. Phillippi to Smithfield Foods, are going to plead their case to Congress and the next farm bill might give them direct compensation or "pig revenue insurance" like crop farmers get today. The pork industry, with its current unprecedented run of profitability, seems to have consolidated enough to avoid its cyclical nature but could this have a unique outcome with beef costing less than pork or poultry? Wouldn't that skew demand!

I hope you realize that all of this is utter speculation. Demand for corn over the next few years seems exceptionally strong but the marketplace and human nature usually destroy any good thing in a short period of time. It's quite likely that another ethanol feedstock, like cellulose will become cheaper than corn in five years. It's also quite probable that farmers will oversupply the corn market in the second year of higher prices. What's not known is how long oil prices will remain at current levels. If oil stays high until there is peace in the Middle East then we know that will occur at the end of the world. Just a farmer's luck: the markets go up and Gabriel ends the game!

Editor's note: Ken Root is now celebrating his 34th year as an agricultural professional. His career began as a vocational agriculture teacher then turned to agricultural broadcasting and writing as well as environmental consulting and association management. He was the original host of AgriTalk (1994-2001) and now is lead farm broadcaster for WHO Radio in Des Moines, Iowa. Ken also contribues to the Midwest Ag Report electronic newsletter each Friday. A free e-mail subscription is available by going to www.hpj.com and clicking on Midwest Ag Report.