The best cure for high prices is high prices, as a time-honored saying around Chicago’s grain futures markets goes. That doesn’t look to be the case this year, at least according to the U.S. Department of Agriculture.
Corn’s rally to all-time highs near $8 a bushel this summer is forcing cuts among the grain’s major users. The U.S. livestock industry’s corn use over the next 12 months is expected to drop to a 16-year low, while exports of the grain will shrink to the lowest in nine years, according to a USDA report Sept. 12. Even ethanol makers are scaling back – corn use by that industry is poised for its first annual decline in at least 13 years, according to AgTraderTalk.com.
But despite reduced demand, corn will still cost more than it ever has over the coming year, at a farm-level average of $6.50 to $7.50 a bushel, the USDA predicted.
Lofty prices reflect weather problems that plagued farmers in the central U.S. much of the year, starting with heavy rains and flooding during the spring followed by a damaging heat wave in July. Citing unusually hot weather, the USDA, in a separate Sept. 12 report, said the corn crop will be 3.2 percent smaller than previously forecast.
The government’s latest crop numbers underscored an increasingly worrisome outlook for livestock producers, who were already seeing increasing amounts of red ink as corn prices soared. There appears to be no relief in sight from high feed costs, and industry analysts such as Rich Feltes say some producers will have little other choice but to cut herds.
“Bad news for the U.S. livestock industry,” Feltes, director of research for R.J. O’Brien & Associates, said in note following the Sept. 12 USDA reports. He expects the USDA will reduce its corn harvest forecast by at least another 2 percent, which will lead to additional “rationing” of the smaller crop among its users.
Most of that “will come out of feeding, thus necessitating sow liquidation and extended poultry production cutbacks,” Feltes said in an e-mail. Corn users “remain at risk.”
Corn feed use predicted at lowest since 1995-96
Corn is a primary feed ingredient for most of the livestock industry, typically comprising two-thirds to three-fourths of the rations to fatten chickens, pigs and cattle to slaughter weight.
According to the USDA’s latest Supply and Demand update Sept. 12 (http://bit.ly/nFU8PX), U.S. livestock feeders will consume 4.7 billion bushels of corn in the 2011-12 marketing year, which began this month. That’s down 6 percent from 2010-11 and would be the lowest feed use since 4.68 billion bushels in 1995-96.
Even at lower consumption, the U.S. livestock industry’s corn costs will surge nearly 27 percent to a total of $32.9 billion in 2011-12, based on an average corn price of $7 a bushel, according to USDA data.
Poultry producers have already curbed production in recent months, and many cattle and hog feeders probably will soon follow suit, analysts say. As of the start of July, the total U.S. cattle herd was at a record low.
U.S. livestock numbers “must shrink even more,” said Jim Robb, director of the Livestock Marketing Information Center in Denver. “Large cuts by chicken broiler producers… could continue well into 2012.”
“Cattle feeders are losing money on every pen of cattle sold, and that red ink will become more problematic if corn prices do not decline this fall,” Robb said in an e-mail. Hog feeders may face expanding losses “to the extent they could begin cutting breeding stock as early as this fall,” he said.
Slaughter-ready hogs averaged about 82.25 cents a pound on a carcass basis nationwide last week, according to USDA reports. The price is about 8 cents below what a typical producer would need to break even, based on an estimate by industry analyst Steve Meyer.
Burgers, steaks will get pricier at grocery store
The effects of high feed costs and fewer animals will ultimately reach consumers at the supermarket meat case, analysts say.
Retail meat prices are expected to rise 6 percent to 7 percent this year, the third-largest annual increase in the past two decades, according to a USDA forecast. In 2012, meat prices are predicted to rise another 3.5 percent to 4.5 percent.
“Longer-term, higher corn means higher red meat and poultry prices for consumers as producers respond by shrinking herds and flocks,” Robb said.
While it may come as little consolation for livestock producers at the moment, chances are strong that corn supplies will increase substantially about a year from now as high prices encourage more planting, analysts say. Barring widespread weather problems similar to 2011, U.S. farmers stand poised for a record crop in 2012.
“Expect a massive increase in corn acres next year, both domestically and abroad,” said Mike North, senior ag risk manager at First Capitol Ag. “At these levels, even marginal grain producers around the globe can profit by growing more corn.”
Livestock producers “should expect a higher price for feed through next summer and be praying all the while that weather is much less dramatic than in 2011,” North said.