October 16, 2006

 

High crude oil, corn prices may crimp US livestock production

 

 

Rising worldwide oil demand in the next few years could reshuffle US livestock production practices and volumes. Agricultural economists also speculated that US hog and poultry production would be hit hardest.

 

High crude oil prices could boost demand for corn, the most widely used feed grain in the US, to make ethanol, the economists said. Once an ethanol plant is built, its corn demand is inelastic unless corn and energy costs get out of balance and the plant becomes unprofitable enough to force its closure.

 

None of the economists contacted said they thought corn prices would ever sustain prices of US$5-7 a bushel, but all said they could envision scenarios that might take prices there temporarily.

 

That hits hog and poultry production harder than the cattle industry, because cattle producers can substitute corn ethanol's by-product, distillers grains, at a higher rate in the rations, Francl said. They also can utilise grass and hay.

 

As corn prices increase, producers could be forced to reduce herd sizes and contain costs, said Hussein Allidina, research analyst at Morgan Stanley & Co, in a study. Initially, this slaughter increase would create a significant supply surplus, sending livestock prices lower, Allidina said.

 

Allidina believes feeder cattle prices would decline most precipitously in response to higher corn prices, but that live cattle and hog prices also were expected to deteriorate in spite of export markets.

 

"We expect rising corn prices will limit the current (cattle) herd expansion," Allidina said. Cattle feeders could be willing to pay progressively less for cattle from cow/calf operators as costs are difficult to pass on.

 

The hog and poultry industries may start feeding other grains and even conduct new research into corn alternatives or distillers grains, the economists said. But other grains may be tricky to feed and only replace part of the corn in hog or chicken diets.

 

Pat Westhoff, economist at the Food and Agricultural Policy Research Institute (FAPRI), said his projections had crude oil prices declining a bit over the next few years, with annual averages no higher than current averages.

 

But as the theoretical price of crude oil rises, so does the theoretical upward limit on corn prices, the economists said. US ethanol demand could lead to corn being priced more on its value as a fuel than as a feed grain. At some point, feeding livestock could be a secondary use for corn since its price would be determined by the value of ethanol.

 

But Francl dismissed ideas that there will ever be a fuel-versus-feed or fuel-versus-food issue with corn. High prices will sort things out between those demanding the corn, he said.

 

Westhoff also said extremely high crude oil prices were hard to envision over a long stretch of time because there are too many alternatives if oil prices are high enough, with ethanol being only one.