While issues abound in the industry, the corn market continues to be the biggest story. With USDA's latest crop estimate being lowered to just above 10.5 billion bu., and with carryover stocks falling to 752 million bu., the corn market rallied to historical highs this week. Not surprisingly, feeder cattle and calves moved lower as a result.
The industry is trying to sort out both the short- and long-term ramifications. One can usually learn a lot by looking at history but history doesn't provide much insight into this issue. The last time corn price levels were this high was 1996, but it was a supply-driven market caused by the disappointing 1995 harvest.
That's not the case this time, as we've had three of the largest crops in history -- consecutively, no less. It's a demand-driven market and corn demand is expected to exceed production this year by a significant amount.
Fact is, the overall market structure has changed. With subsidized ethanol, it's difficult to create a scenario where corn will fall much below $3/bu. for quite some time, and the upside risk from that level is much greater than the downside risk.
Today's corn prices unquestionably are sending the signal to increase corn plantings. With corn growers looking conservatively at profits of $200/acre or more for corn, we can expect more acreage in corn than at any time in the last 60 years. What's more, the weather conditions look positive and oil prices are falling. That combination of factors will curtail demand, and feed demand will drop significantly as well, giving the industry an opportunity to rebuild carryover levels.
From a cow-calf perspective, not only does $4 corn devalue the entire inventory significantly, it also creates other problems. Hay stocks are at their lowest levels since 1988, and hay prices are expected to increase as hay ground and water are diverted to grain crops.
In addition, stocker and grazing pressure are expected to increase grass costs, as feeders look to maximize gains outside of the feedyard. The result is a terrible and simultaneous mix of exploding input costs and decreasing revenues.
The bottom line is if corn stays at today's historically high levels for an extended period of time, the industry's short-lived expansion will move into full-blown liquidation. It also poses some interesting dynamics about how the industry might change, from a management, marketing, and even genetic standpoint.
The industry has to form a plan of action and move to address the ethanol issue. Otherwise, a market-distorting government subsidy stands to take away our number-one competitive advantage.
The odds politically look extremely tough to get the ethanol issue based on true economic realities, however. The new Congress is just underway and already there's a plethora of new bills on renewable energy. Many of them attempt to lock in the artificial subsidies permanently and expand the use of ethanol.
Needless to say, these initiatives have the overwhelming support of grain-producing states. And the general public, very receptive to reducing U.S. reliance on Mideast oil, seems willing to pay the price for it. But it's a potentially devastating price the beef industry will have to pay, and we must aggressively take action.
That leaves us in the unenviable position of trying to hammer out a solution -- one where corn prices for the cattle industry are adjusted back to the real-world economic levels that would have occurred had government not intervened in the marketplace. That gets extremely messy and politically challenging.
While there's no simple answer, if we continue to do nothing, our industry will lose a good deal of its competitive advantage and constrict significantly. The effects of this subsidy, and the attempts to escalate it and make it permanent, now have supplanted the restoration of our export markets as the industry's greatest challenge.
-- Troy Marshall