Corn farmers love the ethanol boom and cattle feeders located in areas where ethanol production has grown, are learning lessons about competitive advantage. Those outside the immediate marketing area of the ethanol plants tend to be pretty down on ethanol plants as they raise the price of corn, and increase competition for feed grains. Some would argue that the historical relationship between corn prices and feeder calf prices will never be the same, if that is the case access to ethanol byproducts will be critical to survival.
There can't be much argument that we are in the middle of a harvest that promises to be one of the biggest in history and yet corn has shown significant strength in its face. While this rally may not be sustainable, the difference between $3 and $2 corn in the marketplace can't be denied. At current cattle prices, the incentive to make cattle big will not subside greatly with $3 corn, and the impact on the calf market is significant.
Some have argued that this could be the one factor that shifts fed cattle production back toward the Midwest, though that would also entail a shift in packing capacity and is difficult to foresee. It will be intriguing to see how the cow-calf segment adjusts its nutritional programs to attempt to take advantage of these byproducts.
Higher corn prices are possibly here to stay with ethanol demand projected to double with the U.S. government providing a subsidy of $.51/gallon. While the subsidy is distorting true market signals and falsely building demand, the risk for building an ethanol plant has largely been removed with numerous estimates suggesting that a new ethanol plant can pay for itself in 18 months.
This false demand has the potential to be as market distorting as the farm bill, and will likely lead to a clash between those who would like to see more ground to go into corn production with the new demand dynamics (we can't continue to bank on record crop year after year, just to meet today's demand levels). This is likely to clash with those who continue to push for more conservation and even more land being taken out of production.
There are many in this country that do not see food production as a national security priority and would like to see food production shifted out of this country, especially animal production. The energy concerns magnified with the unrest in the Middle East, and environmental concerns in the form of increased demand for conservation lands, will be working together to lower U.S. beef production.
-- Troy Marshall