Ethanol's Effects On Cattlemen Offers Many Unknowns

What effect will the rush to ethanol have on cattlemen? There are a lot more questions than answers.

What effect will the rush to ethanol have on cattlemen? There are a lot more questions than answers.

It's pretty hard to have a conversation nowadays that doesn't turn, sooner or later, toward ethanol. What about corn prices? Supplement prices? Calf prices? Feeder-cattle prices?

And the answers? Your guess is as good as anybody's.

There are a few things you can count on, however. The first and most long lasting is that ethanol -- the bad and the ugly, as well as the good -- is here to stay.

Second, ethanol will be produced from corn, at least for the foreseeable future. That sets up a conflict that will have cattlemen at all levels of the marketing chain in various states of panic for some time to come. One of the long-anticipated fallouts to high corn prices is the expected adjustment that cattle feeders would make in other input costs. Question is, just how much backup is there in calf and feeder-cattle prices?

"The ethanol business has put inherent demand in the industry that we can't ignore," says James Herring, president and CEO of Friona Industries, a cattle feeding and ranching business in Amarillo, TX. And it's come, he adds, at a time when we're at a low in the cowherd.

"Let's say corn is at an average of $3.50 for the rest of the year," Herring says. Given that, "Feeder cattle have probably seen their highs, at least for the next six months." After that all bets are off as everyone waits to see what kind of calf crop is weaned this fall and what kind of corn crop is put in the elevator.

The calf-crop numbers are key. The cowherd is at a low number and dropping, and the current supply of calf and feeder cattle is at a low as well. Feeding capacity is the same, which means cattle feeders have plenty of bunk space to fill with fewer available cattle.

"The fact of the matter is," Herring says, "the feeding industry is going to put something in those pens. There's overcapacity in the cattle-feeding sector and we're all going to be slugging it out to see who gets the livestock."

So, high corn prices or no, feedyard demand for feeder cattle and calves will remain strong. Where that demand manifests itself, however, will be influenced strongly by ethanol and weather-driven corn prices.

"The lighter the animal, the more whipsaw you're going to get from the corn market," says Jim Robb with the Livestock Marketing Information Center (LMIC) in Denver. That whipsaw will come largely from the sky. Spring rains delayed planting, putting a major question mark over this fall's corn harvest. And while the rains improved pasture conditions, drought still lingers in parts of the country. "So lightweight calves have to be priced so they will put on weight in forage programs as opposed to grain programs," he says.

Beef-cow slaughter the first half of the year ran much higher than anticipated, reflecting a lot of open cows due to last year's drought and high-priced supplemental feed. "So we don't have a breeding herd that supports much growth in the calf crop -- maybe no growth in the calf crop for the next two years," Robb says.

Then there's heifer retention. There are multiple signals in place to expand the cowherd, Herring says, and if cow-calf producers hold back heifers this fall to replace the cows they culled this spring, everybody in the cattle business will get a new definition of what "tight cattle supplies" really means.

Tight supplies, along with upturned prospects in the export market, are the major drivers in the fed-cattle market, which Robb estimates will set record highs in 2007 and 2008. As Herring points out, cattle feeders look at the world in terms of the relationship between corn prices, feeder-cattle prices and fed-cattle prices. "So the fact we're buying feeder cattle on the highs doesn't mean anything if fed cattle are on their highs, too."

Put all that together, and Robb says calf and feeder prices will be off a little this year compared with last year. But given the tight supply that has cattle feeders in a pitched battle to fill pens, prices won't slide nearly as much as might be expected. Robb says 7 to 8-weight feeders will average $104 this year, compared with $109 last year. Calf prices, while more volatile, will average $120, compared with $125 in '06, and fed-cattle prices will be up 8% or more on the year.

That leaves corn prices. LMIC data showed Omaha corn prices at $3.44/bu. in early May, compared with $2.11 last year -- a whopping 63% jump. That shoots several economic signals down the central nervous system of the cattle industry, one of which is clear -- grass is cheaper than grain. If anybody has a chance for a positive outcome in an ethanol-dominated world, it's the stocker operator, says John Hughes of Bartlesville, OK. "It gives us a better shot at the lightweight replacement cattle and also makes grass gain more valuable."

But it also infuses tremendous uncertainty into an already uncertain business, he says. Hughes' reaction to that uncertainty is to hide and watch, at least for now. For the first time in many years, he says, they've taken in cattle to graze on the gain rather than owning the cattle themselves, allowing them to market their grass while watching what the volatility does to the cattle market.

And he questions, looking at a broader picture, that ethanol will solve any of the problems it's purported to address.

"I think when the consumer figures out that they pay for it three times, it might not be so popular," he says. "They pay for it when they pay their taxes, they pay for it at the pump (with reduced performance and lower gas mileage) and they pay for it again at the grocery store."

Hughes says ethanol's effect will ultimately be huge.

"You just can't have a one-year jump in the cost of the major feeding ingredient and not precipitate an enormous amount of change," he says. "I think it adds a lot more risk to a business that's already a pretty high-risk business."

Herring agrees. "What you're going to see is an accordion in the way cattle are presented to us to buy," he says. "We've got a different set of numbers and those cattle are going to swell and release at different times for different reasons (than has been the case historically). You're going to have big-time volatility bred into the system by the corn situation."

Ultimately, he predicts, that will put some feedyards out of business.

"Corn has never experienced demand at this level," he says. "With that being said, the herd in the U.S. has been contracted violently because of economics and natural forces. Those two are going to have a collision. There's a lot of biting, scratching and clawing on both ends to see how that fits, and there's going to be some fallout from that. And it's not going to stop."