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By Staff | Jul 22, 2011

I read a comment following last week’s USDA supply/demand report that ethanol will consume more corn than is fed to livestock next year.

I can see how someone could make that superficial mistake as USDA projects 2011-12 feed usage at 5,050 million bushels and ethanol consumption at 5,150 million. I wish the USDA wouldn’t record ethanol consumption that way as a third of the bushels of corn that go into the ethanol process come out as high quality feed known as distiller’s dried grain.

The statement that ethanol will consume more corn than is fed is grossly inaccurate. Using a rough breakdown, 6,766 mb is fed against just 3,433 mb that is consumed to make ethanol, when the DDG is discounted from the corn consumption. You and I can understand that, but the average guy reading the headline will be misinformed.

The net ethanol corn consumption is exaggerated out of context and ethanol opponents like it that way. Where is livestock feeding going? The beef industry is using more feed now because of the historical drought that has devastated pastures in the south forcing more cattle on feed.

That is not going to change until it rains again there. The beef herd has been over-liquidated so that a shortage of feeder cattle is likely to follow soaking rains. Market weights may increase, but the numbers on feed will eventually reflect the liquidated herd. Beef cattle feed usage will contract when that happens.

The pork market is globalizing and the U.S. pork market is on the cusp of a dynamic paradigm change in pricing, driven by global demand. Changes are afoot that could dramatically impact demand for U.S. hogs.

Washington made peace with Mexico over the NAFTA trucking dispute that should eliminate the 5 percent tariff Mexico has put in place on U.S. pork. Mexico has been a good ham buyer and stocks of U.S. ham have been a drag on the cutout, so the industry sorely needs another source of ham demand.

There are three FTAs pending ratification that economists believe will add $10 or more in value to U.S. hogs. Those FTAs are being blocked by political gamesmanship, but there is hope that good sense will prevail and they will be ratified by Congress.

The largest source of new pork demand is from China. Pork prices are a major component of the food price inflation in China. They have used imports to increase supply in commodity markets to control domestic prices and it is logical to expect them to do likewise, increasing pork imports substantially.

U.S. pork is priced where it could easily sell at a profit in China. U.S. pork is cheap in the world market.

In total, there are several demand factors that are circling the pork market that if they all came together will result in a repricing of U.S. pork similar to what the ethanol industry has done repricing corn. In other words, the export model adopted by the U.S. pork industry could potentially work out beyond most of their dreams.

China’s tightening is just not going to impact food demand. Once the peasants improve their diets there would be a revolution before they gave up those calories again. Beijing will use its wealth to import more food before that outcome happened.

Whether China buys more corn and soy as they did this week to expand its domestic hog production or they buy pork here, feed grain consumption is going higher. The U.S. consumer is confronting global competition for commodities to a level that they have never experienced before … and that trend is going to strengthen.

The U.S. pork industry is stubborn, owned by people who have long sought market share, domestically and globally. If FTAs are ratified and trade is further liberalized along with China making a forced strategic decision to import more pork, the U.S. is the only place it is available.

It is a safe, consistent quality product that is acceptable in the global market. The U.S. pork industry geared up to be an exporter and events are shaping success. Pork demand in China is behind their corn purchases so some livestock demand for U.S. grain is in the USDA export sales category.

How about poultry feed demand? Just as we see the hog industry sitting on the cusp of a new price structure, the U.S. poultry industry appears to have found some centralized leadership relative to controlling production. Broiler integrators are an oligopoly. I believe that they are beginning to exert some market power as a result.

No one cared about the concentration of the industry while chicken was cheap and abundant. but when profit margins sag the integrated industry now performs like synchronized swimmers. They have pulled back on production to support prices and I think they will coordinate production levels better than OPEC in the future.

That is what oligopolies eventually do. When they get market power they will eventually use it. A lot of poultry in this country is produced in grain-deficit areas. That means that the poultry industry may have the most difficult time finding feed.

We are going to see both beef and hog industries concentrate back to the Midwest where the feed is. The cattle feeding industry is over-built and will contract concentrating around packing plants and ethanol refineries.

The cost of gain advantage for the beef industry has shifted back north because of the availability of DDG, which is why the plains feedlots and their representative organization, the NCBA, loathe ethanol.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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