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Livestock no longer drives corn price

andybob

Well-known member
Livestock No Longer Drives Corn Price
US - Weekly U.S. Market Preview w/e 12th January, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.


There continues to be widespread discussion about the impact that ethanol production will have on livestock sectors, in general, and the pork sector, in particular. It is an important debate for our business as I believe the pork and poultry sectors are going to catch the brunt of the fallout from higher corn prices.

Iowa State University Economist Dermot Hayes has done some interesting work on the potential impact of current ethanol policy and the shifts that have occurred in energy markets. The basic idea is quite simple: The value of corn is now determined not by its usage as livestock feed, but by its usage as an energy source. Therefore, the price of corn will be:



Ethanol yield (2.8 to 3.0 gal./bu.) times 67% of the price of gasoline, plus
Ethanol yield (2.8 to 3.0 gal./bu.) times $0.51 (the blenders' tax credit paid to users of ethanol), plus
The value of 17 lb. of dried distiller's grains with solubles (DDGS), plus
The value of any carbon dioxide that the plant captures and sells, minus
The per-bushel operating cost of the ethanol plant.
Using some reasonable values for all of these items, Dr. Hayes concludes that ethanol plants can pay $4.05/bu. for corn.

If corn is worth $4.05/bu. to make ethanol, then ethanol production will continue to expand until it drives the price of corn to that level. It's just a matter of how long it will take to reach that level. Further, those who produce ethanol will force everyone else to pay $4.05/bu. for corn if they want to use it.

Do not conclude that corn will automatically climb to $4.05/bu. It all depends on oil prices, DDGS prices, operating costs, etc. It takes much lower oil prices, much lower DDGS prices, or much higher operating costs to pull corn prices back into the $2 to $3 range.
Corn and Oil Prices Now Linked
Corn prices fell by about 30¢/bu. from Jan. 1 to Jan. 9. It is no accident that nearby crude oil futures fell at the same time. In fact, the nearby seven crude oil futures contracts are now all below $60/barrel and the February contract is in the low $50s. Corn reversed on Thursday in anticipation of Friday's USDA Crop Report, but look for many more instances of correlated changes in oil and corn prices in the future. They are now linked.

Several sources report that the annual usage rate for the ethanol industry will be roughly 4 billion bu./year by Jan. 1, 2008. That would be about twice the current annual usage rate and would mean that ethanol would use about a third of even a very good 2007 corn crop.

How will this play out for pork producers? I don't know right now.

I don't think it will be a disaster this year, unless we have a poor corn crop. "Poor" would be less than 11 billion bushels or so. Hog prices should be high enough to keep producers in the black in 2007, on average, based on current Chicago Mercantile Exchange (CME) Lean Hogs futures prices. That means that some high-cost producers will be losing money. Further, some pork producers who own crop ground may decide that the added income they earn from hogs is not worth the extra work.

About the only thing we know for sure is that this is going to be very interesting.
 

andybob

Well-known member
http://www.thepigsite.com/swinenews/13118/livestock-no-longer-drives-corn-price
There are some graphs at the end of the article that would't copy, the above link has the whole article.
 

IL Rancher

Well-known member
There was a goal by the corn growers association (I can't remember what they are called) of 15 15 15. Which I think was 15 billion bushels 15 billion gallons of Ethanol (That can't be right but it is the only thing that makes sense) by the year 2015... They are going to need to get the yields to start climbing real, real fast..

The real shame is most of the mills going up are dry mill instead of wet mill. The wet mil product Gluten is actually a better source for finishing cattle than the dry mill product DDGS.. Or so the research guy told me (Suggested mixing the 2 fifty fifty along with some roughage).. I know my hog producing neighbors are a bit worried... One is worried that his barns won't be full and the other worried that feed costs are going to be too high. The second grows all of his own beans and corn but unless hog prices go up it will be impossible to justify a cost of gain that cost more than value of gain..

I still think back to 2001 or 2 when I saw an article in the corn equivelent of Beef magazine and they were having promissing progress to a two crop corn system for southern corn belt. Wouldn't take 180 bushel corn ground and make it 360 but would make it 280 or something like that... Bet those genetics people at ADM, Pioneer and Monsanto are going crazy trying to figure out 1)Higher ethanol yields per bushel and 2) Higher produciton per acre.
 
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