Release Date: May 2007
The Four-Letter Word
Jerry Kozak
President/CEO
Usually, discussions about the health of the dairy producer sector revolve around the price of milk, which of course is a four-letter word, but not the one I'm writing about this month.
Right now, the kernel of many discussions about the dairy sector is another word with four letters: corn. It's a safe bet that producers of other livestock, especially poultry and pork, are also referring right now to corn using their own choice of epithets. The real question is what anyone can do about the price of it, besides cursing.
The rapid acceleration in corn prices – almost a doubling of cash prices from $2 to $4 per bushel last year – shouldn't have come as much of a surprise if you look at the basics of supply and demand. The economics of the corn business are not dissimilar to what's happened in the past year to the dairy business. Strong demand is outstripping the ability of producers to generate sufficient quantities to keep prices in their historic ranges.
In the case of milk production, strong global demand for proteins, along with a strengthening of consumption of fluid milk, has meant that demand is helping lead prices higher this year. In the case of corn, demand is being driven – literally – by ethanol, as mandates that biofuels be used in America's gasoline supply are leading to a gold rush in ethanol plant construction, and ethanol distilling.
The month-old USDA corn plantings report has helped sober the worst of the giddy behavior in the corn trading pits, and prices (at least in the short term) have settled down a bit. But longer term, it doesn't appear that even 90+ million acres of harvested corn this fall will return us back to prices that averaged around $2/bushel in the past decade. Extra acres devoted to corn will also affect the availability and cost of soybeans and hay, and not in ways favorable to purchase of those feeds. All of which means we are entering a new phase in food production in the country, where the definition of the phrase “normal feed prices” is going to be very different.
In turn, that will affect dairy producers in ways both good and bad. Many average-sized dairy farms in this country, particularly in the Midwest, have the ability to grow many of their own feed inputs. For them, the opportunity to sell some corn at elevated prices is a welcome prospect. Unfortunately for other farms, those more reliant on purchased inputs, the high cost of corn is going to continue to put unwelcome pressure on their margins. Add in the continued high cost of petroleum products – gasoline, diesel, nitrogen – and the pressure gets even worse.
Although many of the supply and demand forces leading to high corn prices are long-term and structural, NMPF has been pushing our policy makers to make certain that in the rush to make the U.S. less dependent on imported oil, we don't decimate our livestock sector and in turn make us more dependent on imported foods. We've asked the U.S. Department of Agriculture to create an internal task force of experts to examine the overall impact of the ethanol mandate and the changes it may well bring about. These include everything from helping research higher-yielding crop seeds, to examining the utility of dried distillers' grains in cattle feed, to looking at opening the Conservation Reserve Program lands to environmentally-friendly feedstuff production.
Two other points also need consideration by lawmakers: first, we need to prioritize our research into biofuels with a focus on cellulosic ethanol, the kind that comes from plant materials other than corn. We can't have a monoculture ethanol industry in the country whose sole input is corn. Second, we also need to devote some resources to encouraging biofuel development on livestock farms, principally in the form of methane digesters. Capturing the energy value of manure is a win-win from both an energy and environmental perspective, and it's a hallmark in the Farm Bill proposal that NMPF has recently shared with Congress. (You can download a copy here).
Right now, the price of corn is akin to the weather: it's another thing that many people may gripe about, but no one can actually do anything about. But the difference in that comparison is that the corn price is mostly a man-made phenomenon, not a function of Mother Nature. As retail dairy prices climb to near-record levels this spring and summer, we need to let people know that a big part of the reason is the high cost of feeding corn to cows. Our neighbors and our elected officials have to understand we must, as a society, strike a balance between affordable fuel and affordable food. There's no free lunch any longer.
