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Previous issues of the BEEF Cattle letter

Issue # 513

November 22, 2006

The Long-Run Impact of Corn-Based Ethanol on the Grain, Oilseed, and Livestock Sectors: A Preliminary Assessment - Amani Elobeid, Simla Tokgoz, Dermot J. Hayes, Bruce A. Babcock, and Chad E. Hart, Center for Agricultural and Rural Development, Iowa State University, November 2006

The ongoing growth of corn-based ethanol production raises some fundamental questions about what impact continued growth will have on U.S. and world agriculture. Estimates of the long-run potential for ethanol production can be made by calculating the corn price at which the incentive to expand ethanol production disappears. Under current ethanol tax policy, if the prices of crude oil, natural gas, and distillers grains stay at current levels, then the break-even corn price is $4.05 per bushel. A multi-commodity, multi-country system of integrated commodity models is used to estimate the impacts if we ever get to $4.05 corn. At this price, corn-based ethanol production would reach 31.5 billion gallons per year, or about 20% of projected U.S. fuel consumption in 2015. Supporting this level of production would require 95.6 million acres of corn to be planted. Total corn production would be approximately 15.6 billion bushels, compared to 11.0 billion bushels today. Most of the additional corn acres come from reduced soybean acreage. Wheat markets would adjust to fulfill increased demand for feed wheat. Corn exports and production of pork and poultry would all be reduced in response to higher corn prices and increased utilization of corn by ethanol plants. These results should not be viewed as a prediction of what will eventually materialize. Rather, they indicate a logical end point to the current incentives to invest in corn-based ethanol plants.

EDITOR's NOTE: You may find the full text of the Iowa State University preliminary assessment of the long term impact of corn based ethanol production at the CARD web site: http://www.card.iastate.edu/publications/DBS/PDFFiles/06bp49.pdf

Distiller's Grains Can Contribute To High Performance, Low-Cost Rations - Chris Reinhardt, Kansas State University Extension Feedlot Specialist

Distiller's grains, either wet or dry, can make a valuable contribution to beef cattle diets, regardless of the animals' stage of production. However, there are various factors which need to be considered when determining their potential value in your production system.

It is important to understand that during the distillation process, the starch component of cereal grains (normally 60-70%) is fermented out of the grain to ethanol. By removing this fraction, the remaining nutrients are concentrated, roughly, 3-fold. For beef producers this can be beneficial, resulting in an affordable protein supplement containing roughly 30% crude protein. Also, after removal of the starch component and concentration of the fat and fiber fractions, distiller's grains are a good source of energy in the form of digestible fiber and fat.

However, some of the nutrients which become elevated in distiller's grains may limit their potential use in beef cattle diets. The phosphorus content (~0.8-0.9%) of distiller's grains may require the addition of more calcium in order to maintain a proper calcium to phosphorus ratio. Excess phosphorus in the diet will also result in increased excretion in the manure and the associated need to dispose of this phosphorus. Sulfur content of distiller's grains (~0.5-1.2%) may limit their potential use because excessive sulfur in the final diet may cause trace mineral imbalances, health problems, reduced intake, and possibly death.

The fat content of distiller's grains is beneficial to growing and finishing cattle as a concentrated energy source. But excessive fat in the diet of forage-fed animals can reduce forage digestibility resulting in lower net energy consumption and lost body condition.

One additional benefit of feeding distiller's grains in the wet form (WDG) is the conditioning factor this wet ingredient brings to an otherwise dry diet. This may stimulate consumption by growing and finishing cattle, particularly if all the other ingredients in the diet are dry and/or dusty. The moisture added helps tie the loose, fine particles together.

Conversely, dried distiller's grains (DDG) may actually contribute to dustiness of an already dry diet, due to the fine particle size.

A dusty ration may not be palatable, particularly for stressed calves. This dustiness can be alleviated if even a small amount of some other wet ingredient, such as silage, is fed.

Handling is also an important consideration. Wet distiller's grain stored outside during the summer is subject to spoilage within three to five days. If the operation is not large enough to use a full load within this brief time frame, the product can be stored in sealed plastic bags to limit oxygen content and potential of mold development. Another benefit of sealed storage may be to improve the opportunity to purchase an excess supply of wet distiller's grain at a lower price.

Using dried distiller's grains reduces the risk of spoilage, but because of dustiness, they cannot be stored long-term outdoors. Also, due to high fat content, dried distiller's grains may bridge up in a gravity-flow bin. Ideally, the dried product would be stored in a concrete-floored commodity bay.

Variability can be an issue when feeding either the wet or dry product. Particularly, moisture level in wet distiller's grains between loads can vary greatly, affecting the actual amount of dry matter fed. Also, nutrient content may fluctuate over time, between loads, and between suppliers. There are also notable differences in nutrient content between distiller's grains originating from corn, sorghum, or a blend of the two.

In summary, factors to consider when formulating rations with distiller's grains include: protein, fat, phosphorus, sulfur, moisture, and storage options. If these factors are optimized and rations are properly balanced, distiller's grains can contribute to high-performance, low-cost production for beef producers.

Uncertainty Continues To Churn The Market - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission from CattleNetwork.com, 11/13/06)

Thrill seeker extravaganza…for those who like action the past month has certainly provided its share of twists and turns. The market, on a daily basis, has seemingly brought about new developments with traders on both sides alternating between fretting and celebrating. A heavy dose of mixed signals at the outset of October led to an impasse. The contributing factors have subsequently transitioned into indecisiveness relative to market direction. Traders are carefully monitoring economic conditions and beef demand coupled with conflicting signals from the supply perspective. As such, weekly trade of late has centered upon the short run; the result being heightened spurts of activity with inter-week ups and downs dependent upon newly attained information.

Following October's early stalemate trade occurred largely at $87-8 in subsequent weeks. Closing week's business was boosted by higher wholesale prices: feedyards in the southern tier received $90 while the northern tier settled at $89-89.50. The advance was short-lived; November opened $.50-to-$1 lower. And election-week business added insult to injury as fed trade plunged to $86.

The same ups and downs in the spot market have been amplified at the CME December live cattle, the front-end contract, closed October 6 at $89.35 and then slid to $86.90 over the next five days. In accordance with cash trade, the contract chopped along until a late-month rally lifted it to $89.27. Since then December has been under pressure closing at $85.30 on November 7. That's a swing of nearly $8.50 in a month's time: $2.50 down, $2.50 up and $3.75 back down. Why the swing? As mentioned earlier, traders are being cautious amidst ongoing conflicting signals. That inherently leads to reactionary behavior and contributes to volatility.

October's USDA's cattle-on-feed report was largely in line with private, pre-report estimates. However, the long-term inferences are more important given that the report proves somewhat atypical. This year's mark represents the largest October inventory in series history. Moreover, the 120-day+ inventory also established a new record for October. Those indicators flag caution for the deferred months. Interpretation of those signals, though, also needs to be viewed from the broader context.

The feedyard sector has aggressively advanced delivery of outside supply: June, July, August placements were 10, 17, and 15% ahead of last year, respectively.

That fact will influence spring marketings. Simultaneously, placement of calves weighing less than 600 lbs during the previous six months are 26% ahead of the 5-year pace. However, arrivals of light-weight calves have come at the expense of other categories. Total placements during the past six months are even with the 5-year average for April through September.

Long-term that actually could bode well for the market from a supply perspective. First, placement of calves typically means less total production; light in, light out. Secondly, from an aggregate perspective, lighter placements allow for greater dispersion and flexibility within the prospective marketing window. Third, the previous two factors will likely be compounded by rising grain prices. What's going to be especially noteworthy as we transition into 2007 will be the Choice-Select spread. The beef complex could find itself with declining weights and shorter-fed cattle: both counts could equate to less Choice supply tonnage. Wait and see….

Clearly, the big news within the beef complex has been the recent decline in the feeder market. The decline has been in direct response to the corn market's rising tide. Corn's ascent is certainly an important one with regards to the beef industry - it represents increasing cost of doing business. The impact is especially important to the southern region per the long-term basis shift within the Texas Triangle (see illustration).

Meanwhile, much of the coverage regarding corn's ascent and feeder cattle's descent has outlined the phenomenon as being erratic and hasty. That position deserves another look. Consider that in the middle of August corn, basis Texas Triangle, was $4.31/cwt; that equates to approximately $130 corn investment per head (assuming 3000 lb utilization for a 750-lb steer over 150 days). And in mid-August yearlings were priced at $113.50 or $850/head. Total cattle and corn investment equaled $980/head to be marketed against February live cattle at $90. By November, corn had jumped to $6.70/cwt representing a $70/head increase in feed costs; feeders had stumbled to $105.50 or declined nearly $60 for a total investment of $990/head while being marketed against April live cattle at $90.50. Granted, the feeder cattle charts are painful. But in fact the market has responded in a very systematic manner.

Per that segue, late last summer (see MMP: August, 2005) I provided some coverage about feeder cattle prices with specific focus on the price difference between yearlings and calves. The illustration under this link is an updated version from that discussion and represents the difference between yearling and calf prices over time. The solid line is a 26-week moving average of the price differential. Fluctuation in the price difference between the two classifications of cattle is dictated by several obvious factors. Most important among these is seasonality. Calves are relatively discounted early in the year due to an absence of grass demand and as feedlot placements they possess a projected marketing against fed market summer lows. Calf prices improve as spring transpires with grass emergence plus feedyard placements are targeted for closeout during a seasonally stronger fed market. The figure also provides some insight into important price tendencies over time within the beef industry. Obviously, the long-term trend has been positive; stocker and feeder cattle have been driven ever higher by comparatively limited supply of replacement cattle, widespread profitability and relatively steady corn prices. In reference to specifics, calves and yearlings vary seasonally due to factors previously discussed and the mean price differential more-or-less oscillates within a $7.50/cwt range. Despite amplified price differences over time (a direct artifact of a rising market) yearly fluctuations remain largely limited to the $7-8 window indicated by support and resistance boundaries noted on the illustration.

My primary emphasis at that time was the seemingly perpetual reward for cow/calf producers who failed to implement strategic marketing plans. To some extent that bounty has encouraged complacency among cow/calf producers in recent years with respect to implementing marketing plans and/or adopting meaningful risk management. My comments centered on that indifference which could potentially prove somewhat risky going forward. The escalating price margin between calves and yearlings was somewhat excessive from a technical perspective; the calf market seemed poised to experience a correction in the midst of the '05 fall run.

Well, so much for market timing. The trend advanced even further: the moving average seasonally peaked and reached an all-time high, exceeding $23/cwt, in June. That occurrence comes primarily because replacement demand continues to outstrip supply. (Feedyard demand and competitiveness has been MMP's primary emphasis for discussion during the previous five months). The escalation, though, has been facilitated within an environment of relatively steady corn prices.

Since that time, though, the seasonal decline has broken through long-term support. The question now becomes what happens to that price differences among various categories of replacements given fundamentals within the corn market are shifting. Stated another way, will buyers begin to establish inter-class differences that are more in line with historical expectations? That remains to be seen. However, it's important to remember that rising corn prices represent increased pressure on lighter weights of cattle. Secondly, amidst an operating environment in which the feed market possesses increased volatility, calves represent increased risk - time equals uncertainty. Given corn's recent breakout these factors will likely provide increased pressure on the calf market versus yearlings. As I noted last year…developments in recent months including corn market volatility, softening beef demand and fed cattle supply fundamentals may begin to spill back into the calf market and pressure calf prices during this year's fall run…Given that vulnerability, producers are encouraged to exercise discretion in marketing the calf crop and carefully evaluate all available options.

All of those factors are still in play. Moreover, this year's run-up on the grain side is being driven because of a fundamental shift in demand; conversely, the surge in '95-'96 was supply driven and thus reversed with the next year's crop. Therefore, higher prices need to be perceived as a new paradigm versus simply surviving until a correction occurs. Cow/calf producers need to be especially vigilant in coming months and years: the various dynamics which play on feeder cattle markets are increasingly complex and interrelated.