Comments from the director: October 2007

Iowa Beef Center Director Dr. John Lawrence has a monthly column published in Iowa Cattlemen magazine discussing the current happenings at the Beef Center and issues in the beef industry. Below is his October column:

Time to evaluate your strategy for the future

in the context of the bioeconomy

Iowa State University and Provimi, an international nutrition company, hosted a conference earlier in September focusing on beef in the bioeconomy. This was one of the most comprehensive conferences on ethanol and distillers grains that I have ever attended, and it brought a global perspective with speakers and guests from South America and Europe participating. The presentations confirmed the challenge that I often give to producers: “The world in which you operate has fundamentally changed. What are you doing differently?”

After giving my presentation at the conference, one of our Story County cattlemen put me on the spot. He said, “The question is simple. What is the answer?” Obviously, there is not just one answer, and what is right for one farm might not be best for another farm. But it is time to evaluate your strategy for the future in the context of the bioeconomy. The decisions are likely bigger than tweaking the diet. I will share my perspective on what has changed, its implications and strategies to consider.

What we had: Low-cost oil resulted in low transportation costs for corn from surplus to deficit areas. Fertilizer was low cost to manufacture and transport. Farm policy encouraged grain production by providing direct, counter-cyclical and loan deficiency payments to support farm income if grain prices were low. As a result, feedlot operators could often buy corn cheaper than they could grow it, they could have it transported from wherever, and -- with few exceptions -- there was a readily available supply. At the same time, crop farmers could buy fertilizer cheaper than utilizing available manure nutrients.

What has changed? Oil prices and the U.S. energy policy. While oil prices may cycle, we are near record-high prices now, and they are expected to remain above previous prices into the future. Furthermore, there is greater national emphasis on renewable fuels, particularly ethanol in the form of mandates, incentives and tariffs. The result is that we are expected to have higher transportation, fertilizer and corn prices in the future compared to the past.

What are the implications? It depends on your business model.

• Feedlots that have purchased all of their feed needs will be paying a higher price. They will have to think about availability and may need to have more storage, and if so, will have to finance more feed inventory. If the feedlot is in a corn-deficit region, the transportation cost for feed will be higher. The higher cost of grain will be reflected in lower bids for feeder cattle. These feedlots will move toward placing heavier feeder cattle to reduce total corn use. Fewer days on feed leads to excess feedlot capacity.
• Farmer-feeders are now faced with the question of whether to sell corn, feed cattle, or both. Corn co-products are available, and a farmer may sell some corn and replace it with co-products or perhaps purchase co-products and feed more cattle. This farmer is now buying feed rather than relying only on homegrown grain. For some farmer-feeders, a commodity shed, ordering feed and writing a check for feed may be a new concept.

What are the opportunities?

• Now it is cheaper to produce corn than it is to buy it. If the farmer-feeder charges a cattle enterprise the market price for corn, then his crop enterprise benefits. If he prices the corn at the cost of production, then his cattle enterprise benefits.
• Because competing feedlots are bidding on feeder cattle based on purchased and transported corn, the farmer-feeder should benefit from a wider gross feeding margin.
• Compared to the crop farmer who doesn’t have manure, the farmer-feeder who has a phosphorous-based manure management plan has a fertilizer cost advantage.
• Depending on the land base and crop rotation, it may be possible to expand cattle feeding on the same farm by 40 percent by using a 40-percent inclusion rate of co-products.
• There are numerous diet-related opportunities as well: backgrounding cattle on low-cost roughage and co-products, feeding for the higher quality market as grid premiums widen, extending pasture with co-products, and others.

I can already hear the “yeah, buts” starting. The opportunities listed above are not new, but the fundamental change in oil prices and energy policy is different. How does this change impact your farm? Your competitors’ farms? What opportunities or challenges does it present?

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