Consumers will eventually feel impact of drought

July 10, 2012 9:11 AM

 

Have you ever looked for a particular repair part that was hard to find, and when you did, it was well more expensive than you could afford to pay?  We have all been in that situation and right now the pork industry is right there.  Corn will be hard to find and when they can get it, the price will be beyond their budget.  But animals have to be fed.

The pork industry will be facing some major challenges while some individual producers go through financial sustainability process.  While most of the attention about the drought has been on crop failures, the livestock industry is close by and represents the major consumer of grain products.  Purdue economist Chris Hurt says when drought cuts crop yields, producers have an income stream from the natural hedge that pushes prices higher when grain yields drop, and from crop insurance indemnity checks.  Writing on the financial pinch that the pork industry is in, Hurt says there is a wide variation of impacts on those who are trying to survive the loss of yields.

But he said that eliminates the pork producer because livestock producers do not have any protection against higher feed prices in the short run.  In the three weeks that the weather market has been active, new crop corn prices have risen by $2.25 per bushel and December soybean meal futures are up $100 per ton. 

He says that higher cost of feed has to be absorbed by the livestock industry, which eliminates any profit margin, which cannot be passed on through the value stream.  Hurt says that causes discouragement among producers who end up selling livestock at lighter weights in an effort to reduce feed costs, and begin the process of liquidation of their herd. 

Subsequently, such liquidation increases the slaughter rate in the near term, but over time, the supply of meat and milk products declines and that forces higher prices.  Ultimately, the consumer has to pay indirectly for the higher feed costs and the remaining livestock producer benefits, but not the one which had to face early herd liquidation.

With $7.30 corn and $450 meal costs, pork producers will have to pay a record amount in production costs of $72 per cwt, and Hurt says that will only drop to $69 for the winter quarter.  That means a $20 per head loss in pork production for the summer, fall and winter quarters.  And he says relief may not occur until the fall of 2013 when lower priced corn may be available from the next crop.  As an indication of early marketings, the average weight of slaughter hogs has dropped from 277 to 274 in the past three weeks.  Low production sows will be culled, and more sows will be marketed by the fall.  Farrowings will decline in the winter quarter and hog prices will rise late in 2013 due to the reduced number of lean hogs reaching the market. 

Hurt says the current drought will have a dynamic impact on feed prices now and a dynamic impact on pork prices a year from now.  He says those in the animal industry “need to articulate the extreme financial stress they are likely to experience in the coming 12 to 15 months.

The immediate view is that crop producers will bear the brunt of the financial losses, but losses in animal industries will be enormous over the next year, perhaps becoming considerably greater than for the crop sector. This articulation by the animal industries is important to alert consumers to higher retail food prices, but also to policymakers.”  Hurt says policy makers have an immediate influence on the release of CRP for grazing and hay production, as well as any disaster payments that might benefit the livestock industry.  And he added that includes any adjustment of the Renewable Fuels Standard in 2013.

Summary:
While crop producers are suffering reduced production this year, it will result in reduced livestock production in the coming year as herds are trimmed due to high feed costs.  Policy makers need to realize the impact on the meat and milk industry in an effort to make informed decisions on CRP release and the Renewable Fuels Standard.

Source: FarmGate blog