New Report of the Furture of Grains, Biofuels and Livestock and Poultry Feeind Was Just Released
Don Hofstrand
Retired Extension Agricultural Economist
agmrc@iastate.edu
Regular newsletter contributors Bob Wisner and Don Hofstrand teamed up with agricultural economists Ron Plain of the University of Missouri, Dan O’Brien of Kansas State University and David Anderson of Texas A & M University to peer into the future and author a report titled Future Patterns of U.S. Grains, Biofuels, and Livestock and Poultry Feeding. The project was financed by the Institute for Feed Education & Research (IFEEDER) on behalf of the American Feed Industry Association (AFIA) and The Council on Food, Agricultural and Resource Economics (C-FARE). It was completed in June of 2012 and is available at http://www.cfare.org/future/.
This article provides a summary of the report and identifies areas of interest where you may want to turn to the report for more information.
A basic premise of the report is that the future of the nation’s livestock and poultry industries depends heavily on feed availability and cost. In the first decade of the 21st century, the U.S. livestock, dairy, and poultry sectors and the feed industry faced major challenges brought on by sharply higher and more volatile feed costs. The situation is exacerbated by the current drought conditions that grip the grain and livestock producing regions of the U.S. This new feed cost environment has negatively impacted the entire feed, livestock, poultry and dairy industries. The availability and cost of grain and protein meal in the next several years will, to a large extent, determine the future patterns and direction of these industries.
A major driver of the changing feed cost environment is a rapid increase in corn used for ethanol, and fats and oil used for biodiesel production. This has shifted corn and soybeans from their traditional dual role of food and feed production to a three-way role of food, feed and fuel production. The emergence of the fuel component as a major corn user has reduced the corn available for other uses. Domestic livestock feeding was the largest source of the decrease, although U.S. corn exports also declined. Part of the lower feed use was offset by increased feeding of distiller’s grains with solubles (DGS), the major co-product of the ethanol industry.
A number of developments contributed to the explosive growth of biofuels demand. These included the September 11, 2001 crisis and the policy shift towards increased U.S. energy independence. New government initiatives supporting this policy included mandated volumes of ethanol and biodiesel blending with motor fuels, the phase out of Methyl Tertiary Bu¬tyl Ether (MTBE) as an oxygen-enhancing agent for gasoline, a blenders’ tax credit (that expired in 2011), efforts to reduce greenhouse gas emissions, and financial assistance for smaller ethanol plants.
Before the emergence of the corn ethanol industry, corn supplies frequently exceeded market demand. This pushed prices down in response to government programs that encouraged corn use and discouraged stocks buildups. The result was low-cost feed for the nation’s livestock producers. However, as ethanol processing capacity expanded, demand for corn steadily increased and grain supplies tightened substantially. Corn prices rose to reflect the crop’s value as a motor fuel. At the same time, fuel prices rose, thus further increasing the motor-fuel equivalent value of corn.
Prices of other crops also rose as higher corn prices led to increased world corn plantings and competition for crop acreage. At the same time, Chinese imports of soybeans for feed increased rapidly. China’s expanded feedstuffs demand required additional South American cropland for soybeans at the same time that more acres were needed for corn ethanol.
U.S. Government biofuel mandates affect both the level and volatility of feed costs. When U.S. corn yield is sharply below trend, as is anticipated this year, the reduced supplies are rationed through the market mechanism of higher price. However, the corn ethanol mandate in times of extreme corn supply tightness gives the ethanol industry a purchasing-power advantage over the livestock industry. The mandates require a specific amount of ethanol to be used in the U.S. motor fuel supply, regardless of the cost of corn. Under those extreme supply tightness conditions, they would allow the ethanol industry to pay whatever corn price is needed to fill the mandates, unless government officials decide emergency conditions call for a partial waiver of the mandated ethanol volumes. So, a significant part of burden of reducing corn usage due to an extremely small U.S. crop would fall on the other uses for corn, namely the livestock feed industry and exports.
Looking Ahead at Corn Supply and Demand
Provided U.S. corn yields return to their longer-term upward trend, corn supplies for the feed and livestock industries appear likely to be more adequate over the next three to seven years than in the past few years.
Government corn-starch ethanol blending mandates will increase annually to 2015. However, the rate of growth will be much slower than in recent years and will be capped at 15 billion gallons in 2015 and future years. This prospect, when combined with the near-saturation of the domestic ethanol market, likely will slow the growth in corn ethanol demand in the next three to five years.
In addition, after three consecutive low-yield years of 2010, 2011 and especially 2012 which could have a substantial negative impact on the livestock industry, resumption of the long-term upward trend in yields would mean more readily available corn supplies for the feed industry in the next three to eight years. However, a number of key longer-term questions remain.
China appears to be an emerging major corn importer in response to the country’s rapid growth of consumer incomes and dietary shifts away from grain consumption to more animal-based protein. Earlier this year USDA projected that China will import 355 million bushels of corn in 2016-17, up from an estimated 197 million bushels in 2011-12. USDA further projects that China’s corn imports will double between 2016-17 and 2021-22.
With much slower expected growth in U.S. corn-starch ethanol production through 2022, the long-term upward trend in U.S. corn yields would be expected to result in adequate supplies to meet expanding Chinese demand and increased sup¬plies for the U.S. feed industry. Conversely, if U.S. and/or major foreign grain yields are below normal, the inelastic demand for biofuel likely will lead to sharp spikes in feed costs and reduced utilization. So, the U.S. livestock industry likely would continue to bear the brunt of much of the required cuts in use in the event of short-crop conditions.
Expected Adjustments in the Livestock Sector
When feed costs rise to unprofitable levels, the broiler industry is able to adjust more rapidly than producers of other species. A short biological production cycle allows the poultry industry to quickly curtail or expand production. This flexibility, along with greater grain-to-meat conversion efficiency, will help the poultry industry grow more rapidly than the red meat industry in times of tight grain supplies.
With more adequate grain supplies, the relatively steady decades-long growth in the pork industry is expected to continue. Only minor on-going structural changes in the pork industry are expected in the next three to eight years. Expanding global demand for pork is strengthening hog prices and has helped the pork industry cope with higher feed costs.
The dairy industry experienced severe losses in 2009–2010, triggered by rising feed costs and lower exports. However, it is re¬covering and beginning to expand, although returns were still depressed in early 2012. In the next several years, if current expectations of much slower growth in ethanol demand and increasing U.S. corn yields materialize, the dairy industry will continue its long-term expansion and increased efficiency and productivity.
The beef sector has the advantage of being able to use grass and other roughages to produce meat. It also is able to use DGS more effectively than monogastric species and may benefit as more ethanol plants remove corn oil from DGS to provide a feedstock for reaching government biodiesel and advanced biofuels mandates.
A large and expanding DGS supply has reduced corn use in the beef industry as well as other livestock sectors and has helped control costs. However, DGS and corn prices are closely related and DGS prices have risen in response to higher corn prices. Thus, the beef industry also has been stressed by higher feed costs and the need for adjustments in rations and production levels. Beef cattle numbers are cyclical, and as beef profitability declined in the past few years, producers reduced their herds. The severe Southern Plains drought of 2010-12 and geographic broadening of the drought in recent months accelerated the process and sets the stage for fewer cattle being grain fed and will reduce beef production in the next few years.
If adequate feed supplies are available at a reasonable cost, a cyclical upturn in beef cow numbers and beef production could occur. However, the cattle industry has a longer biological production cycle and greater grain requirements per pound of meat produced than other species. These aspects of beef production, especially high feed costs, will put additional pressure on the beef industry to increase production efficiency and feed conversion efficiency.
Future of the Biofuels Industry
Several corn ethanol firms are beginning to add biobutanol facilities or transition their plants to biobutanol production. Biobutanol can be made from corn and offers several potential advantages over ethanol as a biofuel. In addition, it has the potential for expanding the biofuels market beyond ethanol’s current 10% blend wall (12-15% blend wall if retail sales of E-15 become widespread). If biobutanol production becomes economical, it could create a second-stage biofuels expansion and growth in corn demand that could significantly tighten U.S. feed supplies.
Although cellulosic ethanol technology has not evolved as quickly as expected, the potential for the development of the industry still exists. If the cellulosic feedstock comes from grasses or other sources that are grown on existing cropland, it will compete with the livestock feed industry.
Current indications are that a major growth in biobutanol or cellulosic ethanol, if it occurs, may be several years away. However, it will be important for the livestock and feed industries to monitor these developments (along with other developments in the biofuels industry) over the coming years.
Long-term Implications for the Feed-Livestock Industry
The feed-livestock sector will face a number of important opportunities and challenges during the coming decades. The continued expansion of world population, along with the expected movement of millions of people into the middle class, will create a rapidly growing world demand for meat products. Sourcing adequate quantities and quality of feed for this growing demand will challenge the feed-livestock sector.
It is expected that most of the feed grains increase will come from increasing yields rather than expanding world cropland area. An important approach to increasing yields is improving agricultural productivity (more output per unit of input). Another is closing yield gaps. Yield gaps are areas of the world where yields are below the level that could be achieved with the proper application of current technology. Reducing trade barriers to provide the free flow of feed and livestock products from areas of production to areas of demand are also important.
These factors will be overlaid by the impact of global warming induced climate change. Global warming will challenge the livestock-feed industry to adapt to the changing climate while confronting the issues discussed above.
Remember, if you want to further investigate any of the topics discussed in this article, visit the report below.
Future Patterns of U.S. Grains, Biofuels, and Livestock and Poultry Feeding -- financed by the Institute for Feed Education & Research (IFEEDER) on behalf of the American Feed Industry Association (AFIA) and The Council on Food, Agricultural and Resource Economics (C-FARE). It was completed in June of 2012 and is available at http://www.cfare.org/future/.
