The New Wedge Between Crops and Livestock: Government Policy

In one sense, there has always been a certain conflict between crops and livestock since they tend to benefit from each other when the one is not doing so well at least price-wise.  When crop prices are low, at least temporarily, livestock producers gain profits through lower cost of production.  When crop prices skyrocket, livestock producers tend to struggle until a passthrough occurs or some adjustments take place.  In the past however, there were good reasons for the two major arms of U.S. Ag to talk about their symbiosis and protect each other's interests.  That's when the vast majority of U.S. produced corn, for instance, was destined to be livestock feed.  That dynamic is changing largely due to government policy changes. 

It was not too long ago that the National crop associations were engaged in meetings to surface more win/win situations such as specialty, value-added crop traits that might increase quality characteristics of meat, lower odor from effluents, and/or benefit livestock and meat sales in other ways that allowed a value added premium for crop producers.  Recent changes in government policy however are driving wedges between the interests of these two interdependent streams of agricultural production in the U.S. and abroad.

The first was ethanol subsidy and mandates which not only introduced competing demands for corn but resulted in removing a third of the expected corn crop each year from agricultural use completely.  This created a new dynamic in corn price volatility which is not easily managed with traditional risk management tools.  Incentives to plant more corn meant that soybean prices would also rise as more continuous corn production would be likely and acres driven to corn were not available for soybean production, a critical or at least traditional protein component of U.S. livestock feed.  Not to say there are not some substitutions which can be made but the classic models, forecasting tools and stability of all these industries began to take on new characteristics and lots of increased volatility.  Removing grain from the food chain results in a kind of competitive rebalancing among relationships and products that have not been heretofore observed.  I am talking here about how pricing and profit relationships reallocate corn between agricultural and food uses and fuel uses.  Add to that the uncertain impacts of government support for fuel uses etc. and livestock producers were left with a scramble to understand the new landscape, learn how to (and not to) hedge its risks and understand its trade-offs with the value proposition of corn as a feedstuff.  

Global warming legislation has the potential to do just the same thing.  Government policy advocates of cap and trade point to the tremendous income potential for agriculture through participation in such programs, namely the ability to sequester carbon through a variety of technology changes and practices and then to sell those sequestrations as credits to greenhouse gas producers who want to exceed their mandates.  While various means are available to both crop and livestock producers to generate saleable credits, the net advantage may fall to crop producers who can conceivably deliver up more saleable credits at lower cost.  Already, beef production is cited as a principle problem in climate change and worldwide, various estimates place the problematic impact of agriculture in total at 15% or more.  
Let's not forget too, the inevitable and never forecasted impact of government intervention in agriculture, the unintended consequences.   For instance,  the impact of this legislation will cause
restructuring and consolidation in the crop sector as it will give more
capable producers an exploitable advantage which will drive more acres
into their management and control.

If we get to the point where crop producers are supporting such legislation and livestock producers are against it, we have the basis for another wedge as well as another upset in all the newly emerging price ratios and their historical meanings, expansion/contraction signals, risk management techniques, forecasting accuracy etc.  When we get to the point that U.S. crop producers are essentially or at least substantially uncoupled from their relationship with U.S. livestock producers it may be a good thing in the long run but the short run is going to get really ugly...again and again.