One of the most revealing quotes I heard recently was “What would we be talking about if we didn’t talk about ethanol?” No doubt it is the elephant in the room for most livestock producers so it is important to spend some time on it but there are so many other interesting and important topics flying under the radar of the ethanol intoxication. We need to and will break out of this fixation and take a wider view soon. Regardless, here are some thoughts about the ethanol situation as it impacts corn prices and cost of production for pigs just to make sure the groundwork is set for future comments.
There were a lot of dire predictions in the market place about the future price of corn. Over time these predictions are stabilizing around the $3.50-$3.65/bu average with some swings of up to $0.75 in either direction. FAPRI just issued their latest report May 30th (Emerging Biofuels: Outlook of Effect on U.S. Grain, Oilseed and Livestock Markets; you can access it at http://www.fapri.iastate.edu/). They come in with a corn price forecast near an average of $3.40 through 2010 and suggest soybean prices are expected to rise to the low $7.00 range as people shift 10-15% of the soybean acres to corn.
We know the infrastructure throughout the system is not prepared to instantly adjust to the substantial response corn producers are making to the price incentives available by planting corn. Land prices/rental rates, availability of bins/storage, availability of tanker trucks, wide quality variation of by-products and their resulting (mis-)pricing issues, the unintended consequences of subsidies, global policy impacts, imports/exports, starving the equatorial poor around the globe to drive our SUV’s unimpeded (the Castro analysis)…is all too juicy to treat in a passing way.
If you think about the adjustments in the pig production business, economic theory can take you through the basics of the adjustment process. Pig production is a margin business. When its margins are widened or narrowed by some fundamentally persistent change (such as a permanent increase in corn prices) a set of adjustments work themselves through the markets of the production and marketing chain to reach a new equilibrium. A pass through takes place but there are a lot of possible outcomes and timelines present here. We’ll be looking at this with some additional depth shortly.
