Farmers are selling corn at over $3 a bushel, the highest in a decade. That means generous profits. But for anyone who feeds corn to livestock things are more uncertain. High corn prices could change the industry. Southwest Minnesota hog producer Larry Liepold says every producer is talking about it.
"We did see it coming. We've had these discussions for probably better than two years already," says Liepold.
Liepold knows all sides of the industry, from working in the barn to lobbying in Washington. He's a past president of the Minnesota Pork Producers Association. He says high corn prices bring a complicated set of options. For one thing, Liepold grows most of the corn he feeds his hogs. In a matter of weeks, he's seen that corn transformed from cheap feed into a high dollar energy component.
"It'd be really appealing to take the last few thousand bushels I've got, put it on the market and turn it into cash," says Liepold.
That's risky. If he sells the corn, Liepold must eventually buy more on the open market. Basically he's betting on lower corn prices over the next few months. If that happens, he wins. But, if prices move higher yet, he loses because he ends up paying more than what he got for his home grown supply. That's the basic dilemma for hog producers and others, including chicken and turkey farmers. Liepold says it all adds up to this: if corn prices stay high, some hog producers likely will go out of business.
"There's that distinct possibility," says Liepold. "This could be a couple years down the line, it may be sooner. Yea, there could be a reduction, there could be a huge reduction."
A team of researchers at Iowa State University have looked at how corn prices will affect hog production. ISU's Dermot Hayes says nearly everyone who studies the issue sees trouble ahead for the livestock industry.
"There's a general consensus that if ethanol continues to grow that there will be some displacement of livestock," says Hayes. "And there's a consensus that in rural areas at least that that's not a good thing to happen."
The ISU team made several assumptions. One is that oil prices remain around $60 a barrel. That makes ethanol competitive with gasoline, keeping ethanol production and corn prices high. The second assumption may be a bigger stretch. Right now Minnesota grain elevators pay about $3.25 for a bushel of corn. Hayes says the ISU study assumes corn reaches $4.
“There could be a reduction, there could be a huge reduction.”Larry Liepold
"That would cause a production cost increase to pork producers of about 30 percent," says Hayes. "Now the way that they would pass that cost increase on to U.S. consumers is to reduce their output."
Hayes says the economics of supply and demand would send hog prices higher as production drops. It would also raise grocery store pork prices.
Hayes says it's possible U.S. hog production could decline as much as 15 percent to compensate for higher corn prices. If that happens, many hog farms may go out of business. The poultry industry faces the same prospects.
Beef and dairy cows are mostly insulated from these changes. A cow can eat the corn material leftover from ethanol production, hogs and poultry cannot. For hog producers like Larry Liepold, it's an uncertain time. Liepold says the first thing he's going to watch is whether predictions of a long run of high corn prices comes true.
"The same thing was said back a few years ago in 1996 when corn hit $5 for a period of time there," says Liepold. "At that time they said we'd never see below $3 again. Yeah, we've seen it. We've seen $1.50."
Liepold says farmers will likely produce more corn, which could lower prices. There are millions of acres seeded to grass in various conservation programs. Liepold says it will be controversial, but farmers are likely to convert some of that back to corn production.
Farmers can also switch land from crops like soybeans or wheat into corn. Liepold says hog farmers also have a financial safety cushion of sorts. The industry has had three profitable years in a row, mainly because of cheap corn. How long that financial cushion lasts depends on how long corn prices stay high.