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HUNTIN' DAYLIGHT -- NO INDUSTRY FOR OLDER THINKERS

by: Wes Ishmael

“The world in which you operate has fundamentally changed. How have you changed your business?”

That's a question John Lawrence, livestock economist and director of the Iowa Beef Center posed to participants at the recent BEEF Quality Summit (BQS) presented by BEEF magazine.

Lawrence pointed out the cattle and beef industry we've known in our lifetime has been built upon relatively cheap feed and cheap energy. With exponential increases in those costs, which are expected to be the new norm, why would the same industry still be appropriate?

In a word, ethanol has changed everything. More specifically, the nation's choice to subsidize ethanol production as a means of reduced dependence on foreign oil has turned the world of agriculture upside down.

Increased corn demand and corn prices, fueled by that notion and subsidy have pulled acres away from other crops; 93 million acres of corn were planted last year, the most since 1944. In turn, prices for other crops such as wheat and soybeans are going through the roof in an attempt to buy acreage back from corn production. On both counts, acres are being taken away from forage production. That's before you talk about the downstream effects of increased input costs and shifting demand.

“It's the most dramatic change in my lifetime; it's probably the most dramatic change in agriculture since WW II,” says Barry Dunn, Executive Director and Endowed Chair at the King Institute for Ranch Management. Dunn provided the summary for the BQS.

According to Dunn there are currently 129 ethanol plants operating; by the end of this year they will have churned out about 7.9 billion gallons of ethanol; 12.3 billion gallons is expected next year. Another 85 plants are under construction, planned or earmarked for expansion.

When you account for plants currently in production or being expanded, Lawrence says ethanol production capacity is 11.5 billion gallons. Throw in the new plants that have already broken ground and he says you're talking 14 billion gallons. Not coincidentally that's how much ethanol the U.S. would need if all of its gasoline was sold as E10—gasoline blended with 10 percent ethanol.

Now, think about what's happened in the past couple years, how high and volatile feed and fuel prices have been. Remember that during this time there has been no drought in the primary corn-producing states. Keep in mind the changes have been wrought with about eight billion gallons of ethanol production. During his State of the Union address last year, Bush called for 35 billion gallons of renewable fuels by 2017.

So, prices have more opportunity to climb than not. Incidentally, Dunn points out that a one percent change in supply of a commodity typically spawns a six to eight percent change in the price of the commodity. And, that's before you consider how ethanol production changes the complexion of rural communities and the amount of money that flows through them.

“Rural communities need both livestock and ethanol production,” says Lawrence. But, livestock production is worth more jobs. According to studies at Iowa State University, using a 50-million gallon ethanol plant as an example, 18.5 million bushels of corn is required. The plant accounts for 35 workers directly, as well as 98 created and induced jobs, or 133 jobs all together. Funnel that same amount of corn through a feedlot and you're talking 140 jobs before considering the employment created further down stream in packing and processing.

“Ethanol production is a low labor business; livestock production is a high labor business,” says Lawrence.

Along the way, an already depleted national cow herd is finding both incentive and resources for expansion tough to come by.

“The total number of beef cows is declining, and I think it will for a couple of years,” says Lawrence. “I think we'll lose a lot of cow habitat in this part of the world (Iowa, Nebraska, the Dakotas, etc.), so I think we'll have a hard time rebuilding the cowherd in this country.”

At the same time, ethanol is increasing food prices, further pressing consumer billfolds. For those who argue the point, Lawrence explains the cost of corn as a percentage of total retail beef, hide and offal value ran about 7.4 percent between 1991 and 2006. It rose to 9.0 percent between January and June of this year.

Though domestic beef demand has been strong—even stronger than beef demand indices, according to some—there are limits. “As an industry we can't eat our way to profitability,” says Dunn. “As a nation, we've eaten or way to obesity.” Spun differently, presupposing increasing domestic beef consumption, even when allowing for population growth, is not a sound strategy.

Worse, Dunn points to the unintended consequences of ethanol policy. In Latin American counties, the consumer cost of corn—the staple of their diet—has doubled.

“It would be arrogant and insensitive not to recognize that,” says Dunn.

Undoubtedly the ethanol industry will change—it has already undergone consolidation—but betting against its existence for the foreseeable future is becoming more and more a fool's wager.

Change is Certain—Lots of It

“The mosaic of American agriculture will be very different,” emphasizes Dunn. “There's a battle for resources between cow-calf producers, stockers and feedlots. The marketplace and price discovery will be very different. It will all happen faster than we're used to. But, there's something else going on.”

At the risk of paraphrasing one of the most insightful, eloquent lines of thinking you'd ever hope to share, Dunn believes it boils down to this:

By definition in a capitalistic economy, industries reinvent themselves in order to survive, meaning parts and pieces of industries are destroyed, making room for the new. At the same time, those industries in flux and the markets serving them are trying to find balance.

“It's that conflict between trying to reinvent itself and finding balance at the same time that creates confusion, frustration and opportunity,” says Dunn.

For instance, Lawrence points to opportunities more producers are finding in the Distiller's Grains (DGs) that are a byproduct of ethanol produced with corn. He says that source of energy can be used to stretch grazing with supplemental feeding, used to creep feed. Total mixed rations can make it cheaper than feeding hay, meaning in some cases weight can be added cheaper in a dry lot situation than in the pasture. Imagine that.

There's plenty that's not known about using DGs at this point in time, though. How much can be used in a given situation without negatively impacting cattle, carcass or retail cut performance? Research in all of these areas is underway.

Jay Wolf, president of the Nebraska Cattlemen's Association also spoke at the BQS. He says, “The livestock industry needs a huge educational effort to help producers, especially small and mid-sized operations, adjust to new economies that have resulted when corn is priced as energy instead of food and feed.”

As Lawrence says, “The world isn't predictable anymore.”

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