March 7, 2008

Recent U.S. energy policy places a large emphasis on ethanol’s role to add to liquid fuel supplies. Currently, ethanol primarily is made from corn, and this new demand for corn comprises approximately 24 percent of the 2007-2008 crop.

University of Kentucky College of Agriculture Economist Lee Meyer said that new demand segment, combined with other factors, has pushed corn prices to extremely high levels. The high prices are leading to dramatic changes – both on crop farms and livestock operations.

“High prices are a great incentive for farmers to expand crop production, not only in the United States, but around the world,” he said. “The simplest way for this to happen is to take the land out of another crop, like soybeans. That happened last year, and the reduction in soybean production led to higher soybean prices. Now, all the crop prices are at or near record levels.”

Meyer said currently corn is more than $5 per bushel, soybeans at $14 and wheat around $11 per bushel. These high crop prices will have an impact outside the grain production system. Traditionally, the United States’ greatest use for grain has been to feed livestock. Pork and poultry is produced almost entirely on grain and oilseed protein.

“I’ve estimated that the farm level production cost for pork is up 75 percent with the total cost up about 25 percent,” Meyer said. “The chicken feed index is up 44 percent and so its total cost of production is up to nearly 20 percent. Cattle are a little different; most only depend on grain for the last one-fourth of the production process. As a result, the impacts of higher grain production are reduced, but they are still significant.”

The pork, chicken and beef industries may all respond by cutting production, but Meyer said that will depend on how consumers respond. The fact is meat prices are up. Compared to January 2007, beef prices are up by about 5 percent; pork and chicken prices are up 2 percent and 10 percent respectively.

“If consumers dramatically reduce their consumption, there will be an oversupply and chicken, pork and beef producers will cut production,” Meyer explained, citing research that indicates consumer incomes are the most important factor in retail demand. “So, with a stressed economy, consumers are expected to cut back as a response to higher grocery and restaurant prices.”

Meyer said the most important consideration may be the long-run implications of higher prices. Grain production will increase and one way that will be done in the U.S. is taking land out of pasture and other marginal uses to respond to the market. This will lead to increased erosion.

“Of course, that puts more pressure on the cattle industry to find feed sources since there will be less pasture and hay,” he said.

Other countries are expanding grain and oilseed production. Meyer pointed to South America, where cropland is coming out of forest and Argentina, where pastures are being plowed into grain production.

Not only is meat production likely to decline, there may even be some changing between pork, chicken and beef as well. Meyer said farmers may have to look at producing more beef on hay and pasture to minimize the impact of the ethanol-driven corn markets. If producers are willing to make some adjustments, they may be able to capture a greater portion of the overall meat market.

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