The annual Iowa Pork Congress is a large trade show all about swine production. But ethanol dominated the discussion at the 2007 event last week in Des Moines.
The night before the two-day show, President Bush gave his State Of The Union speech on national television, calling for the production of 35 billion gallons of renewable fuels such as ethanol per year. Bush wants the U.S. to do that by the year 2017—ten years from now. Hog farmers are wincing at what that huge increase in ethanol production would mean for already-high corn prices.
As more ethanol plants continue to be built across the U.S., ethanol's increasing appetite for corn threatens to derail a record-breaking run of profits for hog producers. "The skyrocketing price of corn might even reach a point where investment in the ethanol industry itself is choked off," said Bruce Babcock, one of the speakers at the hog event. He is an economist and director of the Center for Ag and Rural Development at ISU.
Hog profit streak will end
Mark Greenwood, vice president of commercial lending at AgStar Financial Services in Mankato, Minn., told attendees at the Iowa Pork Congress to beware of higher corn prices. He says higher corn prices have raised the cost of producing pork enough that hog producers probably will lose money this month for the first time in three years.
Hog producers will receive $115 to $120 for every hog they sell this month. But, says Greenwood, it will cost the farmers $120 to $125 to raise that hog to market weights. In 2006, ISU economists estimated the cost of producing a 260-lb. market hog rose 10% from January to December, mostly because of higher corn prices beginning in the fall.
Higher costs for corn mean hog farmers will have to lower production costs in other areas of their budget if they want to stay in business. They've used their profits made in the last three-year stretch to pay off debt, says Greenwood.
Corn is now an energy crop
Ethanol has become so crucial to the price of corn that the grain is now considered to be an energy crop. The rapid rise in corn price since this past October has been caused by a frenzy of demand for ethanol. "This is a one-of-a-kind rally," says Babcock. "We've never seen a corn price increase like this that hasn't been driven by a short crop."
Assuming the price of a barrel of crude oil stays between $50 and $60, Babcock says economic models show that corn prices will range from $3.35 to $4.05 per bushel. Any corn price that rises above that ratio of crude oil-to-corn will make ethanol production unprofitable and shut off investment in ethanol plants, he said.
Higher corn prices are already eating into the profit of ethanol plants. Ethanol margins are expected to keep dropping for another year, says Babcock.
Farmers will grow more corn
Higher corn prices will get farmers to grow more corn, beginning this spring. Higher corn prices will also increase cost of production for livestock farmers.
Pork prices in the grocery store will eventually have to rise, says Babcock, as producers reduce the number of hogs they raise due to the increased cost of corn. He looks for a 7% rise in the cost of pork at the supermarket, "which is a relatively modest rise."
The increase in corn acreage and amount of corn produced in 2007 and 2008 and beyond will all go to ethanol production. The use of corn for livestock feed, exports and for food uses will have to go down, as ethanol soaks up more and more of the corn crop.
During the next two or three years, livestock producers can expect corn ranging from $2.65 to $4 a bushel, depending on the size of the 2007 and 2008 corn crops and the price of ethanol, says Babcock.