Livestock Farmers Responding to Tight Feed Supplies

The feed input that is getting the most attention, and is causing the biggest increase in expenditures, is corn. Near the end of March 2007, Central Illinois corn prices were around $3.60 per bushel, 80% higher than the year-earlier price. In February 2007, prices spiked above $4 per bushel for a couple of weeks.

The corn price increase is not the result of small U.S. crop production, but rather unusually strong demand. Demand for corn for ethanol production has increased dramatically in the past couple of years, due to high gasoline prices and government incentives to use renewable fuels. Export demand for corn has also been very strong in 2006/07 despite the high prices. Consequently, high prices are likely to persist into the future, instead of just for a few months.

Although soybeans are not currently in short supply, soybean prices have been supported by the higher corn prices. This is due to the expectation that a large amount of acreage will be switched from soybean to corn production in 2007. Higher soybean prices have supported higher prices for soybean oil and soybean meal, which is also a component of feed rations.

Cattle producers have also been facing regional shortages of pasture grass and harvested forages for several years now. This is especially true in the western United States, which is in the midst of a long-term drought in many locations. The impact of the shortage of forage has been especially evident in beef production. The size of the beef herd finally began to expand in 2005, but the U.S. cattle inventory on January 1, 2007, was only slightly larger than the year-earlier level, and the beef cow herd was actually down by 100,000 cows. This is the result of beef cow slaughter that has been running above year-earlier levels since last summer.

High corn prices and the shortage of forages are also expected to have an impact on dairy production. Due to the associated high fixed costs, dairy operations are very slow to adjust production levels in response to prices, whether on the input or output side. Although milk prices have been increasing for several months, milk cow numbers declined from January to February 2007, and it is likely that this trend will continue.

One of the most striking aspects of recent livestock slaughter reports is the increase in calf slaughter. Calf slaughter for veal production has been declining for years in the United States. It is possible that this is due to some increase in demand for veal, but it seems remarkable that calf slaughter in the first quarter of 2007 was 23% higher than a year earlier, especially with feeder calf prices still near record highs. The average slaughter weight of the calves is well below the average of the past few years, indicating that the calves are going to market simply because it is too expensive to feed them, or that feed is simply not available.

Hog and poultry producers are not affected by the forage situation, but high corn and soybean meal prices directly affect their bottom lines. In recent weeks, hog slaughter has been running well above year-earlier levels, and a bit above the level implied by the December hog inventory report. It is possible that the inventory was mistakenly low, or that imports of slaughter hogs from Canada have been higher than expected. There is at least anecdotal evidence, however, that hog producers have been pulling marketings forward, selling hogs a bit earlier than usual in order to reduce short-term feed use. Average weights at slaughter, which tend to rise over time, have been running a couple of pounds lower per animal. This suggests that producers are selling hogs a bit early.

So far in 2007, however, slaughter numbers do not indicate a large liquidation of the hog breeding herd. The next Hogs and Pigs report, due March 30, 2007, will give a good indication of the overall response of the hog industry to high feed prices.

Broiler production, which usually shows a solid upward trend, has been below year-earlier levels for the past five months. The shorter life-cycle of broilers suggests that it should be easier for producers to adjust production levels than for, say, beef or pork producers to do so, but historically this has not been the case. In the past, broiler production only seemed to show any type of decline in the event of a disease outbreak. This time, however, it is due to low profitability, mostly caused by high feed costs. According to USDA estimates, broiler feed costs are running about 25% higher than a year earlier.