In addition to continuing drought punctuated by the punishing blizzards that ended 2006, Colorado cattle producers are enduring a perfect storm in the marketplace: Prices paid to producers are depressed while the prices producers pay for inputs like corn are racing upward because of competition for corn from ethanol producers.
Ranchers, feedlot operators and cow-calf producers are currently receiving declining prices for their cattle at the slaughterhouse because of an abundant supply. The cattle cycle tends to span a 10- to 12-year period, fueled by consumer demand, herd supply and rebuilding time.
“Feeder and calf prices are now lower than in the past couple of years,´ said Kevin Good, senior market analyst for Cattle-Fax in Englewood. “The price is better than in 2002 when supply was flooded from the drought, but in ’03, ’04 and ’05 the prices were higher, on the top side of the range. Currently, prices are drifting lower nationally because of a larger supply and higher corn costs.”
According to the Livestock Marketing Information Center in Lakewood, “Federally Inspected (FI) cow slaughter in 2006 has been well above a year ago as drought conditions this summer and fall forced many cow-calf producers to increase culling rates. In addition, dairy cow slaughter has also been above a year ago due to rising input costs and milk prices well below a year ago.”
This additional or earlier culling leads to a surplus of boxed beef and depresses prices even when the domestic demand for consumer beef remains strong.
“The year-to-date price of general fed cattle in ’06 is currently $85.50 per hundredweight and last year at this time it was $87.50 per hundredweight,” Cattle-Fax’s Good said.
“The main driver leading to lower prices has been the escalating price of corn, which is now at $1.50 a bushel,” he said. “The competition from ethanol plants for corn has softened the profits that producers earn.”
Ethanol competes for corn
Ethanol in Colorado is in a gearing-up period. The state is currently home to three ethanol plants with an additional two in the works, even though it is widely regarded as a “corn-deficit state.” That means corn is brought into Colorado by rail lines from the Midwest to partially feed the need of the plants.
The corn-deficit status is not necessarily a detriment to the local ethanol industry, because the plants are within a close proximity to the final consumer. The state’s ethanol plants are located in Windsor, Golden and Sterling, and planned in LaSalle and Yuma.
But by raising the price of corn locally, the plants have created an unfair marketplace, according to Terry Fankhauser, executive vice president of the Colorado Cattlemen’s Association.
“We welcome the plants and think that the renewable energy they provide is great, but we are not going to shy away from informing the public that they don’t operate in a free and open market system,” he said. “Most every other commodity is sold on a level playing field which is fair for competition, but ethanol is different. The crops are subsidized and the plants are subsidized.”
The additional demand has yet to filter down to supply, another factor in the expense of corn. According to the U.S. Department of Agriculture’s National Agriculture Statistics Service in 2005 Colorado farmers planted 110 thousand acres of corn for silage, the same acreage as in 2000. Cattle producers are hopeful that the increased price will entice farmers to plant additional acreage in 2007.
To compensate for increased corn prices, cattle producers can feed a percentage of the ethanol waste product, known as distiller’s grain, to their cattle. But producers can’t feed the distiller’s grain in the same way as fresh corn because it affects the quality of grade of meat. It also increases the deposits of sulfur in the manure, which has environmental impact.
Distiller’s grain can be dried, which significantly increases its cost, or fed wet. “The (wet) distiller’s grain can’t be shipped because it spoils after a week,” Fankhauser said, “so producers have to be close to a plant to utilize the grain.”
Cattle prices depressed nationally
The ethanol plant in Yuma, expected to open this year, will directly affect Kenny Rogers, president-elect of the Colorado Cattlemen’s Association. Rogers plans on feeding cattle on his Yuma ranch with less than 30 percent of distiller’s grain and will supplement the rest of his feed needs with corn and hay.
“Corn is extensively used to feed and finish cattle, and it is up 30 percent this year,” Rogers said. “It has gained a dollar a bushel … it just costs more to feed them in an industry where margins are already razor thin.”
The trend of depressed cattle prices is not limited to Colorado. A high supply nationally is also applying a downward pressure on prices.
“Packers have cut their production and they will ramp back up when fed cattle returns to profitability,´ said Keith Belk, professor of animal science at Colorado State University in Fort Collins. “The top five packers are bleeding – they are not profitable. Cargill seems to be doing the best.”
Belk said the domestic consumer market remains strong, but cheaper proteins like chicken and pork are preventing the market from consuming the excess supply. The boxed meat market supply also remains high due to the continued closure of the Korean market and the decreased demand of the Japanese market.
“The feeders are going to have a tough year, unless they have forward contracts,” he said.
How a business manages its inventory can have a tremendous impact on the financial health of the company. Managed properly, inventory can be a great source of increased margins, higher revenue, or a combination of the two.