Grain prices will decline...eventually
More acreage and higher yields are the keys to lower feed prices.
Corn, already in the upper $4/bu. level, is likely to reach at least $5 per bushel on the farm this year. "For most of the poultry operations, add 50 cents to that and that is the base line high priced corn," predicts Richard Brock, owner and president of Brock Associates, agricultural advisory firm.
The culprit: oil. Brock, who spoke at the International Poultry Expo in Atlanta, says that the old rule of thumb has hit home if the price of a commodity is too high for too long, someone will find a way to produce more of it, use less of it, or use something else.
Part of that "something else" is ethanol that is diverting corn and other grain away from feed, playing havoc with price projections and creating a new plateau for the grain industry. The result is uncertainty as to where grain prices are headed and how they will ultimately affect food industry prices.
Fifteen million gallons of the Energy Bill's mandated 36 million gallons of ethanol by 2015 is to come from grain ethanol, or corn. This directive has prompted a growing crop of ethanol plants across the United States.
Brock estimates that there are 127 plants currently operating, each producing an average of 57 million gallons of ethanol annually. Seventy-one plants are under construction, with an anticipated average capacity of 82 million gallons each, which will collectively require 4,879 million bushels of corn.
Plants scheduled to be operational by the end of this year include five in Illinois, five in Indiana, 15 in Iowa, six in Minnesota, four in Nebraska, seven in Ohio, two in South Dakota, and 27 scattered throughout the rest of the country. Another estimated 109 plants have been proposed.
As logic seems to dictate, the bulk of the plants are located within the heart of corn country to minimize shipping of the raw material. But locations like Syracuse, N.Y., Niagara Falls, and states in the Far West are also seeing new construction. With 80 percent of ethanol used on the coasts, the theory is that it is more efficient to haul the corn to the coasts for processing than to move the final product.
If the additional four plants scheduled in California begin production, Brock estimates that they will require 11 additional 100 rail-car units of corn per month corn pulled from western Nebraska. Corn availability and its cost for these plants will be one issue, availability of rail cars and the infrastructure for its transport will be another. Brock's prediction, "Some of these plants won't operate."
More than Enough
A year from now, when the plants under construction add their production to the current ethanol output, the United States will achieve the mandated ethanol production level for 2015. If proposed plants are built, their added production will put the nation past the mandated level by an estimated 32 percent.
Proposed plant construction may, slow, due in part to the nearly doubled cost of building ethanol plants. Cost of a 100 million gallon plant was about a dollar per gallon, or $100 million, three years ago. Today, that cost is closer to $200 million for the same capacity plant. Finding financing for these projects is becoming increasingly difficult. The rising cost of feedstock also comes into play. Brock points out, "I've actually seen five ethanol plants file for Chapter 11 because of the high-priced corn."
Banks were ready and willing to loan up to 75 percent of construction costs for ethanol plants three years ago. For new plants, with the breakeven on a steady increase largely due to the cost of corn, it's a different deal.
Acreage and Yield
Brock's good news for the industry is that there should be plenty of corn to get the egg industry through this year thanks to the big carryover. The problem appears when the industry looks forward to acreage available for corn for 2008-09. The tug-of-war between feed, ethanol and exports calls for more acres with higher yields.
"I think we'll end up somewhere between 90-91 million acres getting planted (his estimate is 156 bushel yield). With only 90 million acres getting planted, there is a problem. If we planted only 89 million acres and had the same corn yield we had in 2007 (151 bushel yield), we've got an absolute disaster you would be looking at $6-plus corn," says Brock.
Fortunately, he projects no such catastrophe, "We'll be somewhere between my average and a 162 yield. Carryover jumps to 1.8 million bushels and you've got a corn market that is a buck and a half overpriced right now, but we're not going to know that probably until September."
Most of the market surprises, says Brock, will come from the bearish side, not the bullish side, "They will come from ethanol usage and, for once now, we are going to see more customer resistance."
Brock's price-lowering surprises range from governmental actions to scientific discoveries, including:
Possible expiration of the 54-cent tariff on imported ethanol (valid through January 2009). He says, "If you had asked me three months ago if this would be renewed, I would have given you a 95 percent yes as long as we have an electoral system electing political candidates, rural votes in Illinois, Indiana and Nebraska count for a lot. But with the building pressure on in Washington, D.C. about what ethanol is doing to the price of corn, I am not so sure this will be renewed."
Genetic improvements continue to increase corn yields. Brock adds, "A 10 bushel increase per acre would solve a lot of problems."
Cellulose ethanol is coming. This alternative feed stock may replace some corn usage in three to five years.
An enzyme is in development that would allow pork and poultry to digest DDGs, potentially offsetting a large portion of corn needed for feed.
Six to 10 million acres of Conservation Reserve Program (CRP) land will become available for production.
Sharp decline in energy prices. Oil usage will go down and development of new alternative energy sources such as ocean windmill farms will go up.
Still, the year ahead will be challenging. Among Brock's predictions for 2008: 1) grain prices will decline from current high levels; 2) for the first time in many years, poultry production will likely decline; and 3) in 2009, food prices will rise significantly, bringing back strong profits.
"In 31 years, I've never seen the entire economic outlook so volatile and so much change taking place," Brock says. "Exciting times."
Article developed from comments made during Richard Brock's presentation, Impact of Feed and Fuel on Poultry Production, during the U.S. Poultry & Egg Association Educational Program held during the International Poultry Expo.