Corn prices eating away cattle profits

By Steve Miller, Journal staff | Tuesday, April 08, 2008

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High prices for corn have farmers smiling, but those same prices are wiping out profits for feedlot operators who have to buy corn to feed cattle, ag specialists say.

Many feedlot operators have lost money over the past year because they’ve had to buy ever more expensive corn, according to Ken Olson, beef specialist at South Dakota State University’s West River Ag Center in Rapid City.

Next on the hit list will be ranchers who raise the calves to sell to those feedlots, Olson said.

“The folks in the feedlot business are losing a lot of money right now because the cost of corn is so high,” Olson said. “They’re not going to be able to pay the kind of prices that they have for calves in the past.”

Most of the feedlots in South Dakota are in central and eastern South Dakota. But most West River ranchers focus on raising calves for the feedlots.

Wall area rancher Myron Williams is in both parts of the cattle business, raising his own calves, and feeding grain and hay to them and calves he buys.

Williams said he hasn’t bought much corn of late because he uses dried distillers grain, a byproduct of the ethanol process.

Dried distillers grain has been a cheaper option than corn in recent years, but it now is in short supply, driving prices up, Olson said. “It used to be less than $100 a ton delivered, but now it’s well in excess of $200 a ton delivered to the ranch,” he said.

Williams said that last fall he locked in prices for the dried distillers grain as well as his source for this year. But he said those safeguards won’t last forever.

Williams said he and other feeders also have locked in prices they’ll get for the fat cattle finished in their feedlots. But without those hedge agreements, feeders have been losing $60 to $80 per head on fat cattle, he said.

If feeders are not able to pass those costs onto the packing companies -- and the consumer -- they’ll have to start paying less for the calves they buy from ranchers, said Al May, Extension grain marketing specialist at South Dakota State University in Brookings.

Part of the picture that is still not in focus is how many acres farmers will plant to corn this year.

The U.S. Department of Agriculture has predicted an 8 percent decline in acres planted to corn this spring and a 7 percent decline in South Dakota, May said, although farmers in the Corn Belt are waiting for the ground to dry out so they can plant.

“Last year we had a 15 million-acre increase in corn acres,” May said. “Now we’re cutting that growth in half.”

There are several reasons farmers might be planning to plant less corn, despite high prices for their product, May said.

First, the costs of fertilizer required for corn have skyrocketed, he said. It’s cheaper to grow soybeans, May said.

Also, farmers planted record acreage to corn last year and many of them may want to rotate to soybeans last year, to replenish some of the nutrients corn takes out of the soil.

Also, with wheat prices at record highs, some Midwest farmers might consider planting spring wheat instead of corn, May said.

After last year’s harvest, there was a 1.4 billion bushel carryover supply, which is not considered flush, because of high demand for corn from ethanol plants, May said.

The farmers’ final decisions will become clearer in June when all the spring crops have been planted.

“We better expect the potential for tighter supplies,” May said. “That would mean prices of corn would stay strong and potentially get even higher.”

Corn prices hit $6 a bushel late last week, about a 70 percent increase over the $3.50 price a year ago, according to Extension specialists.

Again, that’s good news for corn farmers; bad news for the cattle industry.

Along with high-priced corn, cattle feeders and ranchers are facing higher prices for just about everything else that is related to fuel costs -- diesel fuel, fertilizer and everything that is delivered to them.

And weather remains a huge factor in all of these calculations.

In eastern South Dakota and elsewhere in the Midwest, late-spring storms have kept farmers out of the fields.

If farmers get delayed too long in planting corn, they’ll plant soybeans instead, meaning tighter supplies and higher prices for corn, and bigger headaches for livestock feeders, Williams said “These guys need to get in the field.”

Out west, the weather has been too dry. If at least adequate rain doesn’t fall this spring and early summer, cattlemen won’t have grass and hay for their animals.

If there is enough moisture to grow grass, the market could get better, Williams said.

“We need moisture,” he said. “We’ve just got to have the weather straighten out.”

Contact Steve Miller at 394-8417 or steve.miller@rapidcityjournal.com.