When corn is cheap, the old adage is you have to “walk it to market,” meaning add value to corn by feeding it to livestock, says Purdue University Extension economist Chris Hurt.
“Walking corn to market simply meant feeding your corn to livestock rather than selling it as cash grain. That principle worked well when corn was $2/bu., but what about when corn is $4 a bushel?” he asks.
“From the 1999 crop to the 2005 crop, U.S. farm prices for corn averaged $2.06/bu. The value of the same corn fed to hogs was about $3.78/bu. This calculation is based on the value of corn after deducting all hog production costs including full depreciation and family labor costs. It can be argued that the ‘profits’ should be a return to the family management rather than corn, but this serves to make the point,” Hurt adds.
For the 2007 and 2008 crops, the average U.S. farm price of corn was $4.13/bu. Fed to hogs, this corn would only generate $2.63/bu., he says.
“In this period, the financial losses from pork production reduced the value of corn sharply below its cash value. This seems to suggest that the strategy of ‘walking corn to market’ has been replaced by the philosophy of ‘just haul corn to the ethanol plant,’ but we have to look closer,” Hurt says.
The corn price surge from $2 to $4 a bushel sent economic shock waves through the livestock industry. Producers couldn’t pass along these added costs, resulting in severe losses and discouragement for these producers, he says.
“Recently, corn prices have moved higher,” Hurt says. “How much can hog producers pay for corn given the current outlook for hog prices this year and next? Right now, profits are not threatened with live hog prices at $60 per hundredweight. In fact, hog producers could pay near $6/bu. for corn,” he says.
Hog profits are expected through next summer. Live prices are projected to be near $53 this fall and winter, return to $57 in the second quarter of 2011 and move to $54 in the third quarter. At these prices, producers could pay just over $5/bu. for corn and still cover all costs, Hurt says.
Projections for corn prices point to prices ranging from $3.80 to $4.33/bu., based on USDA’s Aug. 12 forecast and futures prices.
“Unfortunately, the catch comes in the fall of 2011. The lean hog futures market anticipates that breeding herd expansion will begin this fall, resulting in expanding pork supplies in late summer and fall of 2011. By fall of 2011, futures are suggesting live prices close to $48, and the breakeven price that pork producers can pay for corn drops to about $3.75/bu.,” he says.
Several factors stand out about the pork industry. First, the industry has contracted to accommodate corn prices of $4/bu. or somewhat higher. Second, higher input costs are just now being passed on to retail. Third, the pork industry needs to remain cautious about even modest expansion that could push the price producers could pay for corn back below $4/bu.