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Continued: High cost of feed hits livestock farmers

  • Article by: MIKE HUGHLETT , Star Tribune
  • Last update: December 8, 2012 - 8:20 PM

For the most part, Minnesota hog producers are losing about $20 to $25 per pig right now. The state's turkey growers are losing about a buck a bird. And business isn't much better for dairy farmers and cattle growers.

This year's big run-up in corn and soybean prices -- courtesy of a searing U.S. drought -- has put the state's and the nation's livestock industry on its heels. The reason is that feed is the primary cost in raising animals, and it's made mostly from corn and soybeans.

"Since [grain] prices spiked in August, everybody's margins have been in the red," said Bill Lapp, of Advanced Economic Solutions in Omaha, which specializes in food and commodities.

The feed squeeze is showing up at the supermarket, as well. Beef prices have been soaring since 2011 -- when drought first hit the cattle industry -- and chicken prices have been rising at a steady clip this year. "Consumers are feeling the burden," said Mike Swanson, an agricultural economist at Wells Fargo in Minneapolis.

Corn and soybean prices respectively rose from around $5.50 and $13 a bushel in June to over $8 and $17 in August, the peak of drought worries.

The price spike was a boon for many Minnesota crop farmers, who unlike their brethren in other states weren't hit hard by drought. And even crop farmers in states where corn and bean fields got toasted at least had a cushion, in the form of federal crop insurance.

But federal insurance for livestock growers is almost nonexistent. And even though corn and soybean prices have come down some this fall, they are still historically high, with corn around $7.50 per bushel and soybeans at nearly $15.

Minnesota livestock producers also often grow corn and soybeans -- and in the case of dairy and cattle producers, hay -- partially mitigating the run-up in feed costs. But few could completely escape this year's feed cost frenzy.

Feed makes up about 60 percent of hog raising costs, for example, and Minnesota is the nation's third-largest hog producer.

"I'd say we have very few [hog farmers] making money, but there's a group who will manage to not go too far backward," said David Preisler, executive director of the Minnesota Pork Producers Association.

As hog farmers have cut back production, and as seasonal factors kick in, losses are expected to moderate during early 2013. Black ink is forecast to return by the second quarter, Preisler said.

Some individual hog farmers' fortunes this year were also mitigated by hedging in the futures markets. "For a while last spring, you could lock in a profit," Preisler said.

Indeed, Jim Compart, a hog grower near Nicollet, Minn., sold hogs short at or near their yearly highs in late 2011 and early 2012, and went long on corn before its price spiked on drought fears.

"We were able to lock in some hog and feed prices for this year," said Compart, who has about 25,000 hogs and whose family has been producing pork for over 60 years. "But going into 2013, there just hasn't been that opportunity."

For Compart's operation, November was the turning point from profits to losses, a situation he doesn't see reversing until spring.

Turkey growers can hedge feed costs, too, but there's no futures market to sell forward their birds. Plus, most turkey growers tend to "buy feed as they go," said Steve Olson, head of the Minnesota Turkey Growers Association.

Olson said growers are currently on average losing about $1 per "tom" turkey, the male of the species.

Minnesota is the nation's largest producer of turkeys. And compared with hogs, feed makes up an even higher percentage of a turkey grower's costs: about 70 percent. "Feed is a horrendous amount of our expense," said Kent Meschke, a Little Falls grower who has about 500,000 birds and whose family has been raising turkeys for 45 years. With feed prices up 30 percent since the start of 2012, "we're in the red," he said, adding, "I don't see a quick turnaround."

Permanent shift?

Not long ago, feed historically made up about half of a turkey grower's costs, Meschke said. Indeed, until about 2007, turkey and other livestock farmers could count on corn at a historical average cost of about $2.50 per bushel.

But since then, there's been a structural change in grain pricing caused by rising global protein demand -- and thus demand for animal feed -- coupled with the growing use of corn for fuel. Nowadays, corn at $4 to $5 a bushel is considered a relative bargain.

Before the drought, that's what some farmers and market observers thought might be on tap for 2012, as the U.S. acreage devoted to corn reached a high not seen since 1937. More supply, lower prices.

"If we had had a normal year [weather-wise] I honestly think corn would have been $4 to $5 a bushel instead of $7 to $8," said Patrick Lunemann, a dairy farmer near Clarissa and president of the Minnesota Milk Producers Association.

Dairy farmers in Minnesota are in a "middling year," Lunemann said, which is better than can be said for their compatriots in California, where dairy farm bankruptcies have been rife. California producers, unlike those in the Midwest, rely much more on purchasing, rather than growing, grain for feed.

Dairy farmers and cow-calf operations in Minnesota -- the latter raise cattle for feedlots -- have had another feed headache caused by the drought. Cows need lots of roughage, and it often comes in the form of alfalfa or corn silage.

But with prices high, corn has more value as grain than silage. And livestock farmers in other states have had their hay crops scorched, thus driving up demand -- and prices -- for Minnesota-grown hay.

Lunemann said he was recently perusing farm advertisements for surplus hay in Minnesota or North Dakota. He came up empty-handed, but did find ads for cattails as a roughage substitute. "I wouldn't even feed that to my cows," he said.

Expensive beef

Joe Martin, executive director of the Minnesota State Cattlemen's Association, said this year has been a "mixed bag" for beef producers.

The U.S. beef industry is dealing with a multi-year contraction of its herd, and is coming off a brutal 2011, courtesy of severe drought in Texas and much of prime cattle country. Those trends, compounded by this year's drought, have led to soaring beef prices at the supermarket.

Beef prices rose 10 percent in 2011 and are expected to climb up to 6.5 percent this year, federal data shows. Beef "has been riding away from the rest of the meats," said Wells Fargo's Swanson. "It's hard to put a steak on the grill."

Poultry prices are also expected to rise a heady 5 to 6 percent this year, while overall food-at-home prices are expected to climb only 2.5 to 3 percent, according to the U.S. Department of Agriculture.

Pork prices should rise only 1 to 2 percent in 2012, as some hog producers have liquidated animals rather than paying to feed them -- glutting the market. But the USDA expects pork prices to rise 3 to 4 percent in 2013.

"Pork has been a real bargain in the supermarket," Swanson said. "But that won't last."

Mike Hughlett • 612-673-7003

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