DTN: Livestock sector bears brunt of 2012 drought
August 2, 2012
OMAHA (DTN) – Illinois cattle feeder Steve Fogelsong has been running a lot of breakeven estimates lately. He's careful to hedge corn at a profitable level when he buys feeders. But even if it pencils out, it may not matter in the end.
"Even if corn is $10, if it's not available, it's not available," he said.
Searing temperatures and dry skies have driven the corn market to atmospheric levels – it's up more than 40 percent in a month – and evaporated hopes that the cattle industry would start rebuilding the beef herd this year.
The weather that killed the corn crop also killed the grass, and the upcoming feed shortage is why the livestock sector faces greater financial losses from the drought of 2012 than the crop sector faces.
“It’s interesting how quickly that pendulum swings from one end to the other. If it started raining tomorrow, how much of it would we take back off? It’s anybody’s guess,
– Steve Fogelsong
"The reason for that is in the crop sector, there are some potential offsets to terrible yields," said Chris Hurt, Purdue University extension ag economist. Higher prices compensate for lower yields and crop insurance helps cover some losses. "The livestock industry has none of that. They have to bear the cost of higher feed and they cannot immediately pass on higher prices."
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Sixty days ago, corn prices were close to $5 and going lower. Farmers had pulled in their second-crop hay before Memorial Day southwest of Peoria, IL, where Fogelsong lives.
"It's interesting how quickly that pendulum swings from one end to the other. If it started raining tomorrow, how much of it would we take back off? It's anybody's guess," Fogelsong said.
December corn futures closed at $7.725 on Monday, making corn about $2.70 more expensive than it was in early June. Cattlemen who didn't cover corn aggressively at $5 are facing "massive, massive losses. And in the short run, we're still going to have the same tonnage of milk, the same tonnage of pork and beef and poultry coming to the consumer. In the short run, we can't push up those prices," Hurt said.
FORAGE PROSPECTS: ONCE BOUNTIFUL, NOW SHORT
The problem with a drought, according to Iowa State ag economist Chad Hart, is that all feedstock prices go up. For instance, the average spot price for dried distillers' grains has spiked nearly $40 per ton in the past three weeks, according to prices tracked by DTN.
"When you're looking for forage, the grass isn't there either. The hay is not there. You're looking at high prices no matter what you're staring at on the feed board. And that's a very tough situation for the livestock producers to be in," Hart said.
Waist-high pastures, once lush green after early spring rains and mild temperatures, are now so dry they'd burn if a match got tossed in it, Fogelsong said.
While Illinois is in the heart of the drought-stricken area, more than half the nation is now experiencing drought conditions. Monday's USDA Crop Progress and Condition report pegged 54 percent of pasture in poor to very poor condition. Just 18 percent fell into the good to very good category.
USDA recently announced it's going to make some CRP land available for grazing and haying, but that's not going to be enough to help the feed shortage, Fogelsong said. Farmers are chopping earless corn to use as hay and are putting up more silage than usual.
"We are going to utilize every ounce of crop aftermath that's out there," Fogelsong said.
FURTHER HERD REDUCTIONS LIKELY
Last year's drought in Texas, Oklahoma, Kansas and the southwest hit cattle directly, said Iowa State's Hart, but this year's drought targets cattle feed. "Both boomerang back on your cattle producers."
The 2011 drought forced cattle ranchers to trim back their herds. Old, dry cattle went first. Calves skipped backgrounding and went straight to feedlots. Some ranchers were forced to sell off their entire herds. Some cow-calf operators moved their cattle to pasture in Nebraska or Wyoming, where it was cooler and wetter.
That pattern might reverse this year, Fogelsong said.
Prices for cull cows are slipping, Fogelsong said, as ranchers send older cows to slaughter.
"The No. 1 thing is to make your feed go farther, so you get rid of all those non-producing cows," he said. "I'm thinking they'll probably cull deeper into the cowherd, whittle off some older cows. Ultimately, that will wind up leading to, at least, no net increase in cow numbers. I don't know whether we'll have further reduction or not, but we may," depending on the how long the drought lasts.
Hurt said he anticipates livestock producers will start paring back their breeding herds and flocks later this summer and into early fall. That lower production won't translate into higher consumer prices until the middle of next summer.
"That means cash-flow wise they have to get through the next 12 to 15 months until two things happen: they get their production for their industry down, and we will not have a potential for lower feed prices until we harvest 2013 crop," Hurt said. "That's more than a year away. That's a long horizon of loss and that's why discouragement could be so large this fall."