I sent this letter to Beef Magazine:
As you know I am a loyal reader of Beef magazine and your newsletters. I’ve been dismayed by your magazine and your writers support of ending ethanol subsidies and deriding the high cost of corn. Can you please explain to me how high priced corn negatively effects most beef producers? I’m sure most of your readers consider themselves “beef producers” rather than “grass producers” (and likely don’t understand WHY they should love high corn) but the reality is that most of them produce grass, and they market that grass thru their cattle, whether they are cow/calf producers or grass/forage stocker operators. Since grass could be considered a substitute for corn (for beef, certainly not chicken or hogs, another reason to love high corn), the higher the price of corn, the higher the value of the grass your readers are producing. Take a stocker operator, for instance. Where a stocker operator might have been able to demand 35-45 cents per pound for the price of gain several years ago, he should now command twice that because even at the higher price, his gain is still cheaper than feedlot gains. Anytime grass gain can compete with grain gain, the higher the price of grain, the higher the value of grass. Yet over and over and over again, your magazine pounds on high grain prices. Why? I’m guessing it’s because you represent feedyards more than the average cattleman. And I’m not saying that I expect feedyards to lose money, I don’t. They must make money, and they will or they will go out of business. The way they operate may need to change, and cheaper corn may mitigate some of those changes, but in the long run high grain prices tremendously benefit the average cattle person. If you can supply me with a rational argument of why what I am saying is not true, I will listen. But as an economist and “grass producer”, I love high priced corn, and not just because it helps my grain farming brethren, but because it helps me get more value from my grass.
And this is a response from Wes Ishmael:
I appreciate the recent note to Joe Roybal that you copied me on.
Here’s why I have a problem with the ethanol subsidies and why many of the cattle producers I visit with do. It’s nothing you haven’t heard before.
First, as a matter of national security, tying the price of food to the price of energy, besides subsidizing the use of foodstuffs for fuel, adds risk; never minding the humanitarian aspect of artificially increasing the cost of a global food staple beyond the means of many.
Second, though truly ‘free’ markets in this country apparently began giving way to regulated ones long before I was born, subsidies artificially skew the market. That’s not only when subsidies begin and end, but for all the time they exist, as well as the adjustment period before and after they’re implemented. In fact, once a subsidy is implemented, I don’t know that you ever have a true market again. With ethanol as an example, the federal government has thrown various subsidies at it for decades—at least since the Energy Tax Act of 1978.
With the Renewable Fuels Standard and Volumetric Ethanol Excise Tax Credit and tariff on imported ethanol, investors kicked production plant development into full gear. When those subsidies decrease or go away, an artificially high production capacity will still be skewing the market.
I thought Wally Tyner, an ag economist and energy policy specialist at Purdue University did a fine job summing up part of that point recently:
“The renewable fuels standard requires 15 billion gallons of ethanol be consumed per year by 2015, regardless of what the price of corn is and regardless of what the price of crude oil is. Corn could be $2 a bushel or $10 a bushel, crude could be $50 a barrel or $100 a barrel and that 15 billion gallons has to be there. That means ethanol production is totally unresponsive to price. There's no flexibility.”
That doesn’t sound like a ‘market’ to me.
Next, from a cow-calf producer’s point of view—the primary audience BEEF is aimed at—higher corn prices typically mean lower calf prices. They still do, though as far as I can tell, no one has yet figured out the exact relationships and degrees of those relationships among interrelated commodities that began shifting with the commodity bubble a few years back; fed cattle tracking oil prices more directly, for instance, due to corn’s stronger connection to energy markets. Besides, the direct impact, higher feed prices in between increase equity requirements and financial risk.
If, I have the grass and wherewithal, I agree with you, the higher grain prices are, all else being equal, the higher the value of gain for stockering cattle. A margin operation or enterprise can exploit such changes in ways that fixed cost ones never can, as you know. Even for margin operators, though, the equity requirement and financial risk is again larger, as is the cost of price risk management. Related to that, the increased price volatility that has accompanied corn prices that are also driven by the energy market has in turn increased the price volatility of calf and feeder prices.
That’s true even for an operation that grows both corn and cattle and has the opportunity to mix and match the highest and best use for the corn they produce.
None of the above factors in how artificially high ethanol production has birthed an industry of Distillers Grains, which continue to skew basis relationships for stocker and cattle-feeding rations based on DG availability.
At the same time, increased corn prices have increased the price of farmland—besides taking more marginal land away from pasture—which in turn generally increases the cost of buying or leasing grass. That’s before considering the impact this has on increasing hay costs, which is a key driver to annual cow carrying costs for a majority of cow-calf producers.
Through it all, higher corn costs—all higher costs—ultimately wend their way through the system and wind up in the retail price of the product. The price point of beef has always been a challenge, relative to competing protein sources. What appear to be permanently higher corn prices—not solely driven by but certainly exacerbated by ethanol subsidies—makes beef even less competitive.
In my opinion, tight cattle supplies and amazingly robust beef export demand have masked the full brunt of what higher corn prices have done to the cow business. Calf prices are high, which used to be a sure invitation to herd expansion nationally. Notwithstanding the forced liquidation due to drought and flooding this spring and summer, cow slaughter continues significantly higher than the five-year average. Prices are up and hardly anyone wants to think of expanding. In my simple view it’s because higher input costs, including corn, means that margins are as narrow as they were—there is no economic incentive for expansion.
On one hand, none of that would seem to matter, given the increased production with few cows over the decades, as much due to the evolution to an annual cattle slaughter almost exclusively driven by mature-weight cattle. But, in my opinion, the industry’s infrastructure depends as much on cattle numbers as it does raw tonnage. Every outside force, every artificial market impediment, such as ethanol subsidies, puts the cow-calf producer—the originator of those cattle numbers that the rest of the industry depends on—at greater risk. In turn that further jeopardizes the industry infrastructure, which subsequently adds to producers’ risk, that in turn jeopardizes infrastructure…etc. etc.
That’s my view.
And this is a response from Burt Rutherford:
Thanks for your e-mail and your thoughts on why high corn prices are good for cattlemen. Let me add my thoughts to those from Wes.
Your take on the situation is a classic example of the conflict that exists in our highly segmented business between what’s good for individual producers vs. what’s good for the industry overall.
Clearly, as you state, high grain prices drive up the costs of a lot of things in the cattle industry, including the value of grass gain. While that’s good for you, is that best for the industry? That’s a question we’ll never answer because of the many conflicting and competing factors and points of view that exist in an industry with somewhere around 750,000 individual entrepreneurs, some of whom are motivated by profit and some of whom are not.
However, high grain prices also tend to drive the prices of other commodities—feeder cattle , to name one—lower. We saw that dynamic play out this week when corn prices dipped and feeder prices increased.
Here’s why we think government-supported ethanol is, overall, a negative for the cattle industry. Anytime you introduce an artificial shock to the cattle market--and diverting 40% of the corn market in a four year period to a government-mandated use qualifies as an artificial market shock, I think—there are going to be any number of unintended consequences. Among those consequences are, in our opinion, a structural change in the industry driven by higher and higher feed prices that will lead to further consolidation, certainly at the feedyard level and probably at the cow-calf level.
In short, we have a smaller industry, and likely permanently so, partly due to an ethanol-fueled grain market.
Some of those structural changes are land-based, as we see more and more pastures plowed under to grow corn. Some of those changes are market-based, as we see more and more feedyards struggle to compete for feed in an artificially-pumped up grain market; and cow-calf producers struggle with higher input costs as other feeds, like hay and supplements, rise as well.
Distillers grains, be it wet, dry or somewhere in between, mitigate that to some extent. But only if you’re close enough to an ethanol plant to make it cost-effective to transport it. If you are, you’re in a better competitive position than those who aren’t and must pay higher transportation costs.
We have no problem with freely-functioning markets dictating production practices and geographical distribution of cattle production. We have a big problem with an artificially-driven, government-mandated market driving structural changes and geographic shifts in the cattle business.
If you’re producing grass-fed beef and selling directly to consumers or running stocker cattle and getting all your gain on grass, that doesn’t affect you. But if you’re one of the majority of our readers, 80% of whom are commercial cow-calf producers, that’s concerning. And that’s why we’re concerned as well.
These are both very well thought out responses and I appreciate them sharing their views. But I still disagree....I responded:
Thank you for the very well thought out response. First off, I HATE subsidies of ANY kind. If you are going to rail against subsidies in general, fine, but why single out ethanol subsidies? As long as the government is going to dole out money, I would prefer they go to agriculture. I cannot and will not argue the MERITS of the ethanol subsidy. Further, I cannot and will not argue the merits of ethanol as an energy source. My primary point was the perception, exacerbated by articles in Beef by “experts” that many people rely on, that high corn prices (stoked by ethanol subsidies) are somehow bad for cattle producers. As a cow/calf producer myself, if the stocker operator can “earn” twice the amount of money he was able to a few years ago (because of high corn prices) than he can afford to pay ME more for my calves. We can see that in the current market and I don’t see that changing, regardless of other factors in the industry. Now to your point about having to pay more for grass, you are absolutely correct. The returns will ultimately go to the owners of the capital (the land)….regardless of whether you are a farmer or rancher. But WHO CARES? If you are a commodity producer, you will always earn just enough, regardless of the price of corn (economic fundamentals assures us of this)...I would hope that many farmers and ranchers actually OWN some of their land and therefore profit tremendously from high land prices, which you have agreed is a direct result of high corn prices. Again, how is this a bad thing? And even if they don’t, as commodity producers, they are insulated from increasing input costs (at least in the long run) and shouldn’t care about rising land prices.
As to your point about expansion, I will tell you why you don’t see expansion, because there is no grass. I would love to expand, but I can’t find the grass to do it with. Anywhere possible, producers are plowing up grass to grow corn, a direct result of high corn prices. But I ask again, why is this a bad thing? Supply side fundamentals (among other things) make my current operation much more profitable than it was with the same amount of cattle. I’m ok with that. So we aren’t expanding?? So what?
To your point about beef’s ability to compete at the retail counter, I say again, so what? Why am I upset that the product I produce now costs x% more than it did a few years ago? Why would I want the price to go down? I’m not the least bit worried about demand erosion….rising incomes in other countries (and therefore a rising demand for protein) has more than made up for any lost demand we have seen domestically and I’m confident it will continue to do so. I’d love it if my product was priced so high that only a select few could afford it…I have a hard time understanding why I want the price of my product to fall. Once beef becomes uncompetitive (price wise) with other protein sources, the price will fall….as long as it continues to rise, it is obviously still competitive. The market will determine the value of beef, and I hope it determines a price as high as possible.
To conclude, I stand by my assertion that high corn prices are not a bad thing and you do a disservice to your readers by continuing to beat that drum. Preach away about the problems with subsidies, but don’t single out ethanol.