Background last update:6 Aug 2012

Risk management crucial as feed prices soar

With a recession underway driven by record oil and crop prices, feed markets are experiencing a historical moment. Feed Tech spoke with sources who say inept public policy and laissez-faire risk management in the United States have contributed to some dramatic losses.   By Nicholas Zeman

Crop prices, especially for feedstuff staples like wheat, soybeans and corn, have toppled previous price records several times over the course of the last 18 months. The biofuels industry has been blamed for this continuing debacle and accused of diverting critical grain supplies used to feed the world. Meat processing companies like Pilgrim's Pride and Tyson have been complaining about feed prices and calling for emergency actions such as the immediate opening of Conservation Reserve Program (CRP) land. Pilgrim's Pride even closed a processing complex and six distribution centers attributing the cause to a crisis facing the chicken industry related
to “soaring feed ingredient cost resulting from corn based ethanol production.” Tyson followed suit releasing a press statement in April which read, “president and CEO supports position to relax ethanol mandate.”
Feed Tech sources say, however, that it's tax subsidies and incentives, not the biofuels industry's production practices themselves, that have caused problems. “We are opposed to policy that makes winners and losers in how the game of how grain is being used,” says Joe Schuele, spokesman for the National Cattleman's Association (NCA). “We think competitors should be able to bid for grains in a free market, and we are at a large disadvantage because subsidies and mandates give the edge to biofuels.”
Public policy promoting the conversion of grain to fuel can also lead to strange behaviour in the private sector contravening the essential intent of legislation meant to support breakthrough energy technologies and start-up companies. “It's undeniably true that subsidies can distort markets, but biofuels policy is only about one-third of the problem with the dramatic
escalation in prices,” says David Swenson, professor of economics at Iowa State University (ISU). “Another third is increased worldwide demand and the last fraction consists of intangibles…like weather and the struggle to keep land in production.”
Not enough land
US policy makers indeed seem to suggest that there is always going to be more acres for increased agricultural production, a seemingly unbounded supply of resources, but that is fallacy. Urban sprawl, for instance, and other forces besides biofuels production, also eat up acres and contribute to higher prices. “The supply of agricultural land is not growing… its  disappearing,” Schuele tells Feed Tech. “There is record-high world demand for feed at the same time there has been a loss of agricultural land to development,” he adds. Increased worldwide demand and bad weather have plenty to do with the current feedstuff shortages, but biofuels have been a convenient scapegoat for record oil and crop prices worldwide. “The popular press, the NBC's and CNN's of the world, seem to have a very simple approach to this situation - reporting whatever the titans of industry tell them,” says Jerry Gidel of North American Risk Management Services, headquartered in Chicago. “But there are some other things going on here besides biofuels. Of course I believe one of the keys to success is to be actively involved in risk management. General Mills just had their best quarter ever, and it was because they were actively involved in the market.”
Food price inflation
Other companies are trying to shift responsibility when the truth is, Gidel says, they didn't manage their risks properly. “The twist in my opinion is so called 'skyrocketing' increases we hear about all the time,” Gidel says. “We've had an about 2.5% annual inflation of food prices since the 1970's, and that's risen over the past year to about 5.7-5.8% - yes it's a jump, but I wouldn't call it 'skyrocketing.'” Managers can't necessarily assume anymore that input expenses will remain under cost calculations, or that things will be the way they've been for the past 20 years, Gidel says.
“So you need to be buying grain and oilseeds ahead of time and you
need to be paying attention to what's going  on in the market every week,” he says. Therefore, monitoring the weather, streaming trade prices and crop reports from the department of agriculture are all things that purchasers need to do when deciding what percentages of raw materials to buy through long-term contracts and what percentages to by on spot markets.
Be active in future market
Purchasers should be actively participating in futures and options and working hard to stay ahead of the game, Gidel says. “Instead there's this laissez-faire approach to buying that can get a lot
of people into a lot of trouble. “The weather could turn back and we could have $4.50 corn again by next fall. The same thing happened with wheat. People were stumbling along saying 'Flour's topped out, better not order any more right now!' But it didn't peak until it hit $14.”
The NCA says high operating costs are not going to go away any time soon, which means producers should be looking to add value through increased sales, market expansion and less waste. “We need to get our export markets hitting on all cylinders,” Schuele says. Korea, for instance has just started to accept US beef, and consumers there have paid steep rates—up to $30-per-pound ($13.60/kg) - locally. “We feel like we are the most efficient producers in the world so the Korean consumer is much better buying from us even if our price of production is high,” he says. “We are still able to use grains very efficiently and it's still getting better all the time.” Different items are also popular in Asia so there opportunities to sell those cuts usually are looked over in the west. Just by utilizing short ribs, which are popular in Korea, producers can add as much as $25-per-head to their bottom lines”, Schuele says.

DDGS opportunity
The argument from the ethanol industry has been that one of its own products can boost feed efficiencies related to fattening and finishing beef cattle, and buffer the spikes in market prices for raw materials in other livestock sectors as well.
“Distillers grains have a fixed value relative to corn prices, as viewed as a corn substitute,” professor Swenson says. “The price has risen right along with corn so that's been the lone bright spot for ethanol plants (who are also struggling), but it's offered little relief for livestock producers.” These are trying times, and the NCA says biofuels coproducts have offered little relief. “Distillers grains were expected to be cheaper than they have been,” Gidel says, adding that utilizing the byproduct has not been a major factor in his risk management advice to clients.

There are areas of high-saturation where distillers can be shipped semi-moist. But it's harder to use in the eastern Corn Belt, plants are trying to get as much as they can for this product.” Distillers grains are a better feed for dairy cows and cattle but not utilized often in the pork and poultry sectors. Cattle can feed about 30 to 40%, while pigs only about 10% and chickens even less. “Some cattle feeders are able to use this product effectively and we do support research that promotes maximizing the applications,” Schuele says. “But it's really a small consolation.”
Good returns offset by high prices
Feedstuff production is a dominant driver of the world's wealth, so it is perhaps ironic that significant gains in the grain sector do not benefit the rest of the economy in a major way, and in fact has negative affects as seen by the crunch felt by livestock producers and meat processing companies.
Right now there is a benefit for certain farmers, but the positive impact only comes if there is an expansion in the rest of the economy, which right now is not happening. “Good returns to farmers are usually offset because of higher food prices and increased household spending on necessities, especially if wages are not increasing,” Swenson says.
The ethanol industry was started by corn farmers looking to add value and diversify their marketing base. Now they are taking the blame for a food crisis situation, and ethanol plants are also struggling because of the cost of their number one input - corn. There's a similar scenario when it comes to biodiesel and soybeans. The price of soy oil has caused several
biodiesel plants to operate below capacity or halt operations. This seems like an insatiable process only companies like ADM, Cargill, Bunge, and ConAgra - which are biofuels producers as well as feed processors - are happy with.
At large, forecasters say there will be a protracted period of stagnation along with a worldwide slowdown and little relief in the foreseeable future, but also record profits for ag-giants. While some companies are boasting record profits during the so-called “food crisis” caused by rising crop and fuel prices, the US dollar have lost 26% of its value compared to competing world currency over the last four years.
Source: Feed Tech magazine - Volume 12 No. 6
Nicholas Zeman is a US correspondent for Feed Tech. He can be contacted at nicholas.zeman@und.nodak.edu.
* The price of soy oil has caused several biodiesel plants to operate below capacity or halt operations. This seems like an insatiable process only companies like ADM, Cargill, Bunge, and ConAgra – which are biofuels producers as well as feed processors - are happy with.

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