Food Prices Fueled

By Tom Webb, Pioneer Press, St. Paul, Minn.

Jul. 13–In an era of $7-a-bushel corn, only two paths to survival remain for livestock and poultry producers, who are now hemorrhaging money.

Either consumer prices for meat and poultry will increase — by a lot.

Or feed corn prices will fall — by a lot.

With their animals gobbling up the priciest corn in history, the folks who raise hogs, chickens, turkeys and cattle are choking on big losses. No industry can lose money indefinitely, but analysts dismiss any possibility that American consumers would tolerate a world without cheeseburgers, pork chops, Chicken McNuggets and Thanksgiving turkeys.

"The meat industry won’t go away," said Brian Buhr, a livestock economist at the University of Minnesota. But meat bargains might. If corn prices remain high, pork prices will leap to the $4- to $5-a-pound range, he thinks.

"We will just about double the price of hogs by next year and, therefore, you’ll see almost a doubling of pork prices," Buhr said.

Shoppers are already grumbling about rising grocery bills, with food inflation at an 18-year high. But if feed prices don’t drop, the worst is still to come, warns Mike Helgeson, chief executive of St. Cloud-based Gold’n Plump, a chicken processor hit by soaring prices for feed corn and soybean meal.

"Consumers have only seen a small portion of the potential price inflation that ultimately will be occurring, as prices are impacted by these high feed costs — including for milk, poultry, meat and

eggs," he said.

Turkey producers are losing money. Milk producers are barely in the black, and only because prices for milk and other dairy products are near record levels. And the cowboys? They’re legendary for enduring cattle cycles of boom and bust, but now, even some of them are singing the blues.

"I’ve known a lot of cattlemen through the years, and they’re willing to ride through the highs and the lows," said Darin Newsom, senior analyst with DTN, a commodities information firm. "This may be something different."

The stakes are especially high in Minnesota because the state is a powerhouse of animal agriculture, nearly all of it fueled by corn. Minnesota has more pigs than people, making it the No. 3 hog state. Its hens lay nearly 3 billion eggs a year. Its cows give 8 billion pounds of milk annually. And it’s the top turkey state, producing 45 million birds a year, the USDA reports.

For decades, those animals fattened up on cheap and abundant piles of feed corn and soybeans. If $1.80-a-bushel corn seemed like the good old days for consumers and livestock producers, they’re not fond memories for farmers.

Jerry Demmer, who grows corn and soybeans near Clarks Grove in southern Minnesota, recalls "commodity prices so low that there wasn’t a profit, and there were piles of corn that nobody knew what to do with."

A tripling of grain prices has changed everything. Experts give a dozen reasons why feed costs have climbed: Bad weather. Tight grain stockpiles. Chinese demand. Skyrocketing oil prices. Poor harvests abroad. Hedge-fund speculation. Investors searching for safety. A weak dollar. U.S. farm policy.

But the one that is mentioned the most is ethanol.

A wave of new ethanol plants is devouring an ever-greater share of the U.S. corn crop, and refineries come online almost every week. To rival users of corn, the congressional mandates that favor corn fuel over corn feed are a menace that could destroy them.

"With subsidies there, the ethanol processors can afford to pay $1.40 a bushel more than what livestock producers can," said Steve Olson, executive director for Minnesota’s turkey, chicken and egg trade groups.

In addition to federal and state laws mandating ethanol use, ethanol producers benefit from a 54-cent-a-gallon tax credit and tariffs on most imported ethanol.

John Burkel, a turkey grower from near Roseau, has watched the price of corn climb to where his business raising 200,000 turkeys a year is below its financial break-even point. Burkel was in Washington, D.C., this past week, to urge U.S. lawmakers to roll back some ethanol mandates.

"The concern we’ve always had is the ‘Perfect Storm’ argument — that once you take a third of our corn and put it into the gas tank, what happens if there’s a weather disaster?" Burkel said. "We’ve been dismissed. I think this year has kind of proven our point."

The U.S. Department of Agriculture has already taken small steps to help livestock producers, but greater changes seem likely. One possibility is letting landowners exit early from the land-idling Conservation Reserve Program. That would put more U.S. acres into crop production, starting next year.

Many poultry and hog operators demand more. And if grain prices don’t fall significantly, some analysts believe Washington will have no choice. Americans may like renewable fuels like ethanol, but not more than they like reasonably priced burgers, bacon and eggs, chicken breasts and ice cream.

Among the policy options under discussion: encouraging imports of ethanol by lifting tariffs, reducing the tax credit for U.S.-made ethanol or waiving new government standards requiring the use of ethanol.

"We’ve got a new administration that’s coming in next year, and I think that’s going to offer an opportunity to make some changes," Newsom said. "I don’t think we’re going to see anything immediately. But with the changing of the guard, and the fact that Congress is now looking so hard at the commodity industry … some changes could occur within the next year."

By then, grocery shoppers may feel the full force of the price spike. Until now, meat and poultry prices have risen only modestly — 2.6 percent in the past year — because some producers have found it less costly to market their animals than to feed them.

"It puts more meat in the counters upfront," Newsom said, "but as we get further into it, then the numbers simply aren’t there. It’s going to tighten things up."

Yet Minnesota is also a powerhouse in corn and corn-based ethanol. Minnesota is the No. 4 corn state, last year growing 1.1 billion bushels. It’s home to 18 operating ethanol plants that can produce some 735 million barrels of ethanol a year, with four more huge plants under construction. Together, those plants will be capable of consuming nearly 40 percent of Minnesota’s mammoth corn crop.

Unlike other states, most of Minnesota’s plants are farmer-owned, so altering ethanol mandates could bring a double hit: lowering grain prices and weakening ethanol markets. That makes corn growers especially resistant to changing the law.

"I know we’ve got a little glitch here," said Demmer, the Clarks Grove corn grower. But, "let’s not do a knee-jerk reaction to what’s happening in the short term. Let’s let this thing work itself out."

Maybe that will mean higher supermarket prices for meat, poultry and dairy products, he says. But Demmer prays it won’t mean cratering corn prices.

"If we see $2 corn again, the farming industry is going to be in a world of hurt."

Tom Webb can be reached at 651-228-5428.

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