Implications of drought tough to identify

For the hog industry, the U.S. drought is a simple matter: higher feedgrain costs mean higher market hog prices are needed to maintain hog production at current levels.

But for the U.S. cattle industry, the drought is much more than a price thing. Farmer decisions in the drought zone, which covers most of the U.S. cattle production area, will be extremely local, and that makes their impact on Canadian producers harder to assess, say agricultural economists.

“When you have a drought, it depends on the subtleties for how it unfolds,” said Jim Robb, the director of the Livestock Marketing Information Centre in Colorado, in an interview.

“How this all unfolds in the cattle sense in terms of prices will really be set in the next six weeks or so.”Much of the attention of the U.S. Midwest drought has focused on crop farmers who are seeing their corn crops burn up and soybean crops suffer. But the worst hit producers will often be livestock producers who need to buy feedgrains and forage for their animals and find it either unobtainable or extremely expensive.

For prairie livestock producers, the situation is almost entirely one of price. There are going to be lots of feedgrains on the prairies this fall, hay crops and stored hay supplies are more than adequate, and pastures are in generally good condition across the West.

Cattle and hog farmers will be forced to pay high prices for feedgrains, but hay prices shouldn’t be outrageous and there is little chance of a feed shortage. Farmer decisions on this side of the border will be made for economic reasons.

That is true too of the U.S. hog industry, analysts say. For hog producers, the drought is just cost impact.

If there are no locally available sources of corn or soybean meal, they will have to pay to bring it in. That could mean bringing it in from far away, including South America. And that comes at a cost on top of the already high world price of the feed.

But that’s little different from Lethbridge’s feedlot alley hauling in U.S. corn when it is cheaper than prairie barley, or Manitoba’s hog industry sourcing U.S. corn when local feed wheat is expensive or has too much vomitoxin.

For U.S. hog producers, the impact will be on their costs and profitability, and if profitability suffers, then farmers will likely shrink their sow herds or leave feeder barns unfilled.

“It has to hit the bottom line before the changes lead to changes in slaughter,” said Ron Plain of the University of Missouri in an interview.

Usually, profitability has to be hit for about five months before farmers react, Plain said, so October, November and December should be when any herd reductions show up. Then, it is months longer before the reductions show up in reduced slaughter numbers.

For cattle producers in the drought zone, the economic dynamics are more complex, and the price impact for prairie producers is harder to assess.

If U.S. farmers have bad pasture and are already using up their supplies of stored hay, they will likely wean early and sell calves early. If local corn crops are being cut and turned into green chop and silage, they can hang on to their calves longer.

If they have little hay left by the end of summer, they’ll likely move cows and heifers too.

The individual decisions made by cattle producers are much harder to predict than for hog producers because hay and pasture can’t be hauled in from far away. That means the flow of calves, heifers and cows will be hard to anticipate as the drought affect continues. The last thing farmers want to do is sell breeding animals.

With beef prices at record levels, and prospects for the next few years excellent because of the decline of the breeding herd, farmers in the U.S. will do anything they can to hang on to their cows and heifers.

Robb said the long-term price outlook for livestock is excellent, once the short-term drought impacts have passed.

Feedgrains in North America will be short for at least a year after this harvest comes in, herds have been shrinking or only slowly growing and producers with animals in a few months should be facing a seller’s market.

“We’ll be capping livestock numbers, and probably already are even for chicken, and that will continue into 2014,” said Robb.

The decline in the breeding herd will continue past the end of the drought and farmers who can still feed their animals, including most in Western Canada, should see the continuation of a booming market for livestock.

About the author

Ed White's recent articles



Stories from our other publications