DES MOINES, Iowa – The Iowa hog industry is built on cheap corn.
The state is home to rich farmland and lots of heat and humidity that make its corn and soybean crops bountiful, supporting hog barns that can be seen every kilometre across most of the state.
But an Iowa State University economist thinks the days of cheap and easy-to-get corn for hog farmers may be ending, as domestic and foreign competitors get hungrier for the energy-rich grain.
“I think the stage is being set. What happens when there is a short U.S. crop or a short world crop, supplies are tight, the motor fuels industry is demanding a lot,” said Iowa State University economist Robert Wisner in an interview during the World Pork Expo in Des Moines, Iowa.
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“Who will be able to bid most aggressively for limited supplies? Will it be the processors? Will it be the pork industry? Will it be the corn buyers?”
Wisner said various state and federal laws are forcing automobile fuel suppliers to include ethanol in their fuels. Because these levels will be set in law, fuel retailers will buy ethanol aggressively even when corn stocks are low.
Wisner said this is already occurring in some places in Iowa.
Last summer an Iowa ethanol plant was offering local corn growers more than the Chicago Board of Trade futures price for corn in an area that usually sees a basis of 30-32 cents US under CBOT.
Will hog producers be able or willing to offer such a high price? Wisner thinks producers will have trouble being profitable if corn prices suddenly spike. They don’t have the same ability as ethanol makers to pass on their increased costs with their product.
Wisner said hog producers face dangers from short term and local price spikes, and from corn price surges in years of short crops. Hog farmers will need to do more to hedge their exposure to sudden price shocks.
“This increases the need for input feed cost risk management for pork producers,” Wisner said.
Danger ahead
For the next two years, corn supplies should be ample for all users, Wisner said, but three years from now danger lurks from increased ethanol production and in a possible market role reversal for China.
China is often the world’s second or third largest corn exporter, but many analysts expect it to soon become a major importer of corn, as it has with soybeans.
If that happens, American hog producers will not only have to compete with the local ethanol industry for corn, but also with world consumers.
“If China stopped exporting, China’s customers would probably be looking elsewhere, and that would most likely be U.S. corn,” said Wisner.
The price effect could be dramatic. In 1995, short crops in both the U.S. and China ended Chinese corn exports that year, pushing U.S. corn prices to $5 per bushel and wheat prices to $7 per bu. That year the hog industry dodged the bullet because hog prices were high and producers could absorb the corn price increase.
“They were looking at some high prices and were able to outbid ethanol producers, and ethanol production actually dropped, but that was before the new mandated fuel standards,” said Wisner.
“It makes a difference when you have a mandated standard.”
