Those who make their living in the business of meat production are going to have to grapple with a new set of price and cost risks which will redefine the threshold for participating in these industries. Price and cost volatility also produce financial risk, the risk associated with borrowed capital and solvency, and place a high premium on both production performance and risk management skills.
The latest information reveals that the forecasted long-term declines in the average stocks-to-use ratios from bio-fuel production for the major feed ingredients are now being realized as Bob Wisner, retired crop extension economist from Iowa State University believes we could wind up in August with only 2.2 weeks of soybeans left in the cupboard, the lowest level since the mid 1960s. USDA forecasts world demand for corn will exceed a reduced world supply in the 2009-2010 crop year, all things being equal, and this means price will ration the available supply to the highest bidders as it always does.
Forecasted declines in the value of the dollar as the economy emerges from recession mean that there very well may be plenty of foreign bidders viewing U.S. corn as a bargain. Since the supply of feed ingredients is fixed in the short run, the “use” part of stocks-to-use will have to continue to decline in the U.S. through substitution of other feed ingredients and the use of bio-fuel distillation co-products. Government policy seems ready to put bigger training wheels on the bio-fuel industry so that market forces will have an even harder time pushing them into the ditch.
Export demand is slated to increase eventually as the dollar falls, economies begin to recover and per capita incomes begin to rise. A recent survey of economists however reveals they currently believe U.S. unemployment will hover near 10% through all of 2010. If true, the demand side recovery required to raise meat prices is still a long way off. The bond market is signaling that inflation risk is rising, so willingness to hold long-term instruments is requiring more reward, which means long-term interest rates will rise, slow recovery and postpone investment. As inflation heats up so will the flight to commodities by investors who will flee cash in favor of hard assets. This will 
drive most input costs used in meat production higher than current supply and demand would warrant (especially energy costs, agricultural products which are storable and building and fabrication materials such as steel).
Coming off of losses in the banking industry, federal regulators and bankers in all sectors will offer less capital at higher costs and will impose added restrictions and covenants to protect cash flows, repayment ability and solvency. Equity levels will need to be higher to buffer volatility in asset values and wide price and cost swings. This means the meat production industry in the United States will be shrinking, just like the air travel industry is getting ready to reduce capacity again and send a lot more jets to the desert near Tucson.
I have described the situation which is emerging for meat producers like playing Russian roulette but with three or four of the chambers loaded. The risk that one of the aforementioned volatility enhancers will be in play at any one time is now getting close to 100% and we haven’t mentioned increased regulation, oversight, reporting and legal challenges that run the gamut from nuisance to animal welfare issues.
The industry must bring up the complexity and variety of risk assessment tools and related management strategies and will have to become more clever and effective in their deployment.
The industry will have to find its way to resilience which is the ability to shrug off random shocks faster and with less core damage. Doing this will require a combination of financial and price/cost risk management tools and more intensity in the production process. By intensity, I mean extracting more value from the same inputs and trimming a whole new layer of waste from production processes by designing and implementing lower variance production processes with the use of enhanced inputs.
DDGs are a crude example of the movement to enhanced inputs. Feeding the whole kernel of corn to livestock is not necessary and is wasteful. All the parts that come packaged in that kernel may not have a high use in livestock production processes but may generate value in applications elsewhere. Stripping the unnecessary parts out of corn and meal and all other inputs makes the production process more intensive, more efficient and produces fewer co-products that have little value. Applying ingenuity to all of the processes of meat production from start to finish will yield a more stable system and a brighter future for tomorrow’s participants.
Editor’s Note: Dr. Dennis DiPietre is a swine consultant in Columbia, Missouri. His monthly commentary is sponsored by Elanco Animal Health. For more information, go to: www.elanco.com
This commentary is for informational purposes only. The opinions and comments expressed herein represent the opinions of the author--they do not necessarily reflect the opinion of Farms.com. This commentary is not intended to provide individual advice to anyone. Farms.com will not be liable for any errors or omissions in the information, or for any damages or losses in any way related to this commentary.