Ron Plain

The rapid growth of ethanol plants is likely to have a major impact on corn prices and consequently on the profitability of hog production. Corn is typically the single greatest expense item in raising hogs. Higher corn prices mean higher breakeven prices for hog producers.

The U.S. livestock industry has grown to record levels in part because we have had several years of low corn prices. During the last 7 years (1999-2005), U.S. corn prices averaged $2.07/bushel. Calculations by John Lawrence at Iowa State indicate the average breakeven price for barrows and gilts during those years was $39.59/cwt live.

During the previous 7 years (1992-1998), U.S. corn prices averaged $2.55/bushel. John Lawrence's calculations indicate the average breakeven price for barrows and gilts during 1992-98 was $44.43/cwt live.

USDA is forecasting 2.15 billion bushels of corn will be used by ethanol plants during the 2006-07 marketing year. That's a third more than this year. More than a fifth of the U.S. corn crop is expected to be turned into ethanol in 2009.

December 2006 corn futures contracts are trading around $2.80/bushel. December 2007 corn futures are trading around $3.10. During the coming 7 years (2007-2013), U.S. corn prices could well average $3.00/bushel, or higher. How much will $3 corn push up hog breakeven prices? Based on past relationships, a $1 per bushel rise in corn prices typically produced a $10/cwt increase in hog breakeven prices. However, in the past, high corn prices were usually accompanied by high protein prices.

Ethanol plants produce feed, DDGS, as well as ethanol. Since DDGS is a high protein feed, the growing demand for corn to produce ethanol may well push up corn prices without much of an increase in protein costs. Thus, a $1/bushel hike in corn prices caused by more ethanol plants should yield less than a $10/cwt rise in hog breakeven prices. How much less? Perhaps $3-4 less, for an overall increase in the live hog breakeven price of say $6.50/cwt.

Retail pork prices would need to increase by a bit over 4% to fund a $6.50/cwt higher live hog price. Normally, the supply of pork would need to decrease about 3% to generate a 4% increase in retail pork prices. However, since higher corn prices also will negatively impact poultry and cattle, the supplies of competing meats are likely to be reduced. Thus, maybe only a 2.5% reduction in the swine herd will be necessary to restore profitability from a $1/bushel hike in corn prices.

Given the large positive margins for turning corn into automobile fuel, the ethanol industry is likely to continue to grow rapidly. This will mean higher corn prices and higher breakeven costs for livestock producers and a smaller livestock industry.