Ron Plain

With corn prices double year-earlier levels, one has to wonder what the fast growing ethanol industry means for U.S. pork producers. The simple answer is that unless crude oil prices plummet (certainly possible) or the federal government eliminates its 51 cent per gallon subsidy for blending ethanol with gasoline (unlikely) corn prices will be much, much higher than in the past. Economists at Iowa State University estimate the equilibrium price for corn is $4.05/bushel when crude oil is $60/barrel. The U.S. corn price for the last 7 years averaged only $2.10 per bushel.

What will $4 corn mean for hog producers? Assuming protein prices increase only modestly, breakeven prices for slaughter hogs should run about $52/cwt live or $70/cwt of carcass.

What does it take for carcass hog prices to average $70/cwt? Well, in 2004 Iowa-Minnesota prices averaged $70.04/cwt with a hog slaughter that was only 1.2% lower than what is expected for this year. Although it would be painful, a 1.2% cut in hog production is certainly doable.

The more difficult question to answer is what will $4 corn do to U.S. farm exports? Last year, the U.S. exported 12.9% of the pork we produced. Low cost corn has helped make U.S. pork producers very competitive. Will we still be able to export 13% of our pork production if corn prices stabilize at $4 per bushel?

The answer depends on how other countries react to $4 corn. The U.S. accounts for nearly 40% of world corn production and two-thirds of corn exports. Our price is the world price. Doubling the price of corn will lead to expanded corn acreage, both here and abroad. I expect all the production from expanded U.S. corn acreage to go into ethanol plants. But, what of the rest of the world? It is likely that some countries will follow our lead and expand ethanol production.

Those that don't will have the option of taking the extra corn they can produce at a $4 price and either export it or use it to expand their livestock industry and export the extra meat. The latter choice would mean trouble for U.S. hog producers. It is quite possible that a country like Argentina could build a large hog and poultry industry on $3.80 corn (U.S. price less transportation cost) and undercut the U.S. as the supplier of choice for meat.

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