1 iowabeefcenter.org beef production in the new era of higher prices and higher costs: do the old...
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IowaBeefCenter.org
Beef Production in the New Era of Higher Prices and Higher Costs:
Do the Old Rules Apply?
John D. Lawrence
Extension Livestock Economist and Professor
Director, Iowa Beef Center
Iowa State University
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IowaBeefCenter.org
Overview
• Factors impacting current beef profitability– U.S. biofuels policy– U.S. and global recession
• Role of economics in genetic selection
• Do the old rules apply in a new era?
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Things to Remember About Economists
• We have a firm grasp of the obvious
• We are better at predicting history than the future
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Biofuels Policy
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US Biofuels Policy
• Energy Independence and Security Act – Passed congress in August 2007– Signed by President Bush December 2007– Established the Renewable Fuel Standard
(RFS) for the United States
• US is one for 40 countries pursuing renewable fuels
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0
5
10
15
20
25
30
35
40B
illi
on G
allo
ns
Corn-based Ethanol Cellulosic BiofuelsBiodiesel Additional Advanced Biofuels
Renewable Fuel Standard by Fuel Type, December 2007 Energy Bill
Energy bill calls for 15 billion gallons of corn-based ethanol by 2015.
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Maximum Corn Value Through Ethanol, by Gas Price2.8 g/bu, non-corn operating $1.75/bu, capital $.75/bu,
DDGS 90% of corn price
$-
$2
$4
$6
$8
$10
1.00 1.50 2.00 2.50 3.00 3.50 4.00
Gas Price $/galTotal cost w/credit Variable cost w/credit
Total cost w/o credit Variable cost w/o credit
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DDGS Production and Forecast, Million Tons
0
5
10
15
20
25
30
35
40
45
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
FAPRI ForecastAssumes:2.8 gal/bu & 17 #DDGS/bu= approximately 3 milT / bgal
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IowaBeefCenter.orgChicago DDGS to Corn and SBM Ratio
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%Ja
n-00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Avg 119% Avg 112% Avg 94%
Corn
SBM
Avg 52% Avg 45% Avg 49%
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IowaBeefCenter.org
Biofuels Summary• Ethanol and now feed price tied to oil price
• New demand for corn and eventually forage– Higher more volatile prices for feedstuffs
• RFS will put supply larger than current E10 + E85 demand– EPA has comment period open for E15
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Recession and Consumer Demand
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It is better to be a mile from Hell headed out than a 100
miles out headed in.
Earl Butz
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Recession Worse Since 1982
• GDP -6.2% in 4thQ, -6.1% in 1stQ
• Unemployment largest in history in number of people and nearing 10%
• Personal spending down first time since 1991 and biggest drop since 1980
• Personal savings that were near 0% increasing
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US Unemployment Rate
0
2
4
6
8
10
12
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
August 2009, 9.7%
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Personal Savings as a Percent of Personal Income
0
2
4
6
8
10
12
14
198
0-I
198
2-I
198
4-I
198
6-I
198
8-I
199
0-I
199
2-I
199
4-I
199
6-I
199
8-I
200
0-I
200
2-I
200
4-I
200
6-I
200
8-I
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Personal Consumption by Quarter 1980-2009 QII
0
2000
4000
6000
8000
10000
12000
198
0-I
198
2-I
198
4-I
198
6-I
198
8-I
199
0-I
199
2-I
199
4-I
199
6-I
199
8-I
200
0-I
200
2-I
200
4-I
200
6-I
200
8-I
$ B
illio
n
4th Q 2008 and 1st half of 2009 personal expenditures has declined
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IowaBeefCenter.org
Personal Consumption on, Selected Items 1980-2009 QII
0
200
400
600
800
1000
1200
1400
1600
1800
2000
198
0-I
198
2-I
198
4-I
198
6-I
198
8-I
199
0-I
199
2-I
199
4-I
199
6-I
199
8-I
200
0-I
200
2-I
200
4-I
200
6-I
200
8-I
$B
illio
n
Food
Health care
Energy
Housing and Utilities
These 4 account for 47.5% of 2008 consumption
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So What, People Still Eat• Beef is highest priced protein in the case• Food expenditures are down
– Less restaurant traffic and $ volume– Value shopping at grocery store– Middle meats down more than ground beef– Oct-Sep compared to year before
• Prime-Choice spread narrowed 40% • Branded-Choice spread widen 4%• Choice-Select spread has narrowed 14%
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IowaBeefCenter.orgFederal Funds Rate, Monthly
0
2
4
6
8
10
12
14
16
18
20
01/1
970,
01/1
973,
01/1
976,
01/1
979,
01/1
982,
01/1
985,
01/1
988,
01/1
991,
01/1
994,
01/1
997,
01/2
000,
01/2
003,
01/2
006,
01/2
009,
19% in 1981 Fighting inflation
0.17% since Jan 09 Fighting deflation
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IowaBeefCenter.org
Recession Summary• Personal spending down for the first time
since 1991. – Less spending even on food– Could lead to long term frugal behavior
• Growing the money supply and cutting interest rates– Inflation expected in the future– Higher interest rates to fight inflation
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IowaBeefCenter.org
Economics and Genetic Selection
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IowaBeefCenter.org
Brief Literature Review• Hazel (1943) “Good approximations to relative
economic values often can be obtained from long-time price averages and cost-of-production figures.”
• Melton (1980) and Melton and Colette (1993) – Maximize the present value of the stream of residual
earnings and prices and interest are important
• Lazenby et al. (1998) found that changing output and input price ratios does change the optimal trait emphasis
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IowaBeefCenter.org
Annual Average Steer Prices
$-
$20
$40
$60
$80
$100
$120
$140
$160
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
4-500# 7-800# Fed Cattle
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IowaBeefCenter.org
Cattle / Feed Price Ratio
0
10
20
30
40
50
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
0.0
0.4
0.8
1.2
1.6
2.0
Steer/corn Calf/Hay
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Retail Price Ratios
0.00
0.25
0.50
0.75
1.00
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Pork/Beef Chicken/Beef
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IowaBeefCenter.org
Long Term Price Ratios
• Relatively stable and thus more predictable than individual prices
• Short term ratios will be out of balance– Let management address short term prices– Could lead to “right” cattle at the wrong time
• Economic reason for relationship and why it tends to the mean
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Implications of Long Term Ratios• Focus on genetic goals
– Efficiency– Product quality– Management traits
• Progeny prediction more accurate than economic prediction.
• Long term ratios provide an economic compass rather than a road map
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Disclaimer
• More research is needed– Different time horizon may yield different trend– Costs other than feed impact annual profitability– Present value impacted by interest rates
• Lazenby et al. (1998) found that changing output and input price ratios does change the optimal trait emphasis – Ratio is important, but how much does it
change
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IowaBeefCenter.org
Other Reasons for Concern
• Biofuel policy increasing competition for feedstocks and land used by cattle– Higher cost of gain bid into feeder cattle– Stable genetic targets, but a smaller herd
• Monetary policy impacting value of dollar– Current higher rate limiting trade– Inflation likely in future– Higher interest rates to cure inflation
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Thank you!
Any Questions?www.iowabeefcenter.org
www.econ.iastate.edu/faculty/lawrence/