Specialist in Agricultural Policy
The U.S. livestock and poultry sector is presently confronting near-record high feed costs driven by the convergence of both current tight supply prospects and long-run market forces. The U.S. livestock sector, where feed costs account for 50% to 80% of cash operating expenses, has seen its profit margins steadily squeezed and its share of U.S. agricultural cash receipts decline. Since June 2010 feed cost increases have outpaced livestock price increases, squeezing the profitability of livestock and poultry producers. When profit margins turn unfavorable, producers are more likely to retain fewer breeding animals or to liquidate herds. Near-term liquidation means smaller future herds or flocks and ultimately higher retail prices for beef, pork, poultry meat, eggs, and dairy products. Persistent upward feed price movements could result in substantial and longlasting consequences for livestock product prices throughout the marketing chain.
USDA forecasts that U.S. corn stocks will approach historic low levels relative to demand by the end of summer 2011. In addition, the current crop outlook remains uncertain due to late planting in the Northern Plains and Eastern Corn Belt and a severe drought that has dried up pasture lands from the Southern Plains into the Southeast, exposing cattle producers to expensive commercial feed markets.
From a longer-term perspective, U.S. feed grain demand has exceeded production in all but one year since 2004. This persistent trend is primarily the result of five factors: rapid growth of U.S. corn-based ethanol production (whose share of the U.S. corn crop in 2011 is forecast to exceed feed use for the first time), limited supply of available U.S. cropland to expand production, prolonged weakness of the U.S. dollar which has made U.S. agricultural exports competitive in foreign markets despite high prices, strong income growth in China and other international markets which has increased demand for livestock products and the feedstuffs (feed grains and protein meals) needed to produce them, and a substantial decline in the price responsiveness of both supply and demand in agricultural commodity markets. The convergence of these factors has resulted in falling grain and oilseed stocks, record or near-record prices for most feedstuffs— grains, oilseeds, hay, and pasture—in 2011, and increasingly volatile commodity prices. These factors are expected to persist for several more years, thus maintaining strong demand for feed grains and strong upward pressure on prices for all commodities that compete for farm land.
Issues surrounding feed use and availability are likely to be of growing interest to Congress as the House and Senate Agriculture Committees monitor the financial health and well-being of the U.S. livestock and poultry sectors, as well as any future ramifications for retail food price inflation. In addition, Congress, along with energy and agricultural market participants, will closely follow any further acceleration of unanticipated side effects on the U.S. livestock sector from continued corn use for ethanol production. Finally, feed availability and associated market price volatility are likely to play a significant role in the next farm bill debate, as the current omnibus farm bill expires in 2012.
Feed market dynamics and what they mean for the U.S. livestock sector depend on many factors. This report provides a review of the current feed market dynamic including the major emerging issues mentioned above and their implications for the U.S. livestock sector and Congress. In addition, background information on the market structure of the U.S. feed grain sector is contained in an appendix.
Date of Report: August 11, 2011
Number of Pages: 32
Order Number: R41956
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