Editor's Note: The following article was written by Ching Lee, Assistant Editor of Ag Alert. Ag Alert is the California Farm Bureau Federations' weekly newspaper.
Prospects for a bumper U.S. corn crop this fall have brightened the outlook for farmers who raise livestock and depend on the commodity for feed.
The latest U.S. Department of Agriculture forecast, released last week, projected corn production at 13.8 billion bushels, up 28 percent from the drought-stricken 2012 crop. If realized, this would be a new record output for U.S. farmers.
At the same time, USDA predicted that 12.7 billion bushels of this year's crop will be used—including for feed, food, fuel, seed and export—up from 11.2 billion bushels last year. Feed usage alone is projected to be about 15 percent higher than last year. This puts projected ending stocks at more than 1.8 billion bushels, compared to 719 million bushels in 2012.
Joel Karlin, commodity manager and market analyst for Western Milling in Goshen, said while USDA downgraded yield estimates slightly from its July forecast, sending corn prices higher recently, he thinks the current projections are too low.
"Not only do I think the upcoming crop is larger, but I also think USDA's estimates for export demand and also for domestic feed demand are somewhat optimistic, perhaps unrealistically so," he said.
He noted that despite a wet spring that delayed planting this year, summer growing conditions in the Corn Belt have been favorable, promising a bountiful harvest. Other major grain-producing regions of the world also enjoyed a good growing season, which means more export competition for the United States, he added.
And with the nation's low cattle numbers and continuing dairy herd liquidations, Karlin said, "we don't have the animal numbers out there to eat that corn." In addition, livestock producers are using more substitute feed products such as distillers grains, and that could further lower demand for corn, he said.
Tulare County dairy farmer Tom Barcellos said he is not too concerned about the short-term spike in corn prices, as markets reacted to the lower-than-expected corn yield forecast.
"It's still going to be one of the largest crops on record, which is beneficial to the dairy industry looking forward," he said.
Corn prices are expected to decline from the 2012 marketing-average price of $6.95 per bushel to a projected $4.90 per bushel this year, said Todd Davis, an economist with the American Farm Bureau Federation.
With the market softening, Barcellos said he recently forward-contracted about 30 percent of his future corn needs "at a very favorable price" and may now lock in an additional 15 percent. Barcellos said while he anticipates corn prices will drop even further, he warned that "we're not done yet; (the crop) still has to finish."
There's the risk that the late-planted crop, which will also be harvested later, might be met with rain and early frost, which could affect yields. But for now, he said his farmer friends in the Midwest "are pretty optimistic about their crop."
For California dairy farmers, who have been hit hard by rising feed costs, cheaper corn will help those who are still in business get back on more stable financial footing, Barcellos said, but he lamented that it won't help those who are already on the verge of closing their doors.
With feed prices moderating, producers will be able to "maintain a good, strong herd with solid production instead of trying to cut corners to keep going," he said. While this could boost milk production, potentially leading to lower milk prices, Barcellos said any increase in the state's milk supply will also be tempered by more dairies exiting the business.
Dairies are not the only agricultural business hurt by high corn prices.
Bill Brandenberg, manager of Meloland Cattle Co., a feedlot operation in the Imperial Valley, said the entire U.S. livestock feeding sector has been losing money for the last 16 months, as corn prices reached record highs last summer. He said his operation will continue to stay in the red for most of 2013 and possibly break even by year's end, noting that producers won't see the full effect of lower corn prices until October, when the crop will be harvested.
Unlike other, more traditional feedlot operations that buy yearling cattle that have been raised on grass and come in at heavier weights, Meloland buys mostly 4-month-old Holstein calves that are then fed for about a year. Brandenberg said he had not anticipated last year's record-high corn prices because U.S. farmers had planted near-record acreage, but then the drought took its toll on the crop. He had bought enough corn through the end of fall and was on the market after that.
"So these cattle have got a lot higher cost than what we originally projected, and so we're losing money right now," he said.
But with corn prices dropping, Brandenberg said there's more of an incentive for him to buy more cattle and "stock back up again" if he knows he can contract them at a profit.
One concern he expressed is how the market will play out for dry distillers grains, a byproduct of ethanol production and which makes up about 15 percent of his feed ration. He said if prices drop considerably lower, China and other foreign buyers will be back on the market competing for the product, and that will drive up prices.
For San Joaquin County egg farmer Richard Jenkins, positive news about the corn crop will influence him to "buy a little more in advance," but mostly he will continue to buy his corn on a monthly basis, he said.
"We don't play the market that much because it's so volatile," he said.
Even though corn is about 80 percent of his feed ration, Jenkins said he hasn't been hurt too badly by high corn prices because the price of eggs tends to adjust along with the cost of feed. He said if feed costs soar, then producers trim their flocks, which reduces the supply of eggs, driving up egg prices.