Editor's note: Ths following article was written by Ching Lee, assistant editor of Ag Alert. Ag Alert is the news source for the California Farm Bureau Federation and can be found here.
Now that much of the nation's corn has been harvested and the impact of this year's drought is clear, analysts say demand rather than supply will drive the feed market, and prices could potentially move lower to gauge where buying interests may be.
Any kind of price relief would be welcomed by California livestock farmers, who saw feed prices soar to record levels this summer as scorching heat and parched conditions withered crops in the Corn Belt.
The state's dairy farmers, particularly, have been hit hard. Many of them were already struggling with financial problems brought on earlier by the recession and the milk price collapse in 2009. Skyrocketing feed costs have added to their plight, with a growing number of producers reportedly closing their doors and filing bankruptcy.
To call attention to their troubles, California dairy farmers staged a rally last week at the state Capitol to ask the California Department of Food and Agriculture to raise milk prices. It was the second such demonstration in the last two months.
Milk producers are not the only ones being squeezed by surging feed prices. Zacky Farms, the second-largest turkey producer in the state, filed for Chapter 11 bankruptcy protection this month, citing rising feed costs for the Fresno company's "extremely difficult liquidity crisis."
Despite U.S. farmers having planted 97 million acres of corn this year—the most since 1937—the drought ravaged yields to their lowest average since 1995. U.S. corn production is now forecast at 10.7 billion bushels, the lowest in six years, according to this month's projections from the U.S. Department of Agriculture.
Joel Karlin, market analyst for Western Milling, a feed company in Tulare County, said high corn prices have definitely hurt livestock producers, and that is now tempering demand for the commodity. He noted that since prices peaked in mid-August, they have come down in the last two months—in part because the market has gotten a good handle on the size of the U.S. crop.
"The high prices have definitely rationed demand," he said. "Whether it's beef cattle, dairy cattle, hogs or poultry, they're all liquidating their herds, feeding less corn. Ethanol margins are very poor, so you've had a lot of plant shutdowns. There's cheaper corn overseas, so exports have been abysmal over the past few months."
Poor economic health around the world is another factor that could drive down demand, Karlin said, noting Europe's ongoing recession, China's slowest economic growth in 15 years and the limping U.S. economy.
But he also warned that while demand for corn may continue to be relatively lackluster, prices can only drop so low, because stocks remain very tight. Based on historic trends, Karlin said when corn begins selling at around $7 a bushel, "buyers usually come out of the woods and start purchasing." He said prices may continue to stay between $7 and $8 a bushel until early spring, when the market has a better sense of the size of the South American corn crop and how much corn U.S. farmers intend to plant next year.
Bill Mattos, president of the California Poultry Federation, said while Zacky Farms' bankruptcy is an unfortunate outcome of escalating feed costs, he does not "foresee any other (poultry) companies having an issue right away."
About 80 percent of the state's poultry ranches are owned by companies such as Zacky Farms and Foster Farms. The other 20 percent are contract growers who raise birds for the poultry companies, which provide the feed. Contract growers are paid on their production efficiency but are generally not affected by feed costs, he said.
"The ones who are affected right away are the major companies that have to stay in business and make a product," Mattos said, adding that as far as he knows, those companies have not cut back on contracts.
Since about 70 percent of the cost of raising a chicken or a turkey is feed—most of which consists of corn—Mattos said the Midwestern drought and the resulting price spikes for corn "put everything into havoc." To help pay for some of the increased feed costs, poultry companies have had to ask supermarkets and retailers that sell California-grown products to allow them to raise prices, he said, noting that in the past year, most chicken and turkey prices have gone up about 15 percent.
But not all livestock sectors are able to raise prices and pass along the increased production costs, said Doug Dickson, commodities director for Harris Ranch who oversees grain purchases for the company's feedlot. He pointed out that while companies such as Foster Farms may be able to raise prices on its finished products, it's much harder to do for feeding operations such as Harris Ranch, because beef prices are established by market trade.
"You can raise prices," he said, "but you won't sell enough to get your revenue high enough to cover your expenses, because you may end up selling less (product). That's the dilemma that the ag producer has."
He said one problem he has encountered as a grain buyer this year is the increased competition in the market. He noted that several of the states where he normally sources his corn were also hardest hit by the drought, and that drove prices of available corn even higher.
There were hopes that the newer, drought-tolerant corn varieties that farmers planted would offer some protection against this year's dry, sweltering conditions. But Dickson said these new varieties are not miracle workers and cannot turn a crop in areas that were completely deprived of rain and subjected to intense heat.
"Even with the best genetically advanced seed, it's very difficult to overcome stressful environmental conditions as bad as they were this past summer," Karlin said, adding that had farmers not used drought-resistant corn, "it could have been worse."