Impact on feed prices and income over feed costs
Toward the end of the last decade of the 20th century and the first decade of the 21st century, corn prices per bushel were $1.85 and $6.20 during 2000 and 2011, respectively. Although numerous formulas are used to price corn silage from corn grain prices, they all yield similar results.
One method is to price each ton of stored corn silage (30 percent dry matter) as corn price per bushel times 10 (Hendrix. 2002). Using this calculation, we can estimate corn silage price per ton was $18.50 ($61.6 on dry basis) and $6.2 ($206.7 on dry basis) in 2000, and 2011, respectively. Prices per pound were thus $0.0009 and $0.003 for corn grain, versus $ 0.03 and $0.10 for corn silage for 2000 and 2011, respectively. For average inclusion rates of 38.4 and 51.5 percent, and 50 pounds of estimated total feed intake, the amounts fed for dried corn grain and silage were 19.2 and 25.8 pounds, respectively. The cost of corn grain inclusion per cow daily was $0.017 and $0.058 for 2000 and 2011, respectively. Similarly, the cost of corn silage inclusion per cow daily was $0.77 and $2.58 for 2000 and 2011, respectively. All these prices are estimated under normal years and average yields. If weather events such as the 2012 drought threaten crop yields, corn prices increase accordingly.
The basic law of supply and demand is the most important aspect of modern economics theory. In very simple terms, it states that the relationship of two factors determines the price of a commodity. As demand for an item increases, its price rises ― it works for corn grain, corn distillers grains, ethanol, etc.
Figure 1 shows that from 2008 to 2009 ethanol production jumped from 6.94 to 10.94, whereas corn price actually dropped from 4.06 to 3.55, the reason being an exceptional corn crop with 11 more bushels per acre for the U.S. as a whole (from 153.9 to 164.7). The following two seasons ― 2010 and 2011 ― had more “average” corn crops with 152.80 and 147.20 and, as a result, corn prices jumped again to $5.18 (2010) and $6.20 (2011) per bushel.
What this shows again is that the corn-ethanol interface is in a very delicate equilibrium that once broken by increased supply (i.e. more bushels per acre) or demand (i.e. lower crop yields due to weather) immediately results in a modification of the price per bushel.
The corn/ethanol interface is extremely vulnerable as it not only depends on internal but also external factors. Market globalization has resulted in higher price volatility of dairy inputs and outputs. Dairy production needs to be economically competitive if there is going to be sustained growth and secured dairy product-based foods in the future. With today’s milk and feed prices, forward contracting either one is not economically viable.