Even with higher corn prices…You can do something to improve your odds

Patrick Johnston stays busy managing a 2,400-cow milking operation that"s spread across two sites in central California. But one sunny afternoon this past Feb. 6, he couldn"t have spent his time any better than going to town.

Driving toward the city of Turlock in his gray GMC pickup, Johnston was looking for help — help in dealing with soaring corn prices. The best strategy, he determined, would be to attend a class on hedging the price of corn on a commodity-futures exchange.

An avowed "super-type-A personality," Johnston was not content to sit back and let the marketplace dictate his future. He wanted to be more proactive than that.

The higher feed cost "forced me to do something I wanted to do anyway," he says. "Dairymen should have been doing this 20 years ago, but necessity is the mother of invention," he adds. Corn could continue to go up in price, with supplies getting even tighter.  

Whether you use commodity futures, the higher price of corn will definitely influence your feeding and purchasing habits. It"s a difficult situation with many far-reaching implications. But there may be a few rays of hope — and perhaps even a few ways to improve your management and stack some of the odds in your favor.  

National priority

For more than 25 years, people have known about corn"s potential in ethanol production, but no one took it seriously — until recently. In 2000, 1.6 billion gallons of ethanol were produced in the U.S., but by last year that had tripled to 4.9 billion gallons, according to the Renewable Fuels Association. It is likely that 1 billion or more gallons of ethanol will be added to the total each year over the next several years.

President Bush has called on Americans to cut their gasoline consumption by 20 percent over the next 10 years, and alternative fuels such as ethanol are a vital part of that strategy.  

Until new technology comes along, ethanol production will continue to take a big chunk out of the nation"s corn crop:

No one knows how much of this year"s crop will go to ethanol production. As of press time, the March 30 "Prospective Plantings" report from USDA had not been released. Yet, many observers think that the number of corn acres planted in the U.S. could increase by 9 percent to 12 percent this year, which will bolster the corn supply and help soften price increases. 

Domino effect

More acres planted to corn will have a domino effect on other crops.

For instance, the number of cotton acres could be down 14 percent this year, according to Tom Wedegaertner, director of cottonseed research and marketing at Cotton Inc. And, he adds, some of the cotton acres being switched to corn are among the highest-yielding. That means cottonseed supplies could be down by more than 14 percent if higher-yielding acres are involved.  

The impact on cottonseed available for feeding is "going to be huge," he adds.

Anticipating higher prices later this year, Wedegaertner suggests that producers contact their cottonseed brokers or dealers now to book up to one-third of their needs for next year. Then, as they see what"s happening with plantings and the weather, they can perhaps add to their forward-position during the year, he adds.

"It"s going to be a crazy year," Wedegaertner says.

That sentiment is echoed by Todd Stroup, dairy-management consultant at Pine Creek Nutrition Service in Denair, Calif. This past winter, Stroup noticed that many producers were going through their supply of corn silage faster than normal so they wouldn"t have to buy as much outside feed. "But that only lasts so long," he says.

Even by-product feeds have gone up in price — pretty much in concert with the corn price. Bakery waste in central California cost $100 per ton a little more than a year ago; now, it"s $170 per ton, Stroup says.

Long-range implications

Jim Nocek, partner in Spruce Haven Farm and Research Center in Auburn, N.Y. (with approximately 1,900 cows in the milking herd), spends a lot of time thinking about the alternatives he has to keep his operation profitable. The key, he says, is to have some sort of plan. But it"s difficult to plan when things are changing so fast. 

"Maybe in five years, we will be looking at it a totally different way in different parts of the country, " he says.  

For instance:

  • Grazing could become more common.
  • Some acres currently in government set-aside programs could perhaps go back into production. Even though the ground may be too marginal for corn production, it could support fiber crops instead. 

Larry Holy, biotechnology/renewable fuels account manager for Cargill, says much of the attention has been diverted to carbohydrates because of the explosive growth of starch in the ethanol industry. However, fiber deserves more attention than it"s been getting, he adds.

"As tillable acreage shifts create new opportunities and hurdles on a regional basis, securing fiber/forage supplies can be just as critical," Holy says.

Perhaps there is a teachable moment in this. "The paradigm shift to nutrient-based feeding (versus an ingredient mind-set) is crossing over the doorstep just in time to provide valuable feeding instruction during these intervals of escalating commodity prices," Holy says. "Ultimately, it"s all about finding the best-cost source of nutrients for the animal — not the cost of corn and other ingredients."

Teachable moment indeed

For Patrick Johnston, the dairy manager in central California, higher corn prices prompted him to do something that he wanted to do all along — learn  how to hedge a portion of his corn supply on the futures market.

By mid-February, he had bought his corn needs through March at $175 per ton, or $15 per ton less than the prevailing cash price at the time. Anticipating higher prices later this    year, he was looking at buying futures contracts and put options to lock in corn at $199.86 per ton through September. "Corn could go to $250 (on the cash market) and the most I will pay is $199.86 if I buy the puts." 

Right now, before taking a position, he has three possible choices:

  • Buy corn on the cash market at a very uncertain price.
  • Buy a futures contract alone.
  • Buy a futures contract and put options. Or, contract with a feed mill to buy corn at certain price and then buy put options as a hedge against that position should the cash market drop. In other words, if he buys put options at a certain price level, and the corn price drops
    below that level, he will get paid the difference.

Buying put options will allow Johnstonto cut his uncertainty.

It"s like having two roulette wheels. One of the wheels, representing the cash market, has many choices and much uncertainty. The other wheel, representing forward-pricing, has fewer choices and less uncertainty.    

Given the higher price of corn, how manageable is your "roulette wheel"?

Feeding strategies

Here are some feeding options to consider, given the higher price of corn.  

  • Know the current starch levels in your rations to determine if there is room to reduce corn grain, says Mike Hutjens, extension dairy specialist at the University of Illinois. Check with your nutritionist. A good target is for total starch to comprise 24 percent to 26 percent of ration dry matter, he adds.
  • Review the processing of your corn grain. For example, when using dry-corn grain in a ration that"s 50 percent forage (1:1 blend of alfalfa and corn silage) on a dry-matter basis, you will hopefully find less than 10 percent of the corn particles are retained on a No. 8 screen (2,360 microns); 25 to 35 percent retained on a No. 16 screen (1,180  microns), and 50 to 60 percent retained on a No. 30 screen (600 microns), leaving just 5 to 15 percent in the pan underneath. If particles are too large (above 2,360 microns), they may go undigested and, therefore, wasted in the manure.

    If using the Penn State Forage Particle Separator, which uses a different set of screens, you don"t want to see more than 35 percent to 45 percent of dried-corn particles retained on a 1.18-millimeter screen, says Rick Grant, president of the Miner Institute in Chazy, N.Y.  "If you have more than that, it"s probably too coarse." 

  • Consider other starch sources (barley, corn gluten feed or hominy) and sugar sources (whey, molasses or bakery waste).
  • When using alternative feeds, try to work with suppliers whose nutrient content is fairly consistent, says Mike Jerred, dairy-marketing manager for Cargill Animal Nutrition. For instance, Cargill has found that canola meal can range from 34 percent to 40.5 percent crude protein and 1.9 percent to 6.9 percent fat when the nutrient is sourced from five different suppliers. 
  • Higher-quality forages provide more rumen-fermentable carbohydrates, allowing them to carry more of the energy load. If you have corn silage with a neutral-detergent-fiber digestibility above 60, you have very good forage quality, Hutjens says.




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