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IowaBeefCenter.org

Beef Production in the New Era of Higher Prices and Higher Costs:

Do the Old Rules Apply?

John D. Lawrence

Extension Livestock Economist and Professor

Director, Iowa Beef Center

Iowa State University

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Overview

• Factors impacting current beef profitability– U.S. biofuels policy– U.S. and global recession

• Role of economics in genetic selection

• Do the old rules apply in a new era?

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Things to Remember About Economists

• We have a firm grasp of the obvious

• We are better at predicting history than the future

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Biofuels Policy

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US Biofuels Policy

• Energy Independence and Security Act – Passed congress in August 2007– Signed by President Bush December 2007– Established the Renewable Fuel Standard

(RFS) for the United States

• US is one for 40 countries pursuing renewable fuels

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0

5

10

15

20

25

30

35

40B

illi

on G

allo

ns

Corn-based Ethanol Cellulosic BiofuelsBiodiesel Additional Advanced Biofuels

Renewable Fuel Standard by Fuel Type, December 2007 Energy Bill

Energy bill calls for 15 billion gallons of corn-based ethanol by 2015.

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Maximum Corn Value Through Ethanol, by Gas Price2.8 g/bu, non-corn operating $1.75/bu, capital $.75/bu,

DDGS 90% of corn price

$-

$2

$4

$6

$8

$10

1.00 1.50 2.00 2.50 3.00 3.50 4.00

Gas Price $/galTotal cost w/credit Variable cost w/credit

Total cost w/o credit Variable cost w/o credit

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DDGS Production and Forecast, Million Tons

0

5

10

15

20

25

30

35

40

45

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

FAPRI ForecastAssumes:2.8 gal/bu & 17 #DDGS/bu= approximately 3 milT / bgal

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IowaBeefCenter.orgChicago DDGS to Corn and SBM Ratio

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%Ja

n-00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Avg 119% Avg 112% Avg 94%

Corn

SBM

Avg 52% Avg 45% Avg 49%

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Biofuels Summary• Ethanol and now feed price tied to oil price

• New demand for corn and eventually forage– Higher more volatile prices for feedstuffs

• RFS will put supply larger than current E10 + E85 demand– EPA has comment period open for E15

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Recession and Consumer Demand

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It is better to be a mile from Hell headed out than a 100

miles out headed in.

Earl Butz

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Recession Worse Since 1982

• GDP -6.2% in 4thQ, -6.1% in 1stQ

• Unemployment largest in history in number of people and nearing 10%

• Personal spending down first time since 1991 and biggest drop since 1980

• Personal savings that were near 0% increasing

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US Unemployment Rate

0

2

4

6

8

10

12

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

August 2009, 9.7%

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Personal Savings as a Percent of Personal Income

0

2

4

6

8

10

12

14

198

0-I

198

2-I

198

4-I

198

6-I

198

8-I

199

0-I

199

2-I

199

4-I

199

6-I

199

8-I

200

0-I

200

2-I

200

4-I

200

6-I

200

8-I

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IowaBeefCenter.org

Personal Consumption by Quarter 1980-2009 QII

0

2000

4000

6000

8000

10000

12000

198

0-I

198

2-I

198

4-I

198

6-I

198

8-I

199

0-I

199

2-I

199

4-I

199

6-I

199

8-I

200

0-I

200

2-I

200

4-I

200

6-I

200

8-I

$ B

illio

n

4th Q 2008 and 1st half of 2009 personal expenditures has declined

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IowaBeefCenter.org

Personal Consumption on, Selected Items 1980-2009 QII

0

200

400

600

800

1000

1200

1400

1600

1800

2000

198

0-I

198

2-I

198

4-I

198

6-I

198

8-I

199

0-I

199

2-I

199

4-I

199

6-I

199

8-I

200

0-I

200

2-I

200

4-I

200

6-I

200

8-I

$B

illio

n

Food

Health care

Energy

Housing and Utilities

These 4 account for 47.5% of 2008 consumption

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IowaBeefCenter.org

So What, People Still Eat• Beef is highest priced protein in the case• Food expenditures are down

– Less restaurant traffic and $ volume– Value shopping at grocery store– Middle meats down more than ground beef– Oct-Sep compared to year before

• Prime-Choice spread narrowed 40% • Branded-Choice spread widen 4%• Choice-Select spread has narrowed 14%

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IowaBeefCenter.orgFederal Funds Rate, Monthly

0

2

4

6

8

10

12

14

16

18

20

01/1

970,

01/1

973,

01/1

976,

01/1

979,

01/1

982,

01/1

985,

01/1

988,

01/1

991,

01/1

994,

01/1

997,

01/2

000,

01/2

003,

01/2

006,

01/2

009,

19% in 1981 Fighting inflation

0.17% since Jan 09 Fighting deflation

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IowaBeefCenter.org

Recession Summary• Personal spending down for the first time

since 1991. – Less spending even on food– Could lead to long term frugal behavior

• Growing the money supply and cutting interest rates– Inflation expected in the future– Higher interest rates to fight inflation

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Economics and Genetic Selection

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Brief Literature Review• Hazel (1943) “Good approximations to relative

economic values often can be obtained from long-time price averages and cost-of-production figures.”

• Melton (1980) and Melton and Colette (1993) – Maximize the present value of the stream of residual

earnings and prices and interest are important

• Lazenby et al. (1998) found that changing output and input price ratios does change the optimal trait emphasis

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Annual Average Steer Prices

$-

$20

$40

$60

$80

$100

$120

$140

$160

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

4-500# 7-800# Fed Cattle

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Cattle / Feed Price Ratio

0

10

20

30

40

50

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

0.0

0.4

0.8

1.2

1.6

2.0

Steer/corn Calf/Hay

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Retail Price Ratios

0.00

0.25

0.50

0.75

1.00

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Pork/Beef Chicken/Beef

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Long Term Price Ratios

• Relatively stable and thus more predictable than individual prices

• Short term ratios will be out of balance– Let management address short term prices– Could lead to “right” cattle at the wrong time

• Economic reason for relationship and why it tends to the mean

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Implications of Long Term Ratios• Focus on genetic goals

– Efficiency– Product quality– Management traits

• Progeny prediction more accurate than economic prediction.

• Long term ratios provide an economic compass rather than a road map

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Disclaimer

• More research is needed– Different time horizon may yield different trend– Costs other than feed impact annual profitability– Present value impacted by interest rates

• Lazenby et al. (1998) found that changing output and input price ratios does change the optimal trait emphasis – Ratio is important, but how much does it

change

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Other Reasons for Concern

• Biofuel policy increasing competition for feedstocks and land used by cattle– Higher cost of gain bid into feeder cattle– Stable genetic targets, but a smaller herd

• Monetary policy impacting value of dollar– Current higher rate limiting trade– Inflation likely in future– Higher interest rates to cure inflation

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Thank you!

Any Questions?www.iowabeefcenter.org

www.econ.iastate.edu/faculty/lawrence/