What Do Livestock Feeders Wantfrom Seed Corn Companies?

Dermot J. Hayes and Noah Wendt

Briefing Paper 00-BP 29April 2000

Center for Agricultural and Rural Development

What Do Livestock Feeders Want

from Seed Corn Companies?

Dermot J. Hayes and Noah Wendt

Briefing Paper 00-BP 29April 2000

Dermot J. Hayes is Pioneer Hi-Bred International chair in agribusiness, Department of Finance,College of Business; professor of economics, Department of Economics, College of Agriculture;and assistant director of the Meat Export Research Center, Iowa State University.

Noah Wendt is an honors student in agricultural business, Department of Finance, College ofBusiness, Iowa State University.

The Center for Agricultural and Rural Development is a public policy research center founded in1958 at Iowa State University. CARD operates as a research and teaching unit within the Depart-ment of Economics, Iowa State University, conducting and disseminating research in fourprimary areas: trade and agricultural policy, resource and environmental policy, food and nutri-tion policy, and agricultural risk management policy.

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This report combines existingresearch and further economicanalysis to suggest that, with one

notable exception, animal feed customersare unlikely to be willing to pay a premiumfor many of the genetic modifications thatare under development in seed corn. Thisconclusion is based on an assessment ofapparent economic barriers to adoption ofnew genetic modifications; barriers that areunique to the animal feed industry. Theconclusion contradicts previous work bythe co-author of this paper, Dermot Hayes,and others at Iowa State University.*

First, and most important, the wide-spread use of least-cost rations in theanimal feed industry ensures that anygenetic modification will be valued at thecommodity cost of the modification. Thismakes the interests of the animal feedcustomer different from those of otherconsumers who typically demand, and areprepared to pay a premium for, a custo-mized bundle of attributes.

Second, animal feeding is an old- and well-researched industry. As nutritionaldeficiencies have been discovered intraditional grain rations, industries havearisen to produce the missing attributes.

These industries have very inelastic supplycurves, and any attempt to supplant thesynthetic additive will result in a price dropfor that additive.

Third, U.S. grain processing and trans-portation systems have achieved largeeconomies of scale in the handling andprocessing of undifferentiated crops.Therefore, initial attempts to market dif-ferentiated products will incur significantadditional costs.

This report suggests that the mosteconomically profitable scientific researchin the seed corn business is that whichincreases yields (or reduces productioncosts) for bulk commodity corn. A secondprofitable avenue is one that would doublethe protein content of corn whilemaintaining yields at 80 percent or more ofcurrent levels. A third advance is one thatwould anticipate a federal or state mandateto reduce the phosphorus and nitrogencontent of animal waste. And, a fourthpossible avenue of research is to monitordevelopments in new additives (flavorenhanced milk substitutes, enzymes), and tomodify the corn plant to produce theseadditives before capital-intensive productionfacilities are built.

Executive Summary

*“Meeting the Challenges of Ongoing Change,” by Dermot Hayes and Don Hofstrand. In Agriculture inthe 21st Century, Surviving and Thriving. College of Agriculture, Iowa State University. March 1999.

The vast bulk of the corn produced inthe United States is fed to livestock,and the farmers who own and feed

livestock compose the largest segment ofseed company customers. This reportdescribes the genetic improvements in cornfor which these customers might be willingto pay.

The use of least-cost rations is wide-spread in the livestock industry. Lease-costmeans that livestock farmers value grainsfor the sum of their components and willswitch formulations in response to minorchanges in the cost of these components.

Least-cost ration formulations allowhog, beef, and poultry producers to makeuse of the same two commodities, cornand soybeans, and enable them to achieveenormous economies of scale in theproduction and transportation of undiffer-entiated commodity products. What dolivestock feeders want from seed corncompanies? They want grain that meetsthe minimum quality standards at thelowest price. Seed companies haveresponded to customer preference byfocusing on increasing yields and reducingproduction costs.

To date, no seed company hasundertaken a commercially successfuleffort to produce a customized grain for aparticular type of livestock because

farmers are not prepared to pay a pre-mium for a grain suited to their uniqueneeds.1 Contrast this situation with thedifferentiation in most consumer pro-ducts on the market today. For example,in breakfast cereal and automobilesconsumers will pay a premium for aunique combination of desired attributes,and these industries have responded withhundreds of different product lines, eachwith a different set of attributes.

Customized Seed:Potential Hurdles

The overarching emphasis on cost in theanimal feed business has created anefficient bulk commodity production andtransportation system. There are severalhurdles to be addressed in introducingcustomized seed into the present marketenvironment.

• The consumer will not pay anymore for seed than the sum of itscomponents.

• Any customized product will needto maintain its identity, and asystem that supports identity

WHAT DO LIVESTOCK FEEDERS WANTFROM SEED CORN COMPANIES?

Introduction

1 This statement would seem to fly in the face ofexisting markets for high-oil corn; however, weargue that high-oil corn will not succeed in thedomestic market so long as animal fat has anypositive value. In other words, animal fat (which isa by-product) will fall in value as high-oil cornproduction grows. This will eventually reduce thecommercial viability of high-oil corn.

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preservation will not be able to takeadvantage of the present commoditytransportation economy of scale.

• Farmers who grow the customizedproduct will be concerned aboutyield differences and about the poorliquidity of the smaller, customizedmarket, and they will have to becompensated for taking theseadditional risks.

• The seed companies will need to becompensated for the risks andresearch needed to bring custom-ized products to market.

• There is the possibility that anysuccessful customized product willupset the market for the additivethat would have been used in thecommodity rations.For example, high-oil corndisplaces animal fat and high-lysinecorn displaces synthetic lysine. Theproducers of the displaced productswill lower prices when faced withnew competition. A price drop maybe just enough to ensure that thecustomized product cannot competewith the commodity product.

Two New StudiesTo date there has not been a study thatconsiders all the potential hurdles.However, two recent Iowa State University(ISU) studies come very close. They wereconducted by researchers from thedepartments of animal science, cropscience, and economics, in collaborationwith industry specialists from OptimumQuality Grains and Pioneer Hi-BredInternational. The key conclusions in thesestudies shed light on the present barriers toincreased use of modified grain in livestockfeeding. Both studies use least-costformulations to value genetic modifications

in corn. One also uses least-costformulations to find the optimum decreasein the market price of the existing syntheticadditive that would force the modifiedgrain out of the ration.

The first study was completed inNovember 1999 (Identifying Valuable CornQuality Traits for Livestock Feed, byLawrence A. Johnson, Connie L. Hardy, C.Phillip Baumel, Tun-Hsiang Yu, and JerryL. Sell). The researchers analyzed thepotential benefit to the animal feed industryof a list of feasible genetic improvements.Their study does not incorporate yield drag,any costs associated with identitypreservation, or any price reductions incompeting additives. The key results arereported in Tables 1 and 2.

Table 1 shows the increased values ona per-bushel basis. Table 2 shows theincreased total value, assuming that thelivestock industry purchases the modifiedvariety and that all of the benefits of thenew variety are passed back to the feedproducer. For purposes of this study, perbushel premium is more important than theultimate size of the market.

The results in Table 1 show that themost important improvement is thedoubling of the grain protein content,which is worth about nine cents per bushelfor each 1 percent increase in protein.2

Other valuable improvements include

2 This modification seems extraordinarilyoptimistic, especially given that the authors do notassume any yield impact from the modification.However, as was mentioned earlier, the authors ofthe study as well as those from industry whoadvised them are very well qualified. It seemsunlikely that this group would have made such anassumption had they not been told that it wastechnically feasible.

What Do Livestock Feeders Want from Seed Corn Companies? / 9

increasing lysine, tryptophan, germ size,and oil content. One improvement that isranked relatively low is increasingphosphorous availability. However, thisanalysis does not take into account anybenefits from reducing the amount ofphosphorous released into the environment.

In the companion study (Impacts of SixGenetic Modifications of Corn on FeedCost and Consumption of Traditional FeedIngredients, by Tun-Hsiang Yu, C. PhillipBaumel, Connie L. Hardy, Lawrence A.Johnson, Marty J. McVey, and Jerry L. Sell,1999), ISU economists identified thesectors of the animal production businessmost likely to pay for each of the mostpromising improvements identified in theJohnson et al. report. They also analyzedwhether any of the improvements wouldjustify the costs associated with yield dragand identity preserved grain. Using actualexperience with high-oil corn in BremerCounty, Iowa, yield drag would add 18cents per bushel, additional seed costswould add 12 cents per bushel, andadditional handling would add 5 cents perbushel.3 The analysis specific to livestockfeeding is shown in Table 3, and the netvalue of the genetic modifications ispresented in Table 4.

As the results in Table 4 indicate, thehog and cattle industries are not likely to bewilling to pay a premium for customized,identity preserved grain.4 But, to thecontrary, the broiler and turkey industriesare likely to pay a premium for corn with ahigh protein content and enlarged germ.

These results also indicate that corn withhigh available phosphorous would cost anadditional 33 cents per bushel if it wereadded to hog rations. The additional cost toproducers of increasing phosphorousavailability (not calculated in the study)would be slightly larger than for hogs.

In a final phase of the study, theauthors estimated the level of costreductions in the poultry feed additives thatwould drive out the genetically modifiedrations (Table 5). Reductions of 1.5 to 4.8cents per pound in the traditionalingredients would drive the modifiedprotein out of all the rations. Soybean mealis currently worth about 8-cents per pound;therefore, a 3-cents per pound pricereduction would be very significant. Thiswould correspond to a drop of $1.44 perbushel at the farm level (assuming that each60-pound bushel of soybeans contains 48pounds of meal). Under current U.S.market conditions, a drop in price of thisamount would not have a major influenceon soybean production because farmreturns are not influenced by market pricesthat go below the loan rate. However, if themodified protein corn were to becommercialized under free marketconditions, then there would be asignificant move away from soybeanproduction and into corn production. Inother words, sales of high-protein corn seedwould go up significantly.

3 The assumption of a $0.05 additional handlingcharge seems low, however the yield drag valueseems a little high and the total value seems to beabout right.

4 Although not explicitly recognized in thereport, it was assumed that monogastricanimals such as hogs would be able to makebetter use of the modifications than cattle.Therefore, the conclusion that themodifications would not be economicallyviable for hog producers can be extended tothe cattle industry.

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One important caveat not consideredby the authors is that a doubling of theprotein content of corn would probably beassociated with a yield drag in excess ofthat for high-oil corn. The results in Table 5show that after an 18 cents per bushelallowance for yield drag, the net benefit inbroiler rations of high protein is 22.3 centsper bushel. Adding 22 cents net benefit tothe 18 cents already subtracted by Baumelet al. provides an advantage before yielddrag of 40 cents per bushel. This suggeststhat as long as yield drag costs less than 40cents per bushel, the high-protein corn willbe economically viable. At current prices, ayield drag of 20 percent would cost about40 cents.

What is not yet clear is whether adoubling of the protein content wouldmaintain yields at 80 percent of commoditycorn yields. The protein modificationwould be worthwhile as long as yield levelscan be maintained. Note, however, that themodification is not feasible in smallincrements. In other words, a 4 percentimprovement in protein would not beeconomically viable.

The Impact of a GovernmentRestriction on Phosphorus in

Animal ManureThis study doesn’t include the impact of alikely mandate by federal or state agenciesto reduce phosphorus (or nitrogen) inlivestock manure. Regulation seems likelyin light of water contamination problems inthe Chesapeak Bay and the Gulf of Mexico.If it were known that corn with highavailable phosphorus would come on themarket at a competitive price, regulationswould be more certain.

If regulations on total phosphorusapplication were put in place, the animalfeeding industries would be forced to usethe modified variety—or close down. Therelatively low costs associated with addingthese modified varieties to animal dietssuggest that the industry would adopt themodified varieties quite readily. Thus, apotentially useful modification of corn forthe U.S. live-stock industry is one thatincreases the availability of phosphorus incorn. This variety might also be exportedto some other countries where phosphorusis a problem.

Exotic ModificationsIn light of the somewhat pessimistic resultsregarding the adoption by the livestockfeeding industry of modified grain, theauthors interviewed additional livestockfeed specialists for input on modificationsnot considered by the ISU team. Asummary of their suggestions anddiscussion is presented here.

Suggestion: Introduce some non-foodattributes such as anti-microbial peptides,vaccines (such as one to control TGE), andimmune stimulants.Discussion: The cost of some of thesemedications is currently high relative tothe cost of corn, and this would suggestthat these grain modifications would passthe market test. However, it seems likelythat consumer advocacy groups would beconcerned about this development,particularly in light of the ongoing GMOdebate. The level of public concernwould be large if the total intake of thesemedications in feed rations exceededdosages administered on an as-neededbasis. Livestock feeders would likely

What Do Livestock Feeders Want from Seed Corn Companies? / 11

respond by agreeing to avoid themodified product.

Suggestion: Genetically insert sow or cowmilk into protein.Discussion: If this were technicallyfeasible, the modified grain would be quiteuseful in rations of early-weaned animals.However the sow/cow also producesantibodies unique to the local environment;and it is unlikely that these antibodiescould ever be inserted into grain in aneconomically viable way.

Suggestion: Incorporate substances thatfuel good bacteria and eliminate bad;replicate animal enzymes such aszylanaize; improve the flavor so thatanimals eat more; improve meat quality;and act as a growth hormone.

Discussion: These genetic products have notyet been developed. They are most likely toenter rations first as feed additives becausethe company that first develops suchproducts will be interested in controllingsupply and charging a premium to coverR&D expenses. There might also be anegative consumer reaction against some ofthese developments. Nevertheless, onemight also argue that it would be lessexpensive to genetically modify corn than tobuild commercial-scale chemical productionfacilities. This might be the reverse of thesituation that occurred with lysine where thesynthetic product existed before themodified variety was commercially ready. Inthis particular case, the possibility ofmodification might deter the construction ofa chemical production facility.

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What Do Livestock Feeders Want from Seed Corn Companies? / 15

References

Yu, Tun-Hsiang, Phillip C. Baumel, Connie L. Hardy, Lawrence A. Johnson, Marty J.McVey, and Jerry L. Sell. Impacts of Six Genetic Modifications of Corn on FeedCost and the Consumption of Traditional Feed Ingredients. Iowa State UniversityExtension. 1999.

Johnson, Lawrence A., Connie L. Hardy, C. Phillip Baumel, Tun-Hsiang Yu, and Jerry L.Sell. Identifying Valuable Corn Quality Traits for Livestock Feed. Iowa Grain QualityInitiative Traits Task Team Project. Iowa State University. November 1999.

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