Farmscape Article 2379  January 27, 2007

Canadian consumers can expect to pay more for pork and other red meats and poultry down the road as North American livestock producers adjust to increased competition for grains that have traditionally been used to feed livestock.

2005 U.S Energy Bill Ignites Massive Expansion of Ethanol Output

The use of grain, primarily U.S. corn to produce ethanol, has increased sharply since the 2005 U.S. energy bill established year to year targets for the increased utilization of biodiesel and ethanol in the United States to the year 2012.

The impact of using grain for fuel was one of the key topics examined earlier this month during the Banff Pork Seminar and it was one of the topics of concern discussed among swine producers from Manitoba, South Dakota, Iowa and Minnesota during a trade mission that concluded Thursday.

Biofuel's impact on Feed Costs Creates Concern In U.S. and Canada

“One of the big issues right now is ethanol,” says Manitoba Pork Council Chairman Karl Kynoch.

Kynoch was part of a Manitoba Pork Council delegation which spent the past three weeks taking part in trade shows in South Dakota, Iowa and Minnesota and discussing issues of common concern with U.S. producers.

“The producers in the U.S. are very concerned.” Kynoch explains, “Feed prices have gone up fast. Grain prices are where they need to be but what needs to happen now is for the meat price to follow. That’s a huge concern down here (the U.S. pork producing states). Where Iowa used to be a major exporter of corn, they could now become a major importer of corn.”

“What ever happens down here in the feedgrain price also happens in Canada and you can pretty much figure that what ever the American producer is paying for corn, we’ll be paying that in Canada plus freight,” Kynoch points out. He notes, our barley and wheat prices have followed corn prices upwards.

Dr. Larry Martin, the CEO of the Guelph, Ontario based George Morris Centre and one of the Keynote speakers at the Banff Pork Seminar observes, so far, most of the biofuels are ethanol and they are mostly produced in the U.S. using mostly corn.

While he expects that to change somewhat, he notes, as of September 106 plants were running in the U.S., 40 were under construction, several were being expanded and, in one week, four more were announced. By contrast, Canada has eight plants. Five are located in western Canada and rely on wheat and three are located in Ontario and rely on corn.

Price of Corn Impacted the Most

University of Alberta feed industry research chair Dr. Ruurd Zijlstra, also on hand in Banff, notes corn has seen the most drastic price increases and as a result of that we’ve seen a spike in barley and wheat prices as well.

“I'm not quite sure if the availability of the grains has shifted yet but certainly the prices of the grains have shifted based on a change in market supply and demand. I would suggest part of this increase in grain prices is simply due to speculation and part of it is due to a change in market demand, particularly from the ethanol industry,” Dr. Zijlstra explains.

Trend Expected to Continue

Dr. Martin believes there are three key motivations for continuing to expand biofuel production.

“Number one, especially in the U.S., they’re concerned about being reliant on imported oil. Number two there is the promise of reduced greenhouse gases emissions and the third, and maybe the most important, is that U.S. politicians see this as a way that they can get U.S farmers off of the old type subsidies that they were using for quite awhile.”

He believes, “What’s fueling the actual development is a combination of a different kind of subsidy and a lot of protection on the industry so that Brazilian ethanol, which is much more efficient, can’t get into the U.S. to force the price down. Plus last summer’s rise in oil prices certainly made it much more attractive too.”

Kynoch admits, he hates to suggest pork producers need lower grain prices. Instead, he believes, “In all reality what we do really need is we need the meat prices to go up so that we can allow the grain farmers to also be making a good living.”

Higher Food Prices Inevitable

According to Dr. Martin that appears to be inevitable, “I think there’s no question in the short term a lot of hog producers are going to lose a lot of money if they haven’t locked in their feed costs.”

He believes higher grain prices are here until at least the summer and if there’s not a great crop, longer than the summer. “We’re going to see a number of people go out of business or shift. I’m already hearing people who are grain growers who also feed their hogs say, why would I keep feeding hogs when I can make more money selling the grain?”

He also anticipates increased price volatility in both the corn market and the hog market as those markets adjust. “We just are going to be in for a big ride over the next little while in terms of volatility.”

However, Dr. Martin also predicts, “The day is coming when consumers are going to pay more for their food.”

Although he is not prepared to name a date, he believes the hog industry will return to a point where producers can make some money on higher grain prices. “It’s probably going to take until we get into 2008 to knock back a few people so the supply comes down enough to drive the prices back up.”

He concludes, “Short term a lot of people are going to lose some money, a lot of volatility in prices of both corn and hogs. Long term, markets always adjust and we'll see some higher hog prices.”

Staff Farmscape.Ca