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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. Overview. Factors impacting current beef profitability U.S. biofuels policy - PowerPoint PPT Presentation
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1
IowaBeefCenter.org
Beef Production in the New Era of Higher Prices and Higher Costs:
Do the Old Rules Apply?
John D. LawrenceExtension Livestock Economist and Professor
Director, Iowa Beef Center Iowa State University
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IowaBeefCenter.org
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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IowaBeefCenter.org
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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IowaBeefCenter.org
Biofuels Policy
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IowaBeefCenter.org
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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IowaBeefCenter.org
05
10152025303540
Bill
ion
Gal
lons
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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IowaBeefCenter.org
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 4.00Gas Price $/gal
Total cost w/credit Variable cost w/creditTotal cost w/o credit Variable cost w/o credit
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IowaBeefCenter.org
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%
Jan-
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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IowaBeefCenter.org
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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IowaBeefCenter.org
Recession and Consumer Demand
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IowaBeefCenter.org
It is better to be a mile from Hell headed out than a 100
miles out headed in.
Earl Butz
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IowaBeefCenter.org
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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IowaBeefCenter.org
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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IowaBeefCenter.org
Personal Savings as a Percent of Personal Income
0
2
4
6
8
10
12
14
1980
-I
1982
-I
1984
-I
1986
-I
1988
-I
1990
-I
1992
-I
1994
-I
1996
-I
1998
-I
2000
-I
2002
-I
2004
-I
2006
-I
2008
-I
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IowaBeefCenter.org
Personal Consumption by Quarter 1980-2009 QII
0
2000
4000
6000
8000
10000
12000
1980
-I
1982
-I
1984
-I
1986
-I
1988
-I
1990
-I
1992
-I
1994
-I
1996
-I
1998
-I
2000
-I
2002
-I
2004
-I
2006
-I
2008
-I
$ B
illio
n
4th Q 2008 and 1st half of 2009 personal expenditures has declined
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IowaBeefCenter.orgPersonal Consumption on, Selected Items 1980-2009 QII
0200400600800
100012001400160018002000
1980
-I
1982
-I
1984
-I
1986
-I
1988
-I
1990
-I
1992
-I
1994
-I
1996
-I
1998
-I
2000
-I
2002
-I
2004
-I
2006
-I
2008
-I
$Bill
ion
FoodHealth careEnergyHousing 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
02468
101214161820
01/19
70,
01/19
73,
01/19
76,
01/19
79,
01/19
82,
01/19
85,
01/19
88,
01/19
91,
01/19
94,
01/19
97,
01/20
00,
01/20
03,
01/20
06,
01/20
09,
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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IowaBeefCenter.org
Economics and Genetic Selection
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IowaBeefCenter.org
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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IowaBeefCenter.org
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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IowaBeefCenter.org
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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IowaBeefCenter.org
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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IowaBeefCenter.org
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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IowaBeefCenter.org
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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IowaBeefCenter.org
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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IowaBeefCenter.org
Thank you!
Any Questions?www.iowabeefcenter.org
www.econ.iastate.edu/faculty/lawrence/