Structural Changes in Animal Agriculture: An Inconvenient Moo Dr. Francis L. Fluharty Department of Animal Sciences The Ohio State University

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Structural Changes in Animal AgricultureAn
Inconvenient MooDr. Francis L.
FluhartyDepartment of Animal SciencesThe Ohio
State University
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Weve Seen Cycles Before At this point, you may
be asking what challenges?

• U.S. Renewable Fuels Legislation is changing
  animal agriculture beyond the Supply and Demand
  economics of the past. This isnt your parents
  cattle cycle or hog-corn cycle.
• Nutrient inputs are changing with ethanol
  co-products.
• Consumers are changing their eating habits and
  demanding high perceived value products.
• International trade is progressing faster than
  food animal producers want to believe.

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Option 1
Source http//kids.nationalgeographic.com/Stories
/AnimalsNature/Animal-myths-busted
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Option 2

• Learn what factors are changing
• Identify what consumers perceive as having higher
  value
• Identify opportunities to differentiate your
  products and services
• Become flexible to changing situations
• One Persons Crisis is Another Persons
  Opportunity

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The Challenges

• The two Major Challenges facing animal
  agricultural in the immediate future are
• 1. The loss of starch in animal diets, and
• 2. The loss of land-based resources used for
  the production of feed for our animal
  industries.
• These both will continue as the corn-based
  ethanol and cellulosic ethanol industries expand.

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On August 8, 2005, President Bush signed the
Energy Policy Act of 2005 (H.R. 6) into law. The
comprehensive energy legislation included a
renewable fuels standard aimed at doubling the
use of ethanol and biodiesel by 2012, and was
backed by economic incentives.
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U.S. Ethanol Legislation

• On December 19, 2007, President Bush signed The
  Energy Independence and Security Act of 2007,
  which expands the Renewable Fuels Standard (RFS)
  by requiring 36 billion gallons of renewable fuel
  be used annually by 2022, and the legislation
  requires 21 billion gallons of that goal must
  come from advanced biofuels including cellulosic
  ethanol
• (Source http//www.ethanolrfa.org/ ).

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Ethanol Production Capacity

• The Renewable Fuels Association, states that
  there are now 134 ethanol plants with a total
  production capacity of 7.2 billion gallons and
  another 77 ethanol plants under construction or
  expanding, with an additional production capacity
  estimated at 6.2 billion gallons (Source
  http//www.ethanolrfa.org/industry/statistics/C).
  
• It is estimated that the industry produced 6.5
  billion gallons of ethanol in 2007, and projects
  ethanol production in 2008 to exceed nine billion
  gallons.
• (Source http//www.ethanolrfa.org/objects/docume
  nts/1493/er261.pdf).

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The Future of Ethanol

• Consider the 5 billion gallons produced in 2006,
  and the 6.5 billion gallons produced in 2007, all
  from grain.
• A major portion of the expansion in ethanol
  production is expected to be due to the
  development of the cellulosic ethanol industry.
  As opposed to grain sources, cellulosic ethanol
  production could use cellulose from silages,
  forages, or trees.

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Impacts of U.S. Energy Policy

• Iowa State University reports that the latest
  USDA projections put corn exports for the 2007/08
  marketing year at 2.45 billion bushels and the
  primary reason for the export situation is that
  between January 1, 2007 and January 1, 2008, the
  U.S. dollar lost 15 of its value compared with
  the Brazilian real and 6 of its value compared
  with the Chinese yuan, export competitors.
• The U.S. dollar lost 6 of its value compared
  with the Japanese yen, making U.S. corn a very
  inexpensive import compared with Brazilian or
  Chinese corn (Source http//www.card.iastate.edu/
  iowa_ag_review/winter_08/article4.aspx).

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Current Impacts of Ethanol

• According to Keith Collins, Chief Economist for
  the USDA in testimony before the U.S. Senate
  Committee on Agriculture, Nutrition, and Forestry
  on January 10, 2007, in 2006, approximately 5
  billion gallons of ethanol were produced in the
  U.S., which accounted for 20 of the 2006 corn
  crop.
• However, the U.S. consumption of gasoline was
  near 140 billion gallons, so 20 of the corn crop
  was diverted to produce less than 5 of our
  gasoline. (Source http//www.usda.gov/oce/newsroo
  m/congressional_testimony/Collins_011007.pdf)
• Ethanol is an MTBE replacement.

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Current Impacts of Ethanol

• The cost of other co-product feeds is increasing
  as nutritionists try to reduce feed costs with
  feeds lower in oil and S than distillers grains,
  while maintaining an energy value close to corn.
• The problem isnt ethanol production, but the
  removal of corn starch from animal feeds and its
  use in renewable fuel energy production.

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Midwest Feed Grains are CostlyMidwest Prices
January, 2008
Feedstuff Price Price / Pound
Corn 4.98/bu .089
Soybeans 12.64/bu .21
Wheat 9.62/bu .16
Oats 3.19/bu .10
Soybean meal 339.30/ton .17
CGF, 21 190/ton .095
DDGS 175/ton .088
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Impacts of Increasing Ethanol Production

• Regionally, the amount of N, P, and S that are
  both fed, and excreted can cause environmental
  problems from ammonia emissions, N and P runoff,
  and S and P buildup in soils.
• Finally, the movement to cellulosic ethanol
  brings up the potential for more wind erosion as
  ground cover is removed in the fall.
• The potentially huge unknown is the extent to
  which grasslands currently used for cattle
  grazing and hay production will be transferred to
  forage production exclusively for cellulosic
  ethanol feedstock production.

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Impact on Pork and Poultry Production

• The amount of corn diverted from swine and
  poultry production could be potentially
  devastating to those industries as DDGS are not
  suitable feeds, in large amounts, for
  non-ruminants.
• From a National Security perspective, having
  affordable domestic meat animal protein
  production is necessary, with the poor and the
  elderly being the consumer groups most affected
  by a rise in food costs.

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Impacts of Increasing Ethanol Production

• As the demand for corn grows, marginal lands
  currently in CRP acreage will be converted to
  corn and soybean production.
• The price paid for cash rent will continue to
  increase, forcing producers to use erodible land.
  This could have severe consequences, long-term,
  for soil and water conservation efforts.

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Impacts of Increasing Ethanol Production

• The transportation infrastructure for both truck
  and rail will be altered as grain is moved into
  more remote areas.
• The Texas Panhandle has a total of 600M gallons
  of ethanol production planned. Water usage on
  already stressed aquifers will be increased, as
  the production of 1 gallon of ethanol takes 3 to
  5 gallons of water.

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Challenges and Opportunities

• We are being faced with challenges that we
  havent even started to consider, but not
  planning for the future will be devastating.
• We need to better manage our pasture resources,
  develop and implement nutrient management plans
  develop technologies and products, or product
  combinations, which maximize the digestibility of
  feedstuffs and optimize an animals immunity

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Challenges and Opportunities

• A balance must be struck between the U.S. need
  for food, and energy. If not, the meat protein
  industries may be forever altered, with
  potentially damaging impacts to the environment,
  if waste management technologies are not
  implemented, and caution is not exercised in
  planting marginal lands, as the demand for corn
  increases to keep up with proposed ethanol
  production targets.

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The Beef Processing Industry is CHANGING

• JBS SA Based in São Paulo, Brazil, a leading
  beef processor in Latin America with 23 plants in
  Brazil and 5 in Argentina, is a worldwide
  exporter. JBS SA had 11.9 billion in revenue in
  2007 with operations in Brazil, Argentina, the
  U.S. and Australia. JBS SA acquired Greeley,
  Colorado-based Swift Foods last year.
• Just purchased in 2008
• National Beef Packing, the nation's
  fourth-largest beef processing company from
  Majority owner U.S. Premium Beef LLC. JBS agreed
  to acquire National Beef in a cash-and-stock deal
  worth about 465 million in cash, 95 million in
  JBS shares and the assumption of 410 million in
  debt. In fiscal year 2007, National Beef
  generated sales of 5.6 billion and processed 3.9
  million head of cattle.
• Smithfield Beef Group The fifth-largest beef
  producer in the U.S. JBS will pay 565 million
  for the beef group in cash, and increase capital
  in feedlot operator Five Rivers by 200 million.
  Five Rivers is the worlds largest cattle feeding
  company, and in addition to Smithfields
  half-interest, JBS is purchasing Conti Groups
  half-interest in Five Rivers, for sole ownership.
  Smithfield Beef processes more than 2 million
  head of cattle a year and sales exceed 2.5
  billion annually. It has major facilities in
  Green Bay, Wis. Tolleson, Ariz. Plainwell,
  Mich. and Souderton, Pa.

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The Beef Processing Industry is CHANGING

• JBS also just purchased the Tasman Group
  Australia's largest meat processor based in
  Brooklyn, Australia. JBS will pay 100 million
  for the group and an existing debt of 50 million
  in the name of the Australian company.
• WE NOW HAVE THE BIG 3 IN U.S. BEEF PACKING
• JBS SA 42,000 hd/day capacity
• Cargill 29,000 hd/day capacity
• Tyson 28,000 hd/day capacity

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Consumers Are Demanding More High Perceived-Value
Products
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What Consumers Want

• The National Restaurant Association conducted a
  chefs survey in October 2007 to identify food
  and beverage items, cuisines, and preparation
  methods based on their popularity.
• Foods that were ranked as Hot based on their
  overall rank, and percentage of Hot responses
• 2 Locally Grown Produce 83
• 3 Organic Produce 81
• 8 Grass-Fed Items
• (Source www.restaurant.org)

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Retail Food and Drug Sector Data
http//money.cnn.com/magazines/fortune/fortune500/
2007/snapshots/1575.html
Store Rank Revenue ( Billion) Profit Change From 05 10 Year Ann. Growth
Kroger 1 66.1 16.4 7.0
Safeway 4 40.2 55.2 7.2
Publix 5 21.9 10.9 18.3
Super Valu 6 19.9 -46.6 1.8
Winn Dixie 8 7.9 Lost 361 M. NA
Whole Foods 9 5.6 49.5 21.1
Rank Walgreen 2, CVS 3, Rite Aid 7
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What Makes Whole Foods and Publix the Fastest
Growing Food Retailers?

• Publix Success Attributed to
• Giving customers a memorable, pleasant
  experience. Building customer loyalty with
  outstanding service and community commitment.
  Adding value to the consumer dollar. Fostering a
  sense of heritage and tradition. Instilling a
  can-do corporate culture.

http//goliath.ecnext.com/coms2/summary_0198-11708
4_ITM
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Publix Goes Green

• In 2007, Palm Beach Gardens and Boca Raton became
  home to the first two Publix GreenWise Markets in
  the chain's history which sell only natural and
  organic food and products.
• GreenWise is the name given to Publix's private
  label of health, natural and organic foods.
  GreenWise products can be found at all Publix
  supermarkets. Some stores feature GreenWise
  sections, whereas others incorporate the products
  throughout the entire store.

http//www.commercialpropertynews.com/cpn/property
_type/article_display.jsp?vnu_content_id100358581
7
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Whole Foods

• Founded in 1980 as one small store in Austin,
  Texas, Whole Foods Market is now the world's
  leading retailer of natural and organic foods,
  with more than 265 stores in North America and
  the United Kingdom. To date Whole Foods Market
  remains uniquely mission driven We're highly
  selective about what we sell, dedicated to
  stringent Quality Standards, and committed to
  sustainable agriculture. We believe in a virtuous
  circle entwining the food chain, human beings and
  Mother Earth each is reliant upon the others
  through a beautiful and delicate symbiosis.

http//www.wholefoodsmarket.com/company/index.html
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Whole Foods

• We believe companies, like individuals, must
  assume their share of responsibility as tenants
  of Planet Earth. On a global basis we actively
  support organic farming the best method for
  promoting sustainable agriculture and protecting
  the environment and the farm workers. On a local
  basis, we are actively involved in our
  communities by supporting food banks, sponsoring
  neighborhood events, compensating our team
  members for community service work, and
  contributing at least five percent of total net
  profits to not-for-profit organizations.

http//www.wholefoodsmarket.com/company/index.html
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Publix and Whole Foods Share Common Traits

• Commitment to customers
• Commitment to the environment
• Commitment to Corporate Values
• Expectations from Employees and Loyalty to
  Employees
• Value is emphasized
• Place emphasis on heritage
• Commitment to community
• Move MORE QUICKLY than competition
• THEY SET THE STANDARD

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Whats The Message?

• Flexibility will be required to remain
  economically competitive in markets that must
  constantly assess changing global economic
  situations, feed resources, and consumer desires.
• Opportunities will exist in markets considered to
  have health or environmental benefits.
• Any entity that does not respond to large-scale
  changes in its environment becomes extinct.

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Final Thoughts

• The Seven Sages of Greece (620 BC to 550 BC)
  included the following sayings
• Nothing in Excess by Solon of Athens
• and
• Forethought in All Things by Periander of
  Corinth
• Change is Inevitable, Progress is Not

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