Food Prices, Biofuels, Farm Profitability and Consumers

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Food Prices, Biofuels, Farm Profitability and
Consumers

• Robert Young
• Chief Economist
• Texas Ag Forum
• June 9, 2006

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FAOs View On Main Drivers

• Weather related production shortfalls
• Stock levels
• Increased fuel costs
• Changing structure of demand
• Biofuels markets
• Operations of financial markets

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Australian Wheat Production
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Chinese Meat Consumption
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Corn Used For Ethanol
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Rice Futures Prices
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Relative Weights For Home Vs. Away From Home Food
CPI
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Share Of CPI for Food At Home
Meat, Poult Fish 22
Eggs 2
Dairy 12
Fats Oils 3
Fruit Veg 15
Sugar 4
Cereal Bakery 13
Non-Alc Bev 12
Other 18

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Index280 March 1984, Jan 2007
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The Food Dollar
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Shares Of Food Cost Increases
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The Good Of Ethanol

• Francisco Blanch Merrill Lynch ethanol
  driving a 15 reduction in gasoline prices
• Dermot Hayes Xiaodong Du Iowa State
  University ethanol lowers gas prices 0.29 to
  0.40 per gallon
• At 140 billion gallons of gasoline consumed per
  year at a 35 you get 50 billion in lower gas
  costs

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Livestock Implications

• Huge losses in hog and broiler production and in
  cattle feeding
• Plenty painful all the way to the farm level
• Liquidation is fast-approaching for hogs and
  poultry, ongoing for years in the beef industry
• Inventories will adjust to higher input prices
• Adjustment takes time and will continue to be
  painful for individual producers

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Livestock Marketing Information Center Data
Source USDA/NASS
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Livestock Marketing Information Center
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CATTLE ON FEED JANUARY 1, 2008(1000 Head)
Livestock Marketing Information Center Data
Source USDA/NASS
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What can be done to address current low-profit
situation?

• Liquidation is a must for pork
• Estimates are 10 of sow herd must go to get
  farrow-to-finish back in the black
• Exports can help considerably
• Pork exports up for 16 straight years
• Beef exports should get big boost from Korea
• Government
• Requests for USDA to make 50 million pound pork
  buy

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2003 to 2008 - 85 Billion Increase
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Corn Production Costs
Year 2001 2007 2008 2009
Operating Costs 160.59 229.61 240.15 247.64
Fertilizer 47.72 93.96 99.95 102.34
Total Costs 343.90 442.34 459.35 473.37
Per Bushel 2.38 2.92 2.99 3.04
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Retail
Margin
Farm
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Retail
Farm
Margin
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Whats A Bushel Of Corn Worth?

• A bushel of corn at 15 moisture content contains
  400,316 btus
• A barrel of oil has 5,780,000 btus
• A gallon of gasoline has 133,333 btus

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Work Through The Numbers

• If a barrel of oil is worth 40, then on a btu
  equivalent basis
• Gasoline ought to be 0.92/gallon
• Corn ought to be 2.77 per bushel
• In 2004, WTI averaged 41.50
• Average price of gallon of gas in New York Harbor
  was 1.20 per gallon (Avg retail was 1.94)
• Average farm price of bushel of corn was 2.47

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Work Through The Numbers

• If a barrel of oil is worth 100, then
• Gasoline ought to be 2.31 per gallon
• Corn ought to be 6.92 per bushel
• So far this year weve averaged 104 per barrel
• Gasoline New York Harbor have averaged 2.58 per
  gallon (Retail - 3.41)
• Corn Farm Price Jan-Apr average 4.58