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

2

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?

3

IowaBeefCenter.org

Things to Remember About Economists

• We have a firm grasp of the obvious

• We are better at predicting history than the future

4

IowaBeefCenter.org

Biofuels Policy

5

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

6

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.

9

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

10

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

11

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%

12

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

13

IowaBeefCenter.org

Recession and Consumer Demand

14

IowaBeefCenter.org

It is better to be a mile from Hell headed out than a 100

miles out headed in.

Earl Butz

15

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

16

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%

17

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

18

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

19

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

20

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%

21

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

22

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

23

IowaBeefCenter.org

Economics and Genetic Selection

24

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

25

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

26

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

27

IowaBeefCenter.org

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

28

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

29

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

30

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

31

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

32

IowaBeefCenter.org

Thank you!

Any Questions?www.iowabeefcenter.org

www.econ.iastate.edu/faculty/lawrence/