High feed prices threaten N.C. livestock industry

Drought drives prices to record highs

mquillin@newsobserver.comAugust 4, 2012 

The drought that’s choking the Midwest is also throttling North Carolina livestock growers, who are seeing record-high feed prices and worrying about farms and processing plants shutting down.

“We’ve had bouts of this before,” said Kelly Zering, an associate professor and extension specialist at N.C. State University. “But this is the most extreme market situation that I’ve ever seen.”

Soaring feed prices have immediate as well as long-term effects, and they reach well beyond the farm, into meat processing plants and surrounding communities supported by the people who work in them. Eventually, consumers also feel the pain in higher meat prices.

More than 65 percent of North Carolina’s agricultural income is from livestock – chickens, turkeys, hogs and cattle – and growers here import more than two-thirds of the corn, wheat and soybeans they use to feed their animals. While feed prices have been trending up since the mid-2000s, this year they’re the highest ever, with corn, the biggest feed component, trading on futures markets at around $8 a bushel. Prices have risen 50 percent in just the past three months.

Feed makes up about 70 percent of the cost of raising livestock.

North Carolina’s livestock operations, many of them started in the 1980s and ’90s, were built on business models that relied on corn prices in the $2 to $3 range. While feed prices have gone up threefold or more, the price farmers get for meat at slaughter has not quite doubled, forcing some growers to liquidate their animal stocks or take out additional loans to stay in business.

Several factors have conspired to make 2012 a punishing year for livestock producers who have to buy grain or soybeans:

• The worst Midwestern drought in 50 years, with at least 1,369 counties across 31 states declared disaster areas by the U.S. Department of Agriculture. As a result of the drought, what was expected to be the biggest U.S. corn crop ever, based on acres planted, is shrinking by the day. The government’s report on the corn crop, due out Friday, is expected to predict an average yield of 120 to 130 bushels per acre. In a good year, yields top 180 bushels an acre.

• The federal requirement that oil refiners use increasing amounts of ethanol as an additive to gasoline. Ethanol producers used more than 40 percent of last year’s U.S. corn crop. Biodiesel production has had a similar effect on the price of soybeans and soybean meal.

• Increasing international demand for U.S.-produced corn, including by China.

• Diminished corn stockpiles. In the spring, stockpiled corn, which can augment a failed crop, was at its lowest in at least eight years, according to the USDA.

‘Living on borrowed time’

Hog and cattle farmers are usually the first to feel the flux in grain prices, because many buy their own feed at market prices. Most poultry farmers in North Carolina work on contract with large companies, which provide the feed and buy it on futures markets. Because those prices are agreed on well in advance, a spike in feed prices has a delayed effect in the poultry industry.

In North Carolina, poultry growers are particularly vulnerable, because they’re still reeling from the loss of processing plants that closed suddenly over the past several years, some in response to earlier feed-price spikes.

There are about 2,200 hog farmers in the state, and about 2,500 poultry farmers. The state is second in the nation in production of hogs and pigs, as well as in poultry and eggs, helping the United States hold its position as a major source of the world’s food.

Hog farmers already have felt the pinch from the recent price increases. Poultry farmers are expected to feel it in the next six weeks or so, when last year’s corn crop is depleted and this year’s crop – at this year’s prices – hits the market.

Henry Moore, who has 5,000 sows on his farm in Sampson County and brings up piglets to about 16 pounds, has been struggling. He says he knows other farmers who are trying to sell off their pigs and some who have filed for bankruptcy. He might have liquidated, too, he says, if he had a way to pay off his current debt.

“We’ve known for a long time that something like this was coming,” said Moore, who sits on the boards of the N.C. Pork Council and the National Pork Board. He has watched closely as ethanol production has taken more of the nation’s corn crop while stockpiles of corn have been allowed to dwindle, both reckless policies in his mind.

“We knew if we had one really bad drought – and we knew we would have one eventually – we’d be in trouble,” Moore said. “We’ve been living on borrowed time.”

What lies ahead

In the short run, livestock farmers have only a few ways to cut their feed costs if they can’t find cheaper sources. They can feed animals less, resulting in lower-weight animals that bring a lower price at slaughter or they can try to reduce or liquidate their herds, often at a below-cost price. In desperation, some growers in past crises have euthanized animals. “We hope it doesn’t come to that,” Zering said.

In the long run, farmers can cut back on production, further reducing their costs but also their income.

In the poultry business, production levels are carefully controlled by the companies with which growers contract. Producers first order a reduction in the number of new chicks to be hatched, and growers who raise the birds get smaller flocks. The next step is longer periods between deliveries of flocks.

This translates into fewer shifts or shorter hours at processing plants as well.

If the business is still unprofitable, processors will completely close plants, as the owners of Townsend did last year in Siler City and Mocksville. Pilgrim’s Pride closed a plant in Siler City in 2008.

Those shutdowns left between 300 and 400 poultry growers with no contracts to sell their chickens, and put more than 1,000 plant employees out of work.

Benny Bunting, who used to raise hogs and now works with farmers through the Pittsboro-based Rural Advancement FoundationInternational, says poultry farmers who were left in the cold by the Pilgrim’s Pride and Townsend closings had to scramble to find other work in a difficult economy. Most were not able to get new contracts with other processors, and many are now facing foreclosure on their farms, including their land and homes, which are tied up in the loans they took out to build their businesses.

“We’ve got an awful lot of farmers who are looking at complete devastation, who are going to lose everything they’ve got,” Bunting said. “And they don’t have enough working years left in them to recoup that.”

One possible short-term remedy might be to release some of this year’s corn crop from the required ethanol production, as farmers, processors and some federal lawmakers have suggested. Last week, a bipartisan group of 156 legislators signed a letter urging EPA Administrator Lisa Jackson to scale back the renewable fuel standard for this year. Ethanol trade groups have urged the EPA to hold to the annual target.

With this year’s reduced crop yields, feed price are expected to stay high for at least another year. “Companies will have to have deep pockets to survive,” Bunting said.

Eventually, production cuts will result in higher prices at the grocery store, but by then, some farmers will have gone out of business, Bunting and others say.

Henry Moore says he’ll stick it out if he can. “I enjoy knowing that I produce food for the world,” he said. “People don’t pat you on the back, but we know as farmers, as providers, what we get to do for people.”

Quillin: 919-829-8989

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