Co-ordinated growth urged in livestock, feed

Canada’s feed grain growers and livestock producers would stand a better chance at sustainable operation if they co-ordinate their growth, the George Morris Centre urges.

The Guelph-based ag think tank last week released a new paper by Al Mussell, Graeme Hedley and Douglas Hedley proposing a “reconciliation” between the livestock and feed grain sectors.

The researchers cite a “remarkable” 2008 for both sectors, in which feed grain prices surged to record highs in the first half of the year, then “retreated sharply” from late July onward. Cattle and hog prices also “strengthened somewhat” in the first half and “significantly” weakened later.

But the situation in 2008 “provides little insight” into long-term trends and the “intimacies” of the livestock/feed relationship, the paper warns.

“By ignoring the fundamentals of feed grain and livestock dynamics, we risk falling victim to policy that treats them as independent, or seeks to benefit one at the expense of the other, ultimately to the benefit of both.”

As one example of bad public policy, the researchers cite the unsuccessful countervail case brought against the U.S. corn sector by Ontario, Quebec and Manitoba corn growers in 2005, as well as the 2002 U.S. Farm Bill that helped pressure corn prices downward and spurred the countervail request.

“A request to offset the effects of the Farm Bill programs would have been perceived with much more credibility by government had it been backed by a broader section of producers and consumers,” the researchers said of the countervail case and Canadian livestock producers’ opposition to it.

“As it was, the corn producers and livestock/meat segments fought one another, and the countervail complaint was easily labelled as self-interest on behalf of corn producers by government.”

Canada’s current mandate for ethanol consumption and its subsidies for ethanol production are cited as another example of bad policy that doesn’t recognize the “mutual dependence” between livestock and feed grains.

“Because it is dependent upon compulsion (blend mandates) and production subsidies, making ethanol from feed grains by definition does not add value,” the paper said. “Moreover, it stands to make livestock and meat industries that do add value to feed grains uncompetitive.

“By championing development of a policy-driven industry (ethanol) at the expense of a market-driven one (livestock and meat), the risks and pitfalls of this strategy within the feed grain segment must be recognized.”

Fundamentals

The paper lays out several “fundamental economic principles” that direct development of feed grain production, livestock feeding and meat packing “in an open-trade, market economy.”

For one, the researchers note, livestock feeding in a given region is due to feed grain production, not the other way around. Feedlots and packing plants are “built, torn down and moved around according to market conditions.” Soil, water, climate and other factors of a given region create its suitability for feed grains.

Further, the researchers wrote, livestock feeding depends more on the basis for feed grains than its price level. A profitability squeeze due to high feed grain prices usually spurs a decrease in livestock supply that takes time to work through the system but, after a lag, will eventually boost livestock prices.

Feed grain production, meanwhile, depends more on the feed grain price level than the basis. Unlike livestock producers, the paper says, feed grain growers don’t compete with growers in other regions for the residual input to production. In grain growers’ case, that’s land, which “for obvious reasons is not traded and price-arbitraged across regions.”

Meanwhile, the researchers noted, livestock expansion is “self-correcting” in that if there’s not enough growth in feed grain production in a region to support its feedlots, livestock production will decline until feed supply and demand come back into balance.

At the same time, expansion in feed grain production is also self-correcting, constrained both by production costs and local feed grain demand. The farther grain must be hauled to clear the market, the greater the resulting discount in the export basis.

Unnoticed

The sixth fundamental principle cited in the paper is that the previous five principles “remain in the background unnoticed” because of other factors that are ultimately less significant in the longer term,

Those less significant factors include exchange rates, regulatory and inspection issues, pests and diseases, crop substitutions, technological changes and “most agricultural policies.”

For example, the researchers wrote, a weak Canadian dollar spurs livestock production for export but also increases the cost of input items priced in U.S. dollars such as machinery, feeder livestock, feed and packing plant equipment. The exchange rate may be important, they wrote, but is less significant in the long run compared to Canada’s competitive positioning on feed grains.

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