Implications of Growing Biofuels Demands on Northeast Livestock Feed Costs: Understanding the Technical Relationships between Ingredient Prices and Feed Costs
Schmit, Todd M.; Verteramo, Leslie J.; Tomek, William G.
An expanding U.S. biofuels industry and corresponding increased demands for grains and oilseeds is affecting the structure of agricultural commodity markets. While the demand from biofuels processors is well-known, though still a relatively recent factor affecting prices, growing incomes and populations in China and India have also increased the demand for farm commodities. The growing demands, relative to available supplies, have significantly raised the average level of commodity prices. Tighter commodity markets exist, and the result is higher price levels and increased price variability (Westcott, 2007). These price effects have substantial implications for livestock operations and management adjustments will be required to respond to higher input feed costs. Northeast U.S. livestock farmers reported increases in feed costs from April 2006 to April 2007 of 14%, 21%, 34%, and 19%, for the hog, layer, broiler, and dairy livestock sectors, respectively (USDA).1 Record-high commodity prices early in 2008 translated into reported (April) farm feed cost increases of an additional 14%, 15%, 50%, and 20%, respectively, over 2007 levels (USDA). Given the expectation that corn and soybean meal (SBM) prices will remain high, substantial interest exists in evaluating the outlook for feed prices and the utilization of biofuels by-product feeds, primarily corn distillers dried grains with solubles (DDGS), as a cost reducing alternative. While increasing supplies of these by-product feeds may result in lower-priced feed ingredients, several limitations need to be addressed. The ultimate effect on feed costs will vary by livestock sector, given varying feedstock prices and the degree of feasible ration and operational adjustments. The intent of this paper is to look beyond the determination of a least-cost minimizing feed mix by incorporating additional firm and market factors that affect the underlying technical relationships between input prices and feed costs. Market data on feed ingredient prices are collected and related to actual reported complete ration feed costs in the Northeast U.S. This more macro-oriented approach presumes that livestock producers maximize returns and determine the appropriate least-cost rations for their operations incorporating nutritional protocols. However, ration adjustments and, ultimately, changes in feed costs will depend not only on nutritional feasibility, but also on changes in industry feeding recommendations and technologies over time, whole-farm planning decisions, nutrient management issues, and the availability of a quality, consistent product. Ultimately, the balancing of these supply and demand components should be reflected in feedstock prices and overall feed costs. Our objective is to examine potential changes in feed costs over a range of anticipated future prices and alternative pricing behaviors of bioenergy by-product feeds. The effects will differ by livestock sector given that DDGS feed ingredients can be utilized more readily in ruminant rations than in non-ruminant rations, and the limiting components (i.e., for energy, protein, fiber, etc.) vary across livestock types. Understanding the differential impacts across livestock sectors will help illustrate limitations on feasible ration adjustments in relation to current utilization and potential impacts on profitability across sectors. Given an uncertain future, such information can serve as a useful tool for planning production and feeding decisions, as well as the adoption of strategies and tools to control input costs.