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June 6, 2008

Feeding Frenzy Factors

A look at the issues driving the markets and how they translate into the heart-fluttering feed bills horse owners now face.

Anyone feeding a horse today knows that hay and grain prices have surged to new heights.

The U.S. Dept. of Agriculture’s National Agricultural Statistics Service reported the national average price for alfalfa hay increased from $104/ton in 2005 to $138/ton in 2007, while corn increased from $2 to $4/bushel, and oats went from $1.63 to $2.50/bushel over the same time period. Following the release of the USDA’s March 31 Prospective Plantings report, the first official national indicator of farmers’ planting intentions for the year, corn prices immediately spiked to more than $6/bushel, a new record.

As these higher prices filter through the equine industry, striking feed manufacturers, feed retailers and horse owners, they ultimately affect our horse management decisions, whether sourcing reliable, quality hay or foregoing a show or new bridle in order to afford that hay.

Not surprisingly, the largest single driving force is the price of oil, which has risen sharply due in large part to increasing global demands coupled with supply concerns. Crude oil, $35/barrel in 2005 and $65 last year, has set one record high price after another, reaching more than $133/barrel as of press time. Nationally, gas price averages topped more than $3.88/gallon, which, adjusted for inflation, surpasses an earlier price spike in the ’80s. U.S. diesel fuel prices had already increased 36.5 percent to $3.38/gallon over the past two years as of February, and soared to a new record of $4.65 in May.

These unprecedented prices affect all aspects of the economy through increased production, supply and transportation costs, but they have a unique relationship with the country’s agricultural economy due to the ethanol factor.

“When you look at what’s happened to the ag sector in the past couple of years, the biggest thing is that ag has been tied to the energy sector,” said Chad Hart, an agricultural economist and head of Iowa State University’s Center for Agricultural and Rural Development’s Biorenewables Policy division. “Ethanol and biofuels have become major components in what’s going on in ag markets today.”

EtOH Stats

Fuel ethanol production has increased steadily in the United States since the 1980s, initially spurred by the desire to reduce energy dependence on foreign supplies following the oil embargoes of the 1970s.

The Energy Independence and Security Act of 2007, enacted in December, increased the nation’s Renewable Fuels Standard to 36 billion gallons of annual renewable fuel use by 2022 and requires that nearly 60 percent of the new RFS eventually be met by advanced biofuels, including cellulosic ethanol.
Cellulosic ethanol, which could theoretically be obtained through conversion of biomass ranging from trash to switchgrass to agricultural waste—instead of corn, our current main ethanol source—is promising but not yet commercially viable.

Ethanol Can Feed Critters And Cars

Though the fermentation process used to create ethanol utilizes corn that might
otherwise be munched upon by livestock, it only removes the corn’s starch from the food chain, leaving fat, protein, minerals and fiber behind in various forms, depending upon the type of processing used.

In addition to approximately 2.7 gallons of ethanol, a 56-pound bushel of corn yields 18 pounds of relatively protein- and fat-rich distillers grains through the dry grind process, and the wet mill process creates 13.5 pounds of corn gluten feed, 2.6 pounds of corn gluten meal and corn oil.

“Most of the DDGS [dried distillers grains with solubles] produced is fed to dairy and beef cows, but it is increasingly being tested and used in swine and poultry rations,” according to the U.S. Department of Agriculture’s Feb. 2007 report “New Technologies in Ethanol Production.” “The non-uniform character of DDGS makes it difficult to establish feeding parameters because the product varies in consistency and nutritional value. Ongoing research is aimed at establishing feed values for various forms of DDGS, and some producers are developing proprietary DDGS brands with guaranteed nutritional properties.”

Not a lot of official research has been done regarding the use of DDGS in equine rations, but studies performed by Dr. Joe Pagan of Kentucky Equine Research showed acceptability at experimental inclusion rates up to 20 percent of the diet.

According to the National Corn Growers Association, the estimated 3.1 billion bushels of corn used for ethanol this year will result in approximately 21 million
metric tons of distillers grains and approximately 2.6 million metric tons of corn gluten feed, 500,000 metric tons of corn gluten meal and about 2.5 million pounds of corn oil.


The United States produced 6.5 billion gallons of corn ethanol in 2007, a 32 percent increase from the 4.9 billion gallons produced in 2006. The USDA reported 17.2 percent of the 2006-07 U.S. field corn crop was used for ethanol production; an equal percentage was exported to other countries, primarily for animal feed; and nearly 47 percent of the crop was used for domestic animal feed. Field corn is different than sweet corn and comprises the vast majority of the U.S. corn crop, with approximately 10 percent of the crop going to human food products such as high-fructose corn syrup and cornstarch.

Ethanol is blended into more than half of the gas sold in the United States, primarily as E10 (a blend of 10 percent ethanol and 90 percent gasoline). With an octane rating of 113, ethanol boosts E10’s octane rating by 2 or 3 points over pure gasoline and reduces vehicle emissions.

“In major metropolitan areas that require a reduction in automobile pollution, ethanol is currently the only oxygenate that can reduce emissions sufficiently to meet EPA clean air standards. MTBE [Methyl tert-butyl ether] was its primary competition but is being eliminated from the market due to health risks,” wrote Connie Hardy in an Ethanol Profile for the Agricultural Marketing Research Center at Iowa State University. “Currently 20 states have some form of legislation limiting or banning MTBE. As a result of a MTBE ban in California, the state quickly became the largest consumer of ethanol in the country.”  

In addition to various state and federal initiatives to stimulate biofuels production and utilization, the Volumetric Ethanol Excise Tax Credit, a federal tax credit in effect from Jan. 1, 2005 through Dec. 31, 2010, gives oil companies an incentive to blend ethanol with gasoline. VEETC provides a credit of 51 cents for every gallon of pure ethanol blended into gasoline—with its 10 percent ethanol blend, E10 earns a “blenders credit” of 5.1 cents per gallon. Ethanol imports from other countries, such as Brazil, are also subjected to tariffs to encourage ethanol purchases and reinvestment within the United States.

According to the Energy Information Administration, the United States imported 67 percent of its crude oil supplies in 2006, at a cost of more than $300 billion—40 percent of the record U.S. trade deficit of $763 billion.

“Although U.S. dependence on the long-haul Middle East oil has fallen sharply [in favor of Western hemisphere suppliers such as No. 1 U.S. supplier Canada], this has not made U.S. prices less vulnerable to a disruption in Middle East supplies,” according to the EIA. “Since oil is a global market, the relevant measure for that vulnerability is not U.S. dependence, but world dependence on Middle East oil—and that has not shrunk.”

But I Don’t Feed Corn!

The energy and agricultural sectors of our economy are currently bound together by ethanol, and whether or not you feed it, what is happening with corn affects the rest of the ag industry—and the livestock it feeds.

While ethanol has increased the demand for corn, farmers have responded; last year’s record 13.1 billion-bushel corn crop bested 2006 production by 24 percent. Corn acres were planted at the highest number since 1944, and the yield per acre was the second highest on record. The USDA’s Prospective Plantings report for this year announced a projected 8 percent decrease in corn acres from the previous year’s robust numbers, and prices spiked immediately in response.

“We’ve pulled back some of those corn acres, but we’re still looking at 86 million acres, which is still historically a very high number,” explained Hart. “Last year we saw acreage coming from almost every other crop across the board, soybeans and cotton, in particular last year. There’s a competition for acres, but there are also additional acres being brought back into production because it’s profitable again [across the board].”

Increased demand for corn increases demand and price for other grains, which take up the slack in livestock feed when corn becomes more expensive. In response to an ag sector running full-tilt, demand also increases for fertilizer, labor, fuel and other petroleum products, which ratchets up the input costs for all crops.

“Even though we don’t use a lot of corn in our feed, the price of corn affects the prices of other things,” explained Eric Haydt, vice president of sales and marketing for Southern States, which produces Triple Crown feed. “Our costs in the past three or four months, just our basic ingredient costs, have gone up about $2 per bag. That’s around 15 to 20 percent.”

Triple Crown utilizes fixed formula formulation for their feeds, which means they, and other companies like them, use the same ingredient combinations to reach their guarantees from batch to batch and bag to bag, regardless of input costs, which can result in increased cost to the consumer. Haydt noted that feed that changes color or smell, lists ambiguous ingredients such as “processed grain products” or provides limited guarantees on the bag may have a variable formula.

“Least cost formulating takes the feed ingredient market into account and changes the basic ingredients to produce a feed using the cheapest combination of ingredients,” he explained. “One of the basic rules of proper horse management is to make changes in your horse’s diet gradually. However, if your feed supplier is changing the basic ingredients in the formulas on a regular basis, you are no longer in control of your feeding program.”

Haydt explained that many small, sometimes seemingly random, factors also play into the high feed prices. “The cost of the dollar, other countries importing our grains, a thousand different things—China produces a lot of vitamins, and they’ve scaled back their production because they’re trying to clean up the environment because of the Olympics!” he said. “I’ve been in this industry for 30 years, and I’ve never seen anything like it.”

Hay, You Should Plan Ahead

Unlike corn and other grains, which have open trading in international markets that establish benchmark prices, hay markets are localized. Hay prices can vary hugely across the country based upon availability and quality, factors that are emphasized by the costs of transporting the bulky feedstuff, particularly when fuel prices are high.

Matt Diersen, Ph.D., a South Dakota State University ag economist, explained that regional production problems over the past five years have created production shocks that have had a cumulative effect on the nation’s hay supply, gradually drawing down stocks. On the brighter side, there hasn’t been a dramatic shift away from hay acres planted, despite the additional demand for corn, but various weather problems have decreased national hay production since 2004, with 2006 having the smallest harvest since 1988. The national stocks of hay in May 2007 were the lowest since 1960, despite a 6 percent production increase over 2006.

“In part because of ethanol, you’ve also drawn down some of the U.S. stocks of hay steadily over the last few years. Once corn went high, you had people saying, ‘OK, we’ll feed more alfalfa.’ Then gradually the price of alfalfa crept up as well,” said Diersen. “You can point the finger at corn, but also we had some production problems, world-wide shorter stocks of wheat and those kinds of things as well, so there’s no one thing that you can say was the reason.”

Because there are low stocks of hay carrying over from last year and a 2 percent dip in projected hay acres for this year, Diersen doesn’t anticipate much relief in the near future for hay prices. “Based on fundamentals, you’d expect high prices to continue unless there was some kind of production increase, so we’d need remarkably good weather across the country to give us a superior kind of production year,” he said.

“If I had horses and I was buying all my feedstuff, I’d want to be thinking about finding a source earlier than the last couple of years,” he added. “You don’t want to get stuck having to go a state or two away at the last minute.”
 
Craig Cook, of Cook Forage in Auburn, N.Y., sees the current feed predicament from two angles, as a hay grower and a horse owner. “Two years ago, we were paying $5.60 for a bag of Blue Seal Rider, and now it’s $11.38,” said Cook, who also has a political science degree from Johns Hopkins University (Md.). “Everything has skyrocketed. Our fuel has gone up about 70 percent over the past year already—we paid $2.06 to 2.20 last year and we’re at $3.71 to 4.40 already. Our fertilizer costs have gone from $300/ton to $1,200/ton, particularly for urea, which is a nitrogen source and is derived from petroleum products. It’s
costing us 81 cents per mile in fuel to deliver hay.”

Cook said that increased fuel and labor costs hit hay growers particularly hard due to the inherent differences between producing hay and other crops. “We cut it twice, flake it out, rake it, bale it, haul it off the field, then transport it to the customer, plus a couple of fertilizer applications. I can’t cut back on those functions. A corn or grain farmer can do no-till, which takes three trips across the field, where we have at least eight per cutting. If we have a lousy hay year, you might have an extra one or two trips across the field to make the hay right.

“In 2006, it cost me $114/ton to make it; in 2007, it cost me $157. I haven’t even figured out this year yet, but fuel alone is probably going to cost me an additional $40,000 over last year,” he added. “I could probably make more off of soybeans than hay this year, but I have so much invested in the hay market that I can’t quite change. Quality hay is more of an art form than anything, and without being able to be rewarded for it, it takes the incentive away.”

Despite the price increases and fuel surcharge that he has to pass on to his customers, Cook, who started his first hay farmette in 1977 when he was still in high school, stressed the value in quality hay.

“The big issue is, when you’re getting a ton or two of grain delivered to you and then you’re getting 18-20 tons of hay in a trailer load, you go nuts when you see the hay bill. You’re paying $6,000 for a trailer load versus $4,000 a year ago,” he said. “A better quality hay is still cheaper than grain—at around 29 cents a pound for grain and 14 cents a pound for hay—with little waste and better nutrition.”

The USDA’s Farm Service Agency has set up a “Hay Net” to help put hay growers and buyers together through their website: www.fsa.usda.gov. Some individual state agencies offer similar sites. 

 
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