By Bob Burgdorfer
CHICAGO (Reuters) - U.S. cattle and hog producersface sharply lower profits now that U.S. corn prices havepushed above $5 a bushel, and the higher feed costs will likelythwart any plans to expand herds and result in lower beefoutput next year.
Corn, an important feed grain, moved past $5 per bushel onFriday for the first time since 2008. Trends in the Chicagofutures markets suggest it will stay above $5 well into 2011.
That will mean higher feed costs for cattle and hogproducers and likely lower profits.
However, producers are generally better prepared preparedfinancially to handle $5 corn this year than they were in 2008,having banked profits on cattle and hogs for much of the lastnine months.
And producers are more optimistic than in 2008 as Chicagofutures markets indicate cattle and hogs will remain profitablethrough much of 2011.
Two years ago, corn shot past $7 per bushel which led tolosses for cattle, hog and chicken producers. These producersresponded by slashing herds and flocks to save on feed costsand to drive up meat prices.
PRODUCTION PRACTICES WILL CHANGE
Corn's $5 price tag will produce significant changes in thelivestock sector.
The percentage of corn in feed rations will be reduced,replaced by other grains or grain products such as distillersgrain which is a byproduct of ethanol production.
"They are going to find a lot of ways to try not to use $5corn," said Steve Meyer, economist at Paragon Economics. "Wehave had a lot of people doing a lot of creative things ondiets."
Cattle and hogs will be marketed at lighter weights asproducers seek to save on feed costs. That will mean less beefand pork output per animal.
"You have less cattle and now you have an even strongerincentive to keep carcass weights down," said Derrell Peel,agricultural economist at Oklahoma State University. "We werealready looking for about 2 percent less beef production nextyear."
Feeder cattle, the yearling cattle brought into feedlotsfor fattening, will be left on pastures longer and spend lesstime being fed grain rations in feedlots, Peel said.
Meat processors like Tyson Foods Inc and SmithfieldFoods Inc have closed plants and made other changes inoperations to better align production with the smaller cattleand hog herds.
MARKETS SHOW PROFITS FOR CATTLE, HOGS
Higher feed grain prices will mean smaller profits oncattle and hogs, but the profits should not turn to losses asthey did in 2008.
At the Chicago Mercantile Exchange, cattle for February andApril delivery are priced at about $103 per cwt, profitablelevels even with $5 corn, analysts said.
CME hogs are at $80, also a profitable level.
"I'm still showing they (cattle producers) could lock in$30 to $35 (per) head profit by placing cattle today andmarketing them in March and early April," said Dillon Feuz,agricultural economist at Utah State University.
The $35 per-head profit is down from the $100 to $150profit seen at times this year and will likely not be enough toallow producers to build herds.
Feuz's calculations include buying corn and feeder cattleat current prices and selling live cattle at about the $103 percwt indicated by the CME February and April cattle futurescontracts.
Tom Tippens, analyst at West Oak Commodities, is lessoptimistic for profits but predicts cattle producers can lockin break-even prices on cattle for next year.
HOG HERD TO STAY SMALL
Chicago hog futures prices at 80 cents per lb or more fromFebruary to August next year would be sufficient to yield aprofit with corn prices at $5, Paragon's Meyer said.
Meyer's calculations have hogs making money through thefirst half of 2011, while losses for the rest of the yearshould be small enough to result in a profit, on balance, forthe full 12 months.
"I don't see it causing liquidation. I do see it probablyputting a lot of cold water on any expansion that might begoing on," Meyers said of $5 corn.
As of June 1, the U.S. hog herd was the smallest in threeyears at 64.4 million head after producers pared numbers due toyears of losses from high feed prices and slow pork sales. (Reporting by Bob Burgdorfer; editing by Jim Marshall)