Upbeat outlook on rising feed costs

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LIVESTOCK FARMERS MUST NOT LET higher feed prices eat up their profits. According to the National Department of Agriculture, the overall gross farming income increased by 11,6% from 2005 to 2006, compared to a 10,5% increase in cost, resulting in a farm profit increase of 21,2% to R14 275 million. More specifically, the income of field crops and horticultural products increased respectively by 8,5% and 5,5%, while the income of livestock products increased by 16,7% due to a 23,2% increase in the average livestock price.

This means that livestock farmers enjoyed a higher gross income from a slightly lower total stock production. Their production costs increased sharply with the rise in feed prices, which make up 28,6% of the total expenditure on intermediate goods and services.

Why the soaring feed prices?
The grain price, as well as the maize and soya beans prices, which are the two major feed ingredients, are important to the livestock producer. The use of grain for biofuel production in the US had a great effect on current grain prices. The price of maize on the Chicago Board of Trade (CBOT) increased from levels below US0 per ton to the current level of US0 per ton and more.

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Biofuel transforming global grain markets
It seems as if the development of the biofuels industry has brought a permanent change in global grain markets. For the US, the development of the biofuels industry holds many benefits. It has resulted in a revival in many rural areas where farmers were squeezed between low product prices and high input costs. It can even result in a reduction in some subsidies in the new farm bill. It has also enabled the US to comply with the spirit of the Kyoto Protocol with little negative effect on the economy. Some believe that the higher grain prices will soon result in a sharp increase in US production, and a return to the previous lower price levels.

However, a recent study by researchers at the Iowa State University in the US has found the opposite to be true. If they take current and future fuel prices into account, they expect an average US maize price of US0. An increase of US per barrel in the price of oil will increase the maize price to US5 per ton. They regard these two price levels as the maximum and minimum range for US maize price in the next decade. Higher use of grain for biofuels will also impact on the international price of soya beans.

The study estimated a price for US soya beans to be between US0 and US7 per ton. Currently (June 2007) maize trades at US5 per ton and soya beans at US1 per ton – in both cases very near to the middle of the price range. Higher US maize production and higher South American oilseed production will not result in lower producer prices. Although the supply of distiller’s grain increases significantly, its price will closely follow the maize price.

US influence on SA
Higher US prices implies higher South African prices as our prices closely stay within the import and export parity price range. Given the expected weakening of the rand, livestock producers will face higher feed cost for the next few years. Fortunately the higher feed prices will result in higher US and world prices for livestock products. The long-term outlook for livestock prices remains favourable, although livestock producers will have to pay more for feed.

Tapering the gap by tightening relations
There is a huge gap between grain and balanced ration producer prices. Farmers must try to keep this gap as small as possible by examining the value chain and eliminating any superfluous links in the system. Internationally, the trend is towards long- term strategic relationships with suppliers and buyers. The survival and continuing profitability of the feed processor depends on the sustainability of the commercial livestock producer. They need each other. Dr Koos Coetzee is an agricultural economist at the Milk Producers’ Organisation. All opinions are his own.