This week's recent buzz has been over the noticeable in prices of major commodities, including corn and soybeans. While the cash crop producers rejoice (and complain that they lost money because they didn’t gamble with their marketing), the livestock producers are getting nervous. And if you are a livestock producer that is not a tiny bit nervous, I envy you.
Livestock producers’ income is driven by two main factors; the farmgate price for their livestock and the cost of feeding that livestock. Feed costs are easily 60-70% of your cost of production. That means when grain prices climb, unless you have the storage or land base to grow all your own feed, it starts to eat at your margin.
The Chain Reaction
When major cash crop prices (corn and soybeans) increase to the rates they are now, levels not seen since 2013, livestock producers and feed manufacturers get pushed to look for alternative feeds. That’s the advantage of playing with your feed ration, you can look at other options for the same result. If you want more on balancing your feed rations, check out this blog post.
The drive to alternative feeds leads to a chain reaction that is already happening, the other feed options like barley, wheat and by-products also increase in price. Derivatives of corn and soybeans like soybean meal and distillers increase because the base product has increased in price. Alternatives increase as producers try to control their costs.
Feed costs overall were forecasted to increase 12% back in December. With current prices, that increase could be higher if you do not have any mitigation strategies.
How can you control your costs?
Know your needs in advance. If you recall this post explained calculating hay needs, as well as the ration options in this blog post, it is possible to know your feed needs well ahead of time. We track every bale fed and every kilogram of feed that goes into our lambs, which provides useful data to base decisions on.
Purchase in bulk. Buying bagged feed is the most costly option so if your needs make it possible, buy your feed in bulk and ask about volume discounts.
Build on-farm storage options so you can take advantage of market opportunities and bulk purchasing. Having the ability to buy grains directly from the field at harvest could be a good mutual arrangement as long as you have the storage capacity.
Collaborate and coordinate with other producers in your area. If buying in bulk is a challenge for you or the volume discounts get more interesting, work with other people. That way you can increase your purchasing power and get better deals. As an example, we purchase our hay supplies with another farmer to get the skid price.
Forward contract your commodities purchase. When you know how much you need, but storage is not an option, you can often make contract purchases with an elevator to fix the price you pay. While there is a chance the market price will go down, knowing exactly what your feed will cost makes budgeting a lot easier and less stressful.
Time your purchases with the harvest. While it is not always the case, most of the time, prices tend to be lowest near harvest when supplies are abundant and higher the further into winter you get. Right now corn is high, supplies are low and at least in Canada, there will not be any new crop corn until October. Corn prices last fall at harvest were significantly lower. While this is an oversimplification of how commodity prices operate, generally there is a seasonal price cycle.
Grow what you can not easily purchase. If you have the land base to grow your own feed, grow the most cost-effective and hard to replace part of your feed ration. For us, that is hay as we believe there is no substitute for high-quality hay. We’re much too small to grow any grain crops efficiently or in a cost-effective way. Hay is also the hardest to replace as seen last summer because when there’s a drought, there is no extra and prices increase rapidly.
Plan Ahead and Plan Often
Above all, feed costs are about planning. If you have livestock, keeping an eye on the commodity prices is a given. It’s important to know what your alternative feed options are and how easily you can access them as not all regions are the same.
The big concern now is the drought out west which is likely to reduce yields in both grains and forages. For producers with grazing livestock, while having a forage-based ration can reduce your risk of cash crop price increases, you will still have to hope for enough rain for that forage to grow. In drought, it is not uncommon to turn to grains to reduce the need to buy expensive hay but when the grain is also expensive, the situation becomes a greater challenge.
With much of the southern Prairies already in a D3 drought and parts of eastern Canada in a D1 with an early dry start to spring, we’re all going to be praying for rain. Because you can’t cash in on those high crop prices if your crops don’t grow.