News Update

Livestock Sector Predicted to Slow
Dec. 6, 2006

LOUISVILLE, Ky. — The livestock industry has been the driving force behind a strong agricultural economy in the state of Kentucky; but, in the coming year, prices are expected to level and input costs to rise, making the enterprises less profitable.

While the equine sector will remain strong, cattle and poultry will see less profitably, University of Kentucky (UK) experts predict. These three sectors comprised 61% of total cash farm receipts in 2006. Grain prices are expected to pick up the slack in 2007, ensuring a continued strong farm economy.

“We’ve seen very good feeder cattle prices in Kentucky for several years now, and we’ve been enthused about those and wondering how long they were going to last and thinking about long-term expansion,” said Lee Meyer, a UK agricultural economist. But corn may affect beef production more than the cattle cycle will, he added.

In the past few months, higher corn prices have had a detrimental effect on cattle prices. The effect of increased corn prices on cattle prices follows what Meyer calls the eight-to-one rule — for every $1 increase in corn prices, feeder cattle prices will drop by $8.

There is also some expectation of a little more beef production in the United States, but not much more than last year. That should help fed-cattle prices to remain steady, while feeder cattle prices are expected to be 5%-10% lower.

“By historical standards, prices are still going to be pretty good,” Meyer said. “Efficient producers should be able to cover their costs, and the longer run, I think, is still looking pretty good.”

A look at the competition

The poultry industry, an $850 million industry in Kentucky, will also be affected by higher feed costs due to increased corn prices. Exports have been strong, and the industry has continued to build on export levels of 15% of broiler meat. In the next year, integrators are expected to reduce production and, as a result, prices are expected to increase slightly. Higher feed costs will increase production costs, tempering income potential. Energy costs, especially for natural gas used to heat broiler houses, have also affected expenses.

Hog production in Kentucky leveled out in 2004 after about a decade of declining production. In 2005 and likely in 2006, as well, production has increased slightly. Prices in 2006 were good and exports are strong, a key factor in the strong prices. Prices in the coming year will be down about 3% overall, but Meyer said the important thing to consider is the breakeven cost of production. Corn is an important component of hog diets, and with the higher prices for the commodity, production costs will be higher, pulling the breakeven price up and affecting producer profit potential.

Much of the increased price of corn is being driven by a high demand for the grain in ethanol production. Distillers’ dried grains (DDG), a byproduct of ethanol production, will be utilized as a feed source by some sectors of the livestock industry.

Distillers’ grain can be used for a feed source for backgrounding calves to complement other feedstuffs and forages in Kentucky, Meyer said. The feedlots are trying to move more toward distillers’ grains in their rations to offset the higher corn prices. This will help offset some of the higher feed costs for cattle.

DDG can be fed to poultry in limited amounts, replacing some of the corn and soybean meal typically found in poultry diets. However, corn will continue to be the predominant ingredient for energy in diets, said Austin Cantor, UK poultry nutrition specialist.

The fermentation process primarily uses the starch in corn, leaving the protein and fiber behind in DDG. Fiber at too high of a level in poultry diets can depress weight gain, he said. Also, poultry diets are computer-formulated based on the cost of nutrients added, so DDG may not be the most cost-effective nutrient source.

DDG can be effectively used in swine diets. However, it is not a straight DDG-for-corn substitution, said Richard Coffey, UK swine specialist. It primarily replaces corn, but it will also affect the amount of soybean meal and dicalcium phosphate. To effectively utilize DDG, diets will need to be reformulated. The traditional inclusion rates have been up to 5% in nursery diets, 10% in grower/finisher and lactation diets, and 20% in gestation diets. However, if the diet is formulated on a digestible amino acid basis, it is possible to go to higher inclusion rates.

— by Laura Skillman, news and information section leader, Agricultural Communications Services, University of Kentucky College of Agriculture