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DES MOINES, Iowa - The National Pork Board here warned pork producers to prepare for fluctuating prices, in light of increased demand for commodity corn, a staple in hog feed, to make ethanol fuel.
Nearly 2.15 million bushels of corn will be used to produce ethanol during the Oct. 2006-Sept. 2007 crop year -- a half a million bushel increase over last year's 1.6 million bushels - according to NPB.
This has spurred demand strong enough to drive up the price of corn. And while it's good for corn producers, and the production of an alternative fuel is a good step in the right direction for America, it's not altogether great news for pork producers.
"Corn is one of the major ingredients in hog feeds," said Steve Meyer of Paragon Economics. "Corn and soybean meal combined make up nearly 60 percent of the total cost of feeding a pig. I use the rule of thumb that every $1 per bushel increase in the price of corn increases the cost of raising a pig by $0.05 per pound of live weight."
Meyer said that the roughly $1.50 per bushel increase in corn prices in recent months has increased hog production by roughly $20 for each 260-pound market hog.
While hog production numbers for 2007 are already set - with pigs that will be harvested from January to June already born, and sows already bred for pigs that will be harvested from July to October - the longer term outlook is more uncertain.
"From 2008 onward may be a different story in regards to pork prices," Meyer said, noting that an important difference between the feed price shock and previous rounds is that this one is demand, as opposed to supply driven.
While Meyer said that in the past, the industry has been one corn crop away from ample supplies and lower prices, it will not help in this scenario since the increase is driven by increased corn usage for ethanol.
"Higher oil prices and the continued governmental subsidies will keep corn flowing to ethanol and keep corn prices high for the foreseeable future," said Meyer, which translates into potential long-term pricing issues for pork.