Paul Hitch on the cost of corn and cattle
Most people know Paul Hitch as a cattle feeder from Guymon, Oklahoma. Actually, the term “cattle feeder” grossly understates what he does. The original Henry C. Fitch Feedlot with room for 52,000 head, joined by Hitch Feeder I with capacity for 59,000 animals and Hitch Feeder II which room for 48,000 head is a business that can handle almost 160,000 animals at any one time.
From the original feedlot, Hitch Enterprises Inc. has grown into an agricultural conglomerate that dominates the Oklahoma panhandle. Hitch Cattle Co. is the cattle buying arm, Hitch Ag Credit finances feedyards, Hitch Commodities does hedging and risk management, Hitch Ranch owns a 150 head cow herd and the wide spread family business even includes pork farrow-to-finish operations.
Paul is president of Hitch Enterprises Inc., chairman of the board, director and chief stockholder. He works on a variety of community and statewide activities, stepping onto the national stage through his activities with the National Cattlemen’s Beef Association. He’s served the organization as Live Cattle Marketing Committee Chairman and is now its president-elect. He’s been on the NCBA Board since 2000 and the executive committee since 2003. He’s also held positions with the Oklahoma Cattlemen's Association and the Texas Cattle Feeders Association.
It’s his experience in the cattle feeding business that led to this interview. Few people have his background and experience. Few people can talk with his authority about what’s going on in the industry today. What the price of corn will do to the future of the cattle business is something we all want to know. I asked Mr. Hitch to shed some light on the subject.
Q. The ethanol boom seems to be quickly rewriting all the rules in the cattle business. The most immediate impact in many peoples’ minds is what the skyrocketing price of corn is doing to feedyards. Mr. Hitch, you feed a few cattle. Can you tell me how it has impacted the business?
A. There’s an old saying that goes, “cheap corn makes for cheap cattle.” I can’t say that’s always true. But I can tell you one thing for sure – expensive corn makes for expensive cattle. With the price of corn almost doubling in one year, feeders’ costs have gone up dramatically. We have to pass some of those costs onto the packer - and ultimately the consumer - or we won’t stay in business very long.
But it is unrealistic to think we will be able to pass on all of this cost increase. If it was that simple, everyone could raise cattle. Feeders will have to absorb our share of the pain here, and it is also forcing us to pay a lower price for calves and feeder cattle. Those prices have rebounded some in the past month or so, but are unlikely to get back to the levels we saw in the first half of 2006 unless we get some relief on grain prices.
Q. The location of feedyards has been based on a lot of economic factors that contribute to operating efficiencies and the opportunity to make a profit – proximity to cattle and feed resources, for instance. With the price of corn leading other feed grains on a seriously upward trend and the rapid construction of ethanol plants near sources of raw materials, will we be witnessing a major restructuring of the feedyard business? Will operators be forced to relocate or develop new feed programs based on higher costs and shorter stays as cattle remain at pasture longer?
A. Grain prices have caused some shift in the cattle on feed numbers. Texas and Kansas are both down a bit from a year ago, while Iowa and Nebraska are up. This is also due to winter storms and some other factors, but clearly as you move further away from the corn belt, cost of gain have risen more.
Having said that, I don’t think we will see major relocations take place. Factors like climate and land availability make relocating feedlots a very tough endeavor. So I think you’re more likely to have some shifts in cattle numbers like we have seen recently, rather than a major revamping of the whole feeding industry.
Q. Grass fed beef has enjoyed a little “boomlet” recently. Could current conditions accelerate its growth or will corn-fed beef continue to dominate the North American market?
A. Grass-fed beef will continue to attract a following of certain consumers, for a variety of reasons. This following will likely grow as producers of grass-fed beef continue to improve the product. But grain-fed beef will dominate the American market as long as it delivers the flavor and value consumers are looking for. I see gains being made by grass-fed beef over the next several years, but no major shifts in consumer preference or production practices.
Q. Of course, as the price of bringing cattle to market increases, everything changes up and down the supply chain. What will happen to the price people are willing to pay for calves and feeder cattle?
A. As I noted above, feeders simply cannot pay the same prices we paid through much of 2005 and 2006, with grain prices where they are today. We are still paying very solid prices for quality calves and feeder cattle, because competition for those animals is still very robust. But if the record prices of the past couple of years are used as the benchmark, we are going to be paying less – there’s just no way around that.
Q. The National Chicken Council has claimed the boost in corn prices has increased the price of poultry by about six cents a pound at retail. The marketplace probably won’t accept it so the increased costs are being absorbed, at least for now, by the producer. While corn isn’t as critical to the final cost of a pound of beef, what will be its impact in the near future?
A. It’s true that cattle do not eat corn for as much of their life as hogs or chickens. Estimates attribute about 70 to 80 percent of total lifetime weight gain in hogs and chickens to feed grain, but only 35 to 40 percent for cattle. But let’s not kid ourselves – beef is going to feel a similar impact because corn is a still major input for our final product. I take some consolation in knowing that the major proteins I compete with are facing the same price pressures. So cattlemen should still fare pretty well in the competition for consumer dollars, but the meat industry could lose some market share to other food types. Cattlemen can also make better use of distiller’s grains than either pork or poultry producers. That’s not a complete solution, but it’s another strategy we can use to deal with high grain prices.
Q. Recently I interviewed Dr. Bryan McMurry, Beef Brand Manager for Cargill Animal Nutrition (Click here to read last week’s “Five minutes with Dr. Bryan McMurry) about traditional finishing diets for cattle in the United States. He’s concerned about the nutritional inconsistency of distiller’s grains as part of a feed program. What steps can be taken to assure adequate nutrition with a new and untested ingredient?
A. First I think it’s important to remember that all distiller's grains are not created equal. From what I understand, the quality of the by-product varies greatly from ethanol plant to ethanol plant. So I think it is very important for cattlemen to consider a single source for the product – and make sure that source is very reliable and dependable. If you try to cut corners, it will probably cost you in the long run.
We also need a lot more research on this subject. We shouldn’t make assumptions – good or bad – about the impact of distiller’s grains without detailed, thorough research. We need to know the impact on carcass quality, flavor, and consistency so that we can be sure that we continue to deliver a quality end product to consumers.
Q. What would you like to say to people in the beef business?
A. Keep in mind that water seeks its own level, and markets have a way of evening out. People will continue to eat beef. Sure, high grain prices are going to impact our incomes and force some adjustments in the livestock industry. But we don’t operate in a vacuum. All proteins are facing similar issues, and we’ll weather this challenge just as we have so many others.
With regard to ethanol and renewable fuels policy, I would like to appeal to everyone’s sense of fairness. Cattlemen are in favor of renewable fuels, but we need a level playing field when we purchase corn. The government doesn’t pay me to convert corn into beef, nor do I want them to. The United States doesn’t charge exorbitant tariffs on imported beef, nor do I want them to. Now that the ethanol industry is booming, it doesn’t need the kind of protection it receives from the fuel-blending tax credit and the tariff on imported ethanol. Those measures should be allowed to go away when they expire over the next few years. It’s not that cattlemen want to hamper ethanol production. It’s just time for that industry to stand on its own, and for every purchaser of grain to have equal footing in the marketplace.
From the original feedlot, Hitch Enterprises Inc. has grown into an agricultural conglomerate that dominates the Oklahoma panhandle. Hitch Cattle Co. is the cattle buying arm, Hitch Ag Credit finances feedyards, Hitch Commodities does hedging and risk management, Hitch Ranch owns a 150 head cow herd and the wide spread family business even includes pork farrow-to-finish operations.
Paul is president of Hitch Enterprises Inc., chairman of the board, director and chief stockholder. He works on a variety of community and statewide activities, stepping onto the national stage through his activities with the National Cattlemen’s Beef Association. He’s served the organization as Live Cattle Marketing Committee Chairman and is now its president-elect. He’s been on the NCBA Board since 2000 and the executive committee since 2003. He’s also held positions with the Oklahoma Cattlemen's Association and the Texas Cattle Feeders Association.
It’s his experience in the cattle feeding business that led to this interview. Few people have his background and experience. Few people can talk with his authority about what’s going on in the industry today. What the price of corn will do to the future of the cattle business is something we all want to know. I asked Mr. Hitch to shed some light on the subject.
Q. The ethanol boom seems to be quickly rewriting all the rules in the cattle business. The most immediate impact in many peoples’ minds is what the skyrocketing price of corn is doing to feedyards. Mr. Hitch, you feed a few cattle. Can you tell me how it has impacted the business?
A. There’s an old saying that goes, “cheap corn makes for cheap cattle.” I can’t say that’s always true. But I can tell you one thing for sure – expensive corn makes for expensive cattle. With the price of corn almost doubling in one year, feeders’ costs have gone up dramatically. We have to pass some of those costs onto the packer - and ultimately the consumer - or we won’t stay in business very long.
But it is unrealistic to think we will be able to pass on all of this cost increase. If it was that simple, everyone could raise cattle. Feeders will have to absorb our share of the pain here, and it is also forcing us to pay a lower price for calves and feeder cattle. Those prices have rebounded some in the past month or so, but are unlikely to get back to the levels we saw in the first half of 2006 unless we get some relief on grain prices.
Q. The location of feedyards has been based on a lot of economic factors that contribute to operating efficiencies and the opportunity to make a profit – proximity to cattle and feed resources, for instance. With the price of corn leading other feed grains on a seriously upward trend and the rapid construction of ethanol plants near sources of raw materials, will we be witnessing a major restructuring of the feedyard business? Will operators be forced to relocate or develop new feed programs based on higher costs and shorter stays as cattle remain at pasture longer?
A. Grain prices have caused some shift in the cattle on feed numbers. Texas and Kansas are both down a bit from a year ago, while Iowa and Nebraska are up. This is also due to winter storms and some other factors, but clearly as you move further away from the corn belt, cost of gain have risen more.
Having said that, I don’t think we will see major relocations take place. Factors like climate and land availability make relocating feedlots a very tough endeavor. So I think you’re more likely to have some shifts in cattle numbers like we have seen recently, rather than a major revamping of the whole feeding industry.
Q. Grass fed beef has enjoyed a little “boomlet” recently. Could current conditions accelerate its growth or will corn-fed beef continue to dominate the North American market?
A. Grass-fed beef will continue to attract a following of certain consumers, for a variety of reasons. This following will likely grow as producers of grass-fed beef continue to improve the product. But grain-fed beef will dominate the American market as long as it delivers the flavor and value consumers are looking for. I see gains being made by grass-fed beef over the next several years, but no major shifts in consumer preference or production practices.
Q. Of course, as the price of bringing cattle to market increases, everything changes up and down the supply chain. What will happen to the price people are willing to pay for calves and feeder cattle?
A. As I noted above, feeders simply cannot pay the same prices we paid through much of 2005 and 2006, with grain prices where they are today. We are still paying very solid prices for quality calves and feeder cattle, because competition for those animals is still very robust. But if the record prices of the past couple of years are used as the benchmark, we are going to be paying less – there’s just no way around that.
Q. The National Chicken Council has claimed the boost in corn prices has increased the price of poultry by about six cents a pound at retail. The marketplace probably won’t accept it so the increased costs are being absorbed, at least for now, by the producer. While corn isn’t as critical to the final cost of a pound of beef, what will be its impact in the near future?
A. It’s true that cattle do not eat corn for as much of their life as hogs or chickens. Estimates attribute about 70 to 80 percent of total lifetime weight gain in hogs and chickens to feed grain, but only 35 to 40 percent for cattle. But let’s not kid ourselves – beef is going to feel a similar impact because corn is a still major input for our final product. I take some consolation in knowing that the major proteins I compete with are facing the same price pressures. So cattlemen should still fare pretty well in the competition for consumer dollars, but the meat industry could lose some market share to other food types. Cattlemen can also make better use of distiller’s grains than either pork or poultry producers. That’s not a complete solution, but it’s another strategy we can use to deal with high grain prices.
Q. Recently I interviewed Dr. Bryan McMurry, Beef Brand Manager for Cargill Animal Nutrition (Click here to read last week’s “Five minutes with Dr. Bryan McMurry) about traditional finishing diets for cattle in the United States. He’s concerned about the nutritional inconsistency of distiller’s grains as part of a feed program. What steps can be taken to assure adequate nutrition with a new and untested ingredient?
A. First I think it’s important to remember that all distiller's grains are not created equal. From what I understand, the quality of the by-product varies greatly from ethanol plant to ethanol plant. So I think it is very important for cattlemen to consider a single source for the product – and make sure that source is very reliable and dependable. If you try to cut corners, it will probably cost you in the long run.
We also need a lot more research on this subject. We shouldn’t make assumptions – good or bad – about the impact of distiller’s grains without detailed, thorough research. We need to know the impact on carcass quality, flavor, and consistency so that we can be sure that we continue to deliver a quality end product to consumers.
Q. What would you like to say to people in the beef business?
A. Keep in mind that water seeks its own level, and markets have a way of evening out. People will continue to eat beef. Sure, high grain prices are going to impact our incomes and force some adjustments in the livestock industry. But we don’t operate in a vacuum. All proteins are facing similar issues, and we’ll weather this challenge just as we have so many others.
With regard to ethanol and renewable fuels policy, I would like to appeal to everyone’s sense of fairness. Cattlemen are in favor of renewable fuels, but we need a level playing field when we purchase corn. The government doesn’t pay me to convert corn into beef, nor do I want them to. The United States doesn’t charge exorbitant tariffs on imported beef, nor do I want them to. Now that the ethanol industry is booming, it doesn’t need the kind of protection it receives from the fuel-blending tax credit and the tariff on imported ethanol. Those measures should be allowed to go away when they expire over the next few years. It’s not that cattlemen want to hamper ethanol production. It’s just time for that industry to stand on its own, and for every purchaser of grain to have equal footing in the marketplace.
posted by Chuck Jolley at Saturday, March 17, 2007
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