Handling High Commodity Prices- Normand St-Pierre

Copyright 2011, N. St-Pierre, The Ohio State University

Handling High Commodity Prices

Normand St-Pierre, Ph.D., P.A.S.

The Ohio State University


Realities

High(er) commodity prices are likely with us for the long-run…

Dairy producers are NOT defenseless Change in thinking and attitude Sharper pencil


A Few Questions

• Is corn expensive?


Corn, U.S. No 2 YellowFOB Gulf of Mexico, US dollars per metric ton

July 1991 – July 2011

Source: International Monetary Fund


A Few Questions

• Is corn expensive?• From a HISTORICAL perspective, YES.

Dah!


What Can Be Done?

Shop better!


What Can Be Done?

Shop better! Finding the same feed, but cheaper somewhere else.

Make sure that you are comparing apples to apples. Commodities can have the same name but different specifications.

Feeds are often bought with services bundled in. Forage analyses, ration balancing These services have a value, but make sure that:

1. You require these services 2. They are delivered at a competitive price


What Can Be Done?

Shop better! Finding the same feed, but cheaper somewhere else. Make use of cash discounts

Manage your cash-flow 1% discount for paying 15 days early is equal to an APR greater

than 25%.


What Can Be Done?

Shop better! Finding the same feed, but cheaper somewhere else. Make use of cash discounts Avoid credit card balances


What Can Be Done?

Shop better! Finding the same feed, but cheaper somewhere else. Make use of cash discounts Avoid credit card balances Make sure that you are getting what you paid for…

(and that you know what you are paying for…)


What Can Be Done?

Shop better! Shop wiser!


What Can Be Done?

Shop wiser! Finding underpriced feeds

Not the same as “cheap feeds” Avoiding overpriced feeds

Not the same as “expensive feeds” Comparing feed ingredients with different

nutritional composition


It’s like buying a house!

What is this house worth?



Or this one?



Or these houses?


House Value

Different houses have different attributes. We can price the house attributes (square feet,

number of bedrooms, number of bathrooms, square yards of backyard, high school average scores on SAT/ACT, etc…) if we have many houses that sold and their attributes.


The Need

To compare feedstuffs of different composition on an economic basis.

To determine the cost of nutrients.


Assumptions

Feedstuffs are worth their content of nutrients Buyers and sellers of feedstuffs are coherent and

rational Markets are competitive but need time (lag) to adjust.


The Peterson MethodApplied to Energy and Crude Protein

Price DM % CP (%) NEl (Mcal/lb)

Corn $ 150 88 10.0 0.89

Soybean Meal $ 300 90 55.1 0.91


The Peterson Method:Using Corn and Soybean Meal

Corn: 150 = 176 $CP + 1566 $NE

Soybean: 300 = 992 $CP + 1638 $NE



Corn: 150 = 176 $CP + 1566 $NE

Soybean: 300 = 992 $CP + 1638 $NE

Value of Crude Protein

In one Ton of Corn



Corn: 150 = 176 $CP + 1566 $NE

Soybean: 300 = 992 $CP + 1638 $NE

Value of Crude Protein

In one Ton of Corn

Value of Energy

In one Ton of Corn



Corn: 150 = 176 $CP + 1566 $NE

Soybean: 300 = 992 $CP + 1638 $NE

Two equations with two unknowns...



Corn: 150 = 176 $CP + 1566 $NE

Soybean: 300 = 992 $CP + 1638 $NE

$CP = $0.177/lb

$NE = $0.076/Mcal


Problems with the Peterson Method:Using Corn and Soybean Meal

• Assumes that corn and soybean meal (barometer feeds) are always perfectly priced• Both are never over- or under-priced

• Values only energy and crude protein• Method implies irrational buyers and sellers

• Buyers would keep buying “overpriced” commodities• Sellers would keep selling “underpriced” commodities


Overcoming the Problems

Sesame uses prices and composition of all feeds traded in a given market to calculate the cost of the nutrients.

Sesame uses the economically important nutrients to assess the economic value of a feed.


Reminders There are no “requirements” in Sesame

Market information back captures the implicit state of supply and demand

Sesame does not look whether a feed “fits” Fitting is tactical; Sesame is strategic

Selection of different nutrients yields different economic values Economic value is not the same for a hog and a cow Economic value is not the same for elite producers

vs. average producer


PA – 8/29/2011


Soybean Meal – 48%


False Savings?

• “I grew it, so it is not as expensive to feed my cows!”


False Savings?

• “I grew it, so it is not as expensive to feed my cows!”• So, the person selling your

corn is either an incompetent or an imbecile!


What is the new nutritional economics era?

• Dietary energy (NEL) costs well above historical average (casualty of grain ethanol ???)

• Discounted RDP prices (dependent on amount of grain processing)

• Variable d-RUP prices (should follow the “protein” market but with greater fluctuation amplitudes)

• Discounted ne-NDF prices (depends on supply/demand for “processed” dietary fiber)

• Expensive e-NDF (casualty of grain ethanol ???)


2004 2008 ---- lbs as fed per day ---- Legume hay 4.2 4.2 Legume silage 19.5 19.5 Corn silage 37.0 37.0 Brewers grains, wet 13.8 - Whole cottonseed 5.0 2.75 Corn, ground 15.0 11.25 Soymeal 44% 2.25 - Soymeal, expeller 2.25 2.75 DDGS - 3.33 Hominy - 2.25 Gluten feed - 2.75 Wheat middlings - 2.75 Tallow 0.5 - Minerals and Vits 1.5 1.5



Same amounts of forage fed



Eliminate Wet brewers grains



Cut whole cottonseed by nearly half



Reduce ground corn by 25%



Eliminate conventional soybean meal



Slight increase in expeller soymeal



Heavy use of by-products

- Multiple sources reduces total diet variation



Eliminate tallow


2004 2008 Dry matter (lbs/day) 51.3 51.3 NEL (Mcal/lb) 0.735 0.734 ---- % of DM ---- CP 17.0 16.7 RDP 11.3 10.8 RUP 5.6 5.8 MP 10.6 10.6 NDF 32.2 33.3 NFC 42.5 42.8 Ether extracts 5.7 4.6


2004 2008 Dry matter (lbs/day) 51.3 51.3 NEL (Mcal/lb) 0.74 0.73 ---- % of DM ---- CP 17.0 16.7 RDP 11.3 10.8 RUP 5.6 5.8 MP 10.6 10.6 NDF 32.2 33.3 NFC 42.5 42.8 Ether extracts 5.7 4.6 Cost ($/cow per day) (using 2008 prices)

6.10 5.52

Difference of $0.58/cow/day


What Can Be Done?

Shop better! Shop wiser! Avoid the black holes!


What Can Be Done?

Avoid the black holes! Shrinkage of commodities

Often exceeds 5% DM shrinkage of silages


Pricing home-grown corn silage


Pricing home-grown corn silage

10% $6.10

$67.10


What Can Be Done?

Shop better! Shop wiser! Avoid the black holes! Don’t cut the corners!


What Can Be Done?

Don’t cut the corners! Value of multiple rations


Nutritional Grouping: Benefits More “precise” nutrition

Diets are closer to the nutritional requirements of all animals in the group

Reduced feed costs Lower lead factors (safety margins) Better targeting of feed additives and value-added

feeds Improved production Better control of body condition Reduced nutrient excretion


Nutritional Grouping: Disadvantages A pain in the b… Transient reduction in production Labor and management demand

More complicated to feed, etc. A pain in the b… worth ~ $0.25/cow/day!


What Can Be Done?

Don’t cut the corners! Value of multiple rations

Avoid steep changes in diet composition Move large number of animals at once Reduced effects in large pens

Group for other things than breeding status


Number of Lactation Diets Practical recommendations:

<100 cows: 1 group 100-300: 2 groups >300: 3 groups


What Can Be Done?

Shop better! Shop wiser! Avoid the black holes! Don’t cut the corners! Using feed additives to hide management

flaws!


What Can Be Done?

Shop better! Shop wiser! Avoid the black holes! Don’t cut the corners! Using feed additives to hide management

flaws! Reduce the welfare checks!


The Welfare Checks

Reduce the welfare checks! Dry cows and replacement heifers are welfare

recipients. Their welfare checks are written by the lactating

cows.


The Welfare Checks


The Welfare Checks

A 30% reduction in net income…


Handling high commodity prices

What do you think?

Thank You

Handling High Commodity Prices- Normand St-Pierre

Education

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