Handling High Commodity Prices- Normand St-Pierre

Handling High Commodity Prices

Normand St-Pierre, Ph.D., P.A.S.
The Ohio State University

Copyright 2011, N. St-Pierre, 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 Yellow
FOB 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!
 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!
 Avoid credit card balances


What Can Be Done?
 Shop better!
 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 Method
Applied 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


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 Value of Energy
In one Ton of Corn In one Ton of Corn

Corn: 150 = 176 $CP + 1566 $NE

Soybean: 300 = 992 $CP + 1638 $NE



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:
• 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


2004 2008
Legume hay 4.2 4.2
Whole cottonseedSame amounts of forage
5.0 2.75 fed
Soymeal 44% 2.25 -
DDGS - 3.33
Hominy - 2.25
Gluten feed - 2.75
Tallow 0.5 -


2004 2008
Legume hay 4.2 4.2
15.0 11.25
Corn, ground Eliminate Wet brewers grains
Soymeal 44% 2.25 -
DDGS - 3.33
Hominy - 2.25
Gluten feed - 2.75
Tallow 0.5 -


2004 2008
Legume hay 4.2 4.2
Soymeal 44% 2.25 -
Soymeal, expeller whole cottonseed 2.75 nearly
Cut 2.25 by half
DDGS - 3.33
Hominy - 2.25
Gluten feed - 2.75
Tallow 0.5 -


2004 2008
Legume hay 4.2 4.2
Soymeal 44% 2.25 -
DDGS Reduce ground corn by 25%
- 3.33
Hominy - 2.25
Gluten feed - 2.75
Tallow 0.5 -


2004 2008
Legume hay 4.2 4.2
Soymeal 44% 2.25 -
DDGS - 3.33
Hominy Eliminate conventional2.25
- soybean meal
Gluten feed - 2.75
Tallow 0.5 -


2004 2008
Legume hay 4.2 4.2
Soymeal 44% 2.25 -
DDGS - 3.33
Hominy Slight increase in expeller soymeal
- 2.25
Gluten feed - 2.75
Tallow 0.5 -


2004 2008
Legume hay 4.2 4.2
Corn silage Heavy37.0 of by-products
use 37.0
- Multiple 5.0
Whole cottonseed sources reduces total
2.75
Corn, ground diet variation 11.25
15.0
Soymeal 44% 2.25 -
DDGS - 3.33
Hominy - 2.25
Gluten feed - 2.75
Tallow 0.5 -


2004 2008
Legume hay 4.2 4.2
Soymeal 44% 2.25 -
DDGS - 3.33
Hominy -
Eliminate tallow 2.25
Gluten feed - 2.75
Tallow 0.5 -


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) 6.10 5.52
(using 2008 prices)
Difference of
$0.58/cow/day


What Can Be Done?
 Shop better!
 Shop wiser!
 Avoid the black holes!


What Can Be Done?
 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!
 Don’t cut the corners!


What Can Be Done?
 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?
 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!
 Using feed additives to hide management
flaws!


What Can Be Done?
 Shop better!
 Shop wiser!
 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?


Handling High Commodity Prices- Normand St-Pierre

Handling High Commodity Prices- Normand St-Pierre

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