Structural Changes in Animal Agriculture:An Inconvenient Moo

Dr. Francis L. FluhartyDepartment of Animal Sciences

The Ohio State University

We’ve Seen Cycles Before: At this point, you may be asking ‘what

challenges?’ • U.S. Renewable Fuels Legislation is changing animal

agriculture beyond the Supply and Demand economics of the past…. This isn’t your parent’s cattle cycle or hog-corn cycle.

• Nutrient inputs are changing with ethanol co-products.

• Consumers are changing their eating habits and demanding high perceived value products.

• International trade is progressing faster than food animal producers want to believe.

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Option #1

Source: http://kids.nationalgeographic.com/Stories/AnimalsNature/Animal-myths-busted

Option #2

• Learn what factors are changing• Identify what consumers perceive as having

higher value• Identify opportunities to differentiate your

products and services• Become flexible to changing situations:

One Person’s Crisis is Another Person’s Opportunity

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The Challenges:

• The two Major Challenges facing animal agricultural in the immediate future are:

1. The loss of starch in animal diets, and

2. The loss of land-based resources used for the production of feed for our animal

industries.

These both will continue as the corn-based ethanol and cellulosic ethanol industries expand.

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On August 8, 2005, President Bush signed the Energy Policy Act of 2005 (H.R. 6) into law. The comprehensive energy legislation included a renewable fuels standard aimed at doubling the use of ethanol and biodiesel

by 2012, and was backed by economic

incentives.

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U.S. Ethanol Legislation

• On December 19, 2007, President Bush signed The Energy Independence and Security Act of 2007, which expands the Renewable Fuels Standard (RFS) by requiring 36 billion gallons of renewable fuel be used annually by 2022, and the legislation requires 21 billion gallons of that goal must come from advanced biofuels including cellulosic ethanol

(Source: http://www.ethanolrfa.org/ ).

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Ethanol Production Capacity

• The Renewable Fuels Association, states that there are now 134 ethanol plants with a total production capacity of 7.2 billion gallons and another 77 ethanol plants under construction or expanding, with an additional production capacity estimated at 6.2 billion gallons (Source: http://www.ethanolrfa.org/industry/statistics/#C).

• It is estimated that the industry produced 6.5 billion gallons of ethanol in 2007, and projects ethanol production in 2008 to exceed nine billion gallons.

(Source: http://www.ethanolrfa.org/objects/documents/1493/er261.pdf).

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The Future of Ethanol

• Consider the 5 billion gallons produced in 2006, and the 6.5 billion gallons produced in 2007, all from grain.

• A major portion of the expansion in ethanol production is expected to be due to the development of the cellulosic ethanol industry. As opposed to grain sources, cellulosic ethanol production could use cellulose from silages, forages, or trees.

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Impacts of U.S. Energy Policy• Iowa State University reports that “the latest USDA

projections put corn exports for the 2007/08 marketing year at 2.45 billion bushels” and the primary reason for the export situation is that between January 1, 2007 and January 1, 2008, the U.S. dollar lost 15% of its value compared with the Brazilian real and 6% of its value compared with the Chinese yuan, export competitors.

• The U.S. dollar lost 6% of its value compared with the Japanese yen, making U.S. corn a very inexpensive import compared with Brazilian or Chinese corn (Source:

http://www.card.iastate.edu/iowa_ag_review/winter_08/article4.aspx).

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Current Impacts of Ethanol• According to Keith Collins, Chief Economist for the

USDA in testimony before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry on January 10, 2007, in 2006, approximately 5 billion gallons of ethanol were produced in the U.S., which accounted for 20% of the 2006 corn crop.

• However, the U.S. consumption of gasoline was near 140 billion gallons, so 20% of the corn crop was diverted to produce less than 5% of our gasoline. (Source: http://www.usda.gov/oce/newsroom/congressional_testimony/Collins_011007.pdf)

Ethanol is an MTBE replacement.Fluharty, 2008

Current Impacts of Ethanol

• The cost of other co-product feeds is increasing as nutritionists try to reduce feed costs with feeds lower in oil and S than distillers grains, while maintaining an energy value close to corn.

• The problem isn’t ethanol production, but the removal of corn starch from animal feeds and its use in renewable fuel energy production.

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Midwest Feed Grains are CostlyMidwest Prices January, 2008

Feedstuff Price Price / Pound

Corn $4.98/bu .089

Soybeans $12.64/bu .21

Wheat $9.62/bu .16

Oats $3.19/bu .10

Soybean meal $339.30/ton .17

CGF, 21% $190/ton .095

DDGS $175/ton .088

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Impacts of Increasing Ethanol Production

• Regionally, the amount of N, P, and S that are both fed, and excreted can cause environmental problems from ammonia emissions, N and P runoff, and S and P buildup in soils.

• Finally, the movement to cellulosic ethanol brings up the potential for more wind erosion as ground cover is removed in the fall.

• The potentially huge unknown is the extent to which grasslands currently used for cattle grazing and hay production will be transferred to forage production exclusively for cellulosic ethanol feedstock production.

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Impact on Pork and Poultry Production

• The amount of corn diverted from swine and poultry production could be potentially devastating to those industries as DDGS are not suitable feeds, in large amounts, for non-ruminants.

• From a National Security perspective, having affordable domestic meat animal protein production is necessary, with the poor and the elderly being the consumer groups most affected by a rise in food costs.

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Impacts of Increasing Ethanol Production

• As the demand for corn grows, marginal lands currently in CRP acreage will be converted to corn and soybean production.

• The price paid for cash rent will continue to increase, forcing producers to use erodible land. This could have severe consequences, long-term, for soil and water conservation efforts.

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Impacts of Increasing Ethanol Production

• The transportation infrastructure for both truck and rail will be altered as grain is moved into more remote areas.

• The Texas Panhandle has a total of 600M gallons of ethanol production planned. Water usage on already stressed aquifers will be increased, as the production of 1 gallon of ethanol takes 3 to 5 gallons of water.

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Challenges and Opportunities

• We are being faced with challenges that we haven’t even started to consider, but not planning for the future will be devastating.

• We need to better manage our pasture resources, develop and implement nutrient management plans; develop technologies and products, or product combinations, which maximize the digestibility of feedstuffs and optimize an animals immunity

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Challenges and Opportunities

• A balance must be struck between the U.S. need for food, and energy. If not, the meat protein industries may be forever altered, with potentially damaging impacts to the environment, if waste management technologies are not implemented, and caution is not exercised in planting marginal lands, as the demand for corn increases to keep up with proposed ethanol production targets.

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The Beef Processing Industry is CHANGING• JBS SA: Based in São Paulo, Brazil, a leading beef processor in Latin America

with 23 plants in Brazil and 5 in Argentina, is a worldwide exporter. JBS SA had $11.9 billion in revenue in 2007 with operations in Brazil, Argentina, the U.S. and Australia. JBS SA acquired Greeley, Colorado-based Swift Foods last year.

Just purchased in 2008• National Beef Packing, the nation's fourth-largest beef processing company from

Majority owner U.S. Premium Beef LLC. JBS agreed to acquire National Beef in a cash-and-stock deal worth about $465 million in cash, $95 million in JBS shares and the assumption of $410 million in debt. In fiscal year 2007, National Beef generated sales of $5.6 billion and processed 3.9 million head of cattle.

• Smithfield Beef Group: The fifth-largest beef producer in the U.S. JBS will pay $565 million for the beef group in cash, and increase capital in feedlot operator Five Rivers by $200 million. Five Rivers is the world’s largest cattle feeding company, and in addition to Smithfield’s half-interest, JBS is purchasing Conti Group’s half-interest in Five Rivers, for sole ownership. Smithfield Beef processes more than 2 million head of cattle a year and sales exceed $2.5 billion annually. It has major facilities in Green Bay, Wis.; Tolleson, Ariz.; Plainwell, Mich.; and Souderton, Pa.

The Beef Processing Industry is CHANGING

• JBS also just purchased: the Tasman Group: Australia's largest meat processor based in Brooklyn, Australia. JBS will pay $100 million for the group and an existing debt of $50 million in the name of the Australian company.

WE NOW HAVE THE BIG 3 IN U.S. BEEF PACKING

1. JBS SA 42,000 hd/day capacity

2. Cargill 29,000 hd/day capacity

3. Tyson 28,000 hd/day capacity

Consumers Are Demanding More High Perceived-Value Products

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What Consumers Want• The National Restaurant Association conducted a

chef’s survey in October 2007 to identify food and beverage items, cuisines, and preparation methods based on their popularity.

• Foods that were ranked as ‘Hot’ based on their overall rank, and percentage of ‘Hot’ responses:#2 Locally Grown Produce 83%#3 Organic Produce 81%#8 Grass-Fed Items(Source: www.restaurant.org)

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Retail Food and Drug Sector Datahttp://money.cnn.com/magazines/fortune/fortune500/2007/snapshots/1575.html

Store Rank Revenue ($ Billion)

Profit % Change From

‘05

10 Year Ann. % Growth

Kroger 1 66.1 16.4 7.0

Safeway 4 40.2 55.2 7.2

Publix 5 21.9 10.9 18.3

Super Valu 6 19.9 -46.6 1.8

Winn Dixie 8 7.9 Lost $361 M. NA

Whole Foods 9 5.6 49.5 21.1

Rank: Walgreen 2, CVS 3, Rite Aid 7Fluharty, 2008

What Makes Whole Foods and Publix the Fastest Growing Food Retailers?

Publix Success Attributed to:

‘Giving customers a memorable, pleasant experience. Building customer loyalty with outstanding service and community commitment. Adding value to the consumer dollar. Fostering a sense of heritage and tradition. Instilling a can-do corporate culture.’

http://goliath.ecnext.com/coms2/summary_0198-117084_ITM

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Publix Goes Green

• In 2007, Palm Beach Gardens and Boca Raton became home to the first two Publix GreenWise Markets in the chain's history which sell only natural and organic food and products.

• ‘GreenWise is the name given to Publix's private label of health, natural and organic foods. GreenWise products can be found at all Publix supermarkets. Some stores feature GreenWise sections, whereas others incorporate the products throughout the entire store.’http://www.commercialpropertynews.com/cpn/property_type/article_display.jsp?vnu_content_id=1003585817

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Whole Foods• ‘Founded in 1980 as one small store in Austin, Texas,

Whole Foods Market® is now the world's leading retailer of natural and organic foods, with more than 265 stores in North America and the United Kingdom. To date Whole Foods Market remains uniquely mission driven: We're highly selective about what we sell, dedicated to stringent Quality Standards, and committed to sustainable agriculture. We believe in a virtuous circle entwining the food chain, human beings and Mother Earth: each is reliant upon the others through a beautiful and delicate symbiosis.’http://www.wholefoodsmarket.com/company/index.html

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Whole Foods

• ‘We believe companies, like individuals, must assume their share of responsibility as tenants of Planet Earth. On a global basis we actively support organic farming — the best method for promoting sustainable agriculture and protecting the environment and the farm workers. On a local basis, we are actively involved in our communities by supporting food banks, sponsoring neighborhood events, compensating our team members for community service work, and contributing at least five percent of total net profits to not-for-profit organizations.’

http://www.wholefoodsmarket.com/company/index.html

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Publix and Whole Foods Share Common Traits

• Commitment to customers• Commitment to the environment• Commitment to Corporate Values• Expectations from Employees and Loyalty to

Employees• ‘Value’ is emphasized• Place emphasis on ‘heritage’• Commitment to community• Move MORE QUICKLY than competition:

THEY SET THE STANDARDFluharty, 2008

What’s The Message?

• Flexibility will be required to remain economically competitive in markets that must constantly assess changing global economic situations, feed resources, and consumer desires.

• Opportunities will exist in markets considered to have health or environmental benefits.

• Any entity that does not respond to large-scale changes in its environment becomes extinct.

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Final Thoughts

• The Seven Sages of Greece (620 BC to 550 BC) included the following sayings:

‘Nothing in Excess’ by Solon of Athensand

‘Forethought in All Things’ by Periander of Corinth

Change is Inevitable, Progress is Not

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