Through the month of October, the average cost per 100 pounds of layer feed in the U.S. in 2012 was $15.73, according to Egg Industry Center estimates. The cost of feeding laying hens has more than doubled since 2006, when the average price was $6.92 per 100 pounds of feed (see graph 1). When grain prices rise to historically high levels, some buyers are tempted to lock in future supply fearing that prices will rise even higher, but this play can be very costly.
Dr. Paul Aho wrote an interesting review of Pilgrim Corp.’s fall into bankruptcy in 2008, and the impact that high grain prices and futures contracts played in the company’s financial demise for WATT PoultryUSA. Pilgrim’s made the mistake of purchasing a futures contract for corn in the summer of 2008 when the commodity hit, what at that time were, record high price levels. In that year, a record size world wheat harvest helped to mitigate the impact of the smaller than expected U.S. corn harvest, and corn prices fell quickly from record territory. Pilgrim’s hedging mistake cost the company $100 million.
One adage that economists frequently use is that high prices will, one way or the other, cure high prices. In the case of corn, in the short term, high prices led to supply rationing, some buyers will not be able to pay the high prices and will buy less, will substitute other feedstuffs, or will exit the market. In the longer term, high prices will bring increased supply, from planting more acreage, in this country or in others.
So far in 2012, we are seeing some of the impact of high corn prices on the market for corn. In October, California turkey producer Zacky Farms filed Chapter 11 bankruptcy. The average layer feed cost in October was $16.92 per 100 pounds, which is still a very high level, but that was down from the August average of $18.57, according to Egg Industry Center data.
Let’s hope that Adam Smith’s “invisible hand” works its magic and grain prices continue to ease heading into 2013, be careful making purchases assuming grain prices won’t ease, and let’s all pray for rain.
