Both hog and ethanol productions compete for corn as a main input in their industries, but not all corn used for ethanol production is lost to hog production as the ethanol industry produces both ethanol and livestock feed (distiller’s dried grains with soluble (DDGS)). Fuel ethanol facilities currently can produce about 2.8 gallons of ethanol per bushel of corn (56 pounds of corn). Also, about 17 pounds of DDGS are produced per bushel of corn. In this case, the trade-off for the hog industry is 56 pounds of corn for 17 pounds of DDGS. Still, since corn is the main component in the hog diet, the production of DDGS do not fully compensate (the hog industry) for the corn used to produce ethanol.
Figure 1 shows the breakeven for the hog and ethanol industries for the period after the Volumetric Ethanol Excise Tax Credit (VEETC) subsidy to the ethanol industry expired. The VEETC ended on December 31, 2011. The estimation of the breakeven for both industries is based on the corresponding marginal value of corn (i.e., the margin after subtracting operation costs, excluding the cost of corn). During the 46 months shown in Figure 1, 63% of the time (29 months out of 46 months) the hog industry has been better positioned to purchase corn compared to the ethanol industry. The period when the hog industry had the largest competitive advantage to purchasing corn relative to the ethanol industry coincide with the period when hog prices were relatively high. This happened in 2014 (see Figure 2) when hog prices increased as production declined due to the spread of the porcine epidemic diarrhea virus (PEDv). Hog prices in 2015 have declined as the hog industry has essentially recovered from PEDv. The average hog price (Iowa/Southern Minnesota) from January to October 2014 was $103.96 ($/cwt) compared to $71.44 ($/cwt) during the same period in 2015. According to the latest (November 2015) USDA/ERS’s Livestock, Dairy, and Poultry Outlook report, 2015 pork production is projected at 24,508 million pounds, representing a 7.3% increase year-over-year. Moreover, based on the same report, 2016 pork production is expected to increase 1.7% to 24,925 million pounds relative to 2015. The market price ($/hundredweight) of barrows and gilts (based on the national base cost, 51-52% lean, live equivalent) in 2016 is expected to decline 4.6% compared to the 2015 projection, from an expected average of $50.82/cwt in 2015 to $48.5/cwt in 2016.
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