Climate Change

High Corn Prices Ripple Through the Economy


Corn plants stand in a field during harvest in Le Roy, Ill.

Photograph by Daniel Acker/Bloomberg

Corn plants stand in a field during harvest in Le Roy, Ill.

According to Deutsche Bank’s (DB) chief economist Joseph LaVorgna, the drought last summer sapped about one percentage point of growth from the U.S. economy in 2012. Although the photos of withered crops and sun-baked fields have largely disappeared, the worst drought since the 1930s remains. Its latest casualty is one of the largest beef processing plants in the country: Cargill’s Plainview (Tex.) facility, which handled about 4 percent of all the cattle slaughtered in the U.S., was expected to shut down on Feb. 1. Shrinking cattle herds made the plant unnecessary, and most of the 2,000 workers there will lose their jobs. Cargill is helping workers find jobs at its other plants and other companies.

Although it took some time to work its way up the food chain, the drought is now hitting the beef industry with full force. Cattle ranchers were already thinning their herds because of higher corn prices, which increased the cost of feed. Now that grasslands have dried up and the price of hay has risen 60 percent above its 10-year average, the thinning has quickened considerably. At 90 million head, the U.S. cattle herd is at its lowest level since 1952, leaving too much slaughterhouse capacity to chase fewer and fewer cattle.

The trouble is acute in Texas, where there’s been little rain since 2011. Cargill, the largest beef processor in the U.S., had been decreasing the number of cattle it slaughtered at Plainview for the last three to five years, according to spokesman Mike Martin. In recent months the plant had reduced its capacity by so much that it was no longer open enough hours to pay its workers a living wage. “The drought situation left us with no alternative,” Martin wrote in an e-mail. Though it might not seem like a lot, those 2,000 jobs make up a considerable portion of the 11,900 people employed in Texas’s beef cattle industry as of 2011.

The feedlots are getting squeezed, too. The feeders are the vital middlemen, buying calves from ranchers, fattening them up, and selling them at a profit to the slaughterhouses. Their problem is twofold: Not only are they paying more per calf, since there are fewer of them, they’re paying more to feed them, too, thanks to rising corn prices. “Things have gone from bad to worse,” says Kyle Williams, manager of Lubbock Feeders, where he feeds and sells about 50,000 cattle a year. Williams says he’s running at 50 percent capacity and has been operating at a loss since last spring.

The story is brighter when it comes to crop farmers. Although the drought destroyed billions of dollars worth of produce, much of that loss was covered by federal crop insurance. The crops that farmers did manage to sell ended up fetching a higher price. The value of all crops sold in 2012 was $216 billion, up from $208 billion in 2011. While ranchers can hedge through the futures market, it’s not as good as having insurance. “That really does provide crop farmers a degree of protection that doesn’t exist on the livestock side of things,” says David Anderson, an agriculture economist at Texas A&M University.

With beef prices near a record high, ranchers would normally start expanding their herds. Yet there’s not enough grass to feed more cattle. “The only way this gets fixed is if we get rain,” says Anderson. A recent three-month outlook by the National Weather Service’s Climate Prediction Center forecasts that the drought will persist across the Plains and spread across most of Texas.

The bottom line: With the U.S. beef cattle herd at its smallest size since 1952, ranchers, feedlots, and beef processors are suffering.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.
Singh is a reporter for Bloomberg News in Chicago.

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