Government Buy Affects Markets

USDA announced Aug. 13 that it would purchase up to $170 million of pork, lamb, chicken and catfish for federal food programs.

In a press release, available in this issue of the EXTRA, the purchase was characterized "as part of the Obama Administration's commitment to do everything it can to help farmers, ranchers, small businesses and communities being impacted by the nation's persistent drought."

The purchase breaks down as up to $100 million of pork, $10 million of catfish, $50 million of chicken and $10 million of lamb. Some of this product may go to food banks. At least one story also mentioned that the Department of Defense would look at the possibility of pulling forward some purchases and store product for later use. Chicago Mercantile Exchange (CME) Group Lean Hogs futures traded up more than $1 per hundredweight (cwt.), mostly across the board at times Aug. 13, but only October and December were able to hold those gains.

How much the mini-rally had to do with the USDA announcement is hard to judge. This purchase is, in volume terms, pretty inconsequential. While $100 million sounds like a huge number, it will only buy about 107 million pounds (lb.) of carcass-weight pork and the United States produced 408 million lb. the first week of August.

USDA will not be buying carcass-weight pork. They will be buying value-added products such as precooked sausage patties that will almost certainly cost more than Aug. 12's cutout value of $92.36 per cwt. — meaning the quantity purchased will actually be less than 107 million lb.

We do not want to sound unappreciative, but everyone must keep this in perspective. It is not huge, it doesn't fully address the issue of high feed costs, and it doesn't start to address the issue of feed availability next summer.

Renewable fuel standard

USDA is doing "everything it can," of course, except altering the renewable fuel standard (RFS) requirement that 13.8 billion gallons (gal.) of ethanol be blended into gasoline in 2013 — a move that many believe is necessary if feed supplies are to be sufficient. In USDA's defense, we all need to realize that the Secretary of Agriculture really has no power to alter the RFS. That power resides with the Administrator of the Environmental Protection Agency (EPA), and there is no requirement for her to do anything. The EPA secretary only has the authority to change the RFS. Legislation is still pending in Congress that would require action in the case of projected low year-end stocks-to-use ratios.

Then there is the matter of whether changing the RFS requirement that 13.8 billion gallons of ethanol be blended into gasoline in 2013 will actually reduce the amount of corn used by ethanol refineries. It is not clear that it would do so simply because the mandate has not been binding in recent years and may not be binding this year given the number of credits (called RINs) that were generated by "overblending" in years past. See the chart above.

Blenders have used ethanol because it was profitable to do so, not because they were required to do so. Higher oil and gasoline prices make this profit incentive stronger, as does the fact that there is a relatively new value driver for ethanol in gasoline: octane enhancement.

We aren't exactly petroleum engineers but, as we understand it, ethanol is a cost-effective way to increase the octane ratings of motor fuels. As such, ethanol is deriving its value not just from its energy content (which is about two-thirds that of gasoline) but its octane value, as well.

The situation is analogous to what has happened to distillers' dried grains with solubles (DDGS) in animal diets. From mid-2009 to late 2011, DDGS was priced primarily as a corn replacement. Beginning early this year, it gained value due to its relatively high protein content and the explosion of soybean meal prices. The DDGS did not change, but its source of value in diets did and thus drove its price upward relative to its historical value supporter, corn. We expect DDGS to stay high relative to corn for a while.

Editor's Note: The Daily Livestock Report is published by Steve Meyer and Len Steiner. To subscribe, visit www.dailylivestockreport.com.