By Cheryl Warren

1/10/08 2:40 PM

OMAHA (DTN) -- Across the board, the biggest concern all livestock producers seem to have for 2008 is the high cost of feed.

While livestock producers may be enjoying good prices for their meat, eggs or milk, the high overhead costs involved with feed are driving profit margins down. Some livestock industry analysts attribute the increases in feed costs to an ethanol-driven rise in corn prices.

Robin Schmahl, hedge and marketing specialist and DTN contributing dairy analyst, said prices for all alternate feeds used by dairies -- such as distillers grain, blood meal, cotton seed, etc. -- are increasing, driving up the cost of production.

"There's nothing out there right now that is a good buy price-wise," he said. "The bottom line is that all feed prices are going up, and it's going to be a real issue in 2008 if we continue with underlying grain prices as they are."

Producers counting on DDGs to compensate for high-priced corn may be in for a surprise, since DDG prices almost always follow corn prices, said Terry Klopfenstein, professor of ruminant nutrition at the University of Nebraska-Lincoln .

Dave Moody, president elect of the Iowa Pork Producers, said swine markets and feed costs are the talk of the industry right now.

"Both are headed in the wrong direction to be profitable," he said. "Grain markets are up and that adds to overhead costs.

OTHER ISSUES

Beef producers in wheat-growing states from Kansas south may need to watch the price of wheat and the effect that will have on wheat pasture. Producers in these states usually put cattle on wheat fields to graze until February, March or April, depending on how far south they are.

"My understanding is that because the grain is worth so much, some of the wheat producers don't want cattle in the fields and risk reducing (the) grain crop, so those cattle will have to go somewhere else," Klopfenstein said.

Beef producers may also be interested in provisions being debated in the farm bill regarding restrictions on packer ownership of cattle.

"This could be a concern for the industry," Klopfenstein said. "Some think packer-ownership gives packers too much power and drives down the price of cattle." Others, he said, think packer-ownership is beneficial because it gives packers more control over supply so they can operate more efficiently.

One factor that has been an issue for the dairy industry in the past year and will be watched closely is the price of dry whey and nonfat dry milk, Schmahl said. Dry whey is a byproduct of cheese production and is used for a variety of food products, including protein bars, health foods, candy bars and calf milk replacers.

"We hit record prices in 2007 because of demand. Prices are coming down now, but will be a big driver and have big influence on amount of cheese produced and milk price," he said.

Dairy producers may also want to keep an eye on a change in the formula for milk pricing in California that took effect Jan. 2. California has set an average dry whey price of 25 cents per pound, eliminating any potential farmers had of gaining value off an increase in dry whey prices, Schmahl said.

"There is some potential that practice could be adopted by the federal order system," he said. "That's a concern."

Schmahl said another issue to watch in 2008 will be the change in labeling that took place in Pennsylvania as of Jan. 1. The new rule prohibits claiming that something is not in a dairy product unless it is laboratory-verified. The rule is aimed at labeling claiming dairy products are free of rBST, an artificial hormone given to increase milk production. Since rBST cannot be detected in milk, a laboratory cannot tell the difference in milk samples from rBST and non-rBST cows. That means farmers who received a premium for rBST-free milk may lose it.

"Other states are looking at this as well," he said. If they start adopting it, this could have huge implications on milk pricing and rBST usage."

The poultry industry will continue to keep an eye on the avian influenza, said Bill Roenigk, senior vice president for the National Chicken Council. Though there is no influenza in the U.S. and safeguards to keep it out of commercial U.S. flocks are strong, there is always a remote chance of infection as long as it exists in Asia . Such an occurrence would be damaging to U.S. production as well as export markets.

"Even though the U.S. could quickly eradicate the influenza, many countries will not accept poultry from a country where influenza has been detected," he said. "Even with safeguards, there are wild birds flying around, or other carriers that could get through the firewall."

Other issues of concern to poultry producers are increasing costs of building new chicken houses and the increasing costs of energy to run them. Processing plants will also have continuing difficulty finding an adequate supply of documented workers.

"Many companies would like to increase production, but don't have workers to do that," he said. "That will continue to be a very tough problem in 2008."

The swine industry will likely see an increase in numbers of hogs, thanks largely to circovirus vaccines that were developed in early 2007.

"There was enough supply of the vaccine that is was used extensively in areas having problems," Moody said. "The vaccines were very effective and prevented huge death losses, but now have created a market issue with huge numbers."

TRADE ISSUES

The biggest issue for the beef trade is the continuing restriction on U.S. exports based on BSE concerns, Klopfenstein said.

"Some people are optimistic that we'll be able to negotiate with both ( Japan and Korea ) and loosen up those restrictions so trade will increase," he said. "But it just doesn't appear that they really want to open trade up. At this point, it's just kind of a 'wait and see' situation."

The dairy industry will be looking at a potential for increased exports, which may support higher prices. With the economy of some countries improving and more westernized lifestyles, demand for protein -- especially cheese -- has been increasing.

"Some countries in Europe and New Zealand have had a shortfall in production. Their lower milk production has tightened up the world market," Schmahl said. "But the higher prices are spurring a desire to increase production in those countries in the coming year, and that export market growth will probably continue and could help in potentially higher prices."

Roenigk said he is optimistic about poultry exports, and while only 15 percent of poultry production is exported, many foreign countries that have a preference for dark meat will continue to import leg quarters. As consumers in countries such as Russia and China have additional income to apply to their food budget, the demand for animal protein will increase.

ADVICE FOR 2008

Klopfenstein said that risk management will be important for beef producers, in order to have some control over prices, feed and cattle prices. Also, using futures markets could be important. For instance, dried distillers grain prices were relatively inexpensive this past summer and could have been contracted for the year at a reasonable price.

"Producers need to make good decisions on those things," he said. "Locking in prices will be really important."

Higher milk and feed prices will mean that marketing is also vital for dairy producers in 2008 in order to maintain profitability, Schmahl said. Producers may need to consider culling cow numbers to support milk prices or if feed costs become too high. Locking in feed prices and milk prices will be key, he said.

Poultry producers need to take a look at all over-cost factors such as labor, energy and feed, Roenigk said, and see if there are any improvements they can make in terms of overall cost structures.

Go to futures markets and find positions that are favorable as far as cost for corn or soy meal, then take a significant amount in futures contracts. Roenigk said.

In 2008, Moody said, producers will need to strategize to buy feedstocks, using hedging and forward-contracting.

"Do what you can to buy at the right times and try to outguess the market to get the best prices," he said. "I'm just not sure if anybody knows what the right time is. Everything is going up right now."

Cheryl Warren can be reached at cheryl.warren@dtn.com.

(SS/SK)