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New Energy Economics: Impact of Climate Change Legislation on Cow-calf Feeder Livestock Prices

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Cole Gustafson, NDSU Biofuels Economist Cole Gustafson, NDSU Biofuels Economist

By Cole Gustafson, Biofuels Economist

NDSU Extension Service

Joseph Glauber, U.S. Department of Agriculture chief economist, recently testified before the U.S. House of Representatives’ Agriculture Subcommittee. He described the impacts of proposed climate change legislation on the agricultural sector. By 2015, he said, corn production would decline by 1.4 percent, while prices would rise from the baseline estimate of $4.03 per bushel to $4.32 per bushel. He also predicted that fed-beef production would fall 0.4 percent by 2015 and that prices would rise by 1.4 percent.

Does this imply that North Dakota cow-calf producers could expect higher prices and be better off after the passage of climate change legislation?

Well, not exactly. Usually, when fed-beef prices go up, it is due to rising consumer demand in the marketplace. With greater demand, cattle buyers can pay more for feeder cattle and pass the costs on to consumers while still enjoying greater profitability.

In this case, fed-beef prices will go up because feedlot costs are expected to face several increased costs. This means that prices need to increase or else feedlot owners will be unable to cover all of their expenses and face foreclosure.

As mentioned above, increasing corn prices will raise the cost of production and overall feedlot costs. It’s not only corn prices that cause this increase. Since corn will be more expensive to finance, interest charges also will increase. The same holds for insurance and other direct costs that are a function of animal value.

Feedlots also will face greater scrutiny from the Environmental Protection Agency (EPA). The 11 largest operations nationwide have been targeted by the EPA and will have to reduce greenhouse gas emissions stemming from methane production. The feedlots will invest in new technology to lower these emissions or purchase carbon credits from other firms that have generated more than they can utilize. In either case, operating costs will rise.

When feedlots have a cost of production increase, they either can pass those costs on to consumers or pay less for calves coming into their facilities. Market pressure and competition from other meat products usually limit price increase opportunities. Consumer meat prices are inelastic. This implies that consumption doesn’t vary much through time or with respect to price.

The alternative is to lower the price feedlot owners are willing to pay for cattle entering their feedlots. In essence, while the EPA is targeting only the 11 largest operations, the ramifications of the regulations will trickle down to other feedlots and cow-calf producers, so the prices offered may tend lower.


NDSU Agriculture Communication

Source:Cole Gustafson, (701) 231-7096, cole.gustafson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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