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Market Preview
Anxiously Awaiting
Hog and Crop Forecasts
All eyes turn to USDA reports as agency statisticians
publish estimates of hog numbers on Friday and, perhaps more
importantly, crop acreage and grain stocks on Monday. Watch your e-mail
on Monday for our summary of the Hogs and Pigs Report.
Figure 1 shows the results of DowJones’ quarterly pre-report survey of
market analysts regarding their expectations for the report. These
numbers generally agree with my expectations. I believe (perhaps it is
more hope than believe) that the breeding herd may be a bit smaller than
this. I expect a 2% reduction based on both sow slaughter and gilt
slaughter data from the University of Missouri.
I believe a few of these numbers are quite notable. First, analysts
still expect the market herd to be significantly larger than last year.
June slaughter has run 7.0% higher than last year when one compares the
same number of weekdays and weekends. As usual, that number vs. the
180-lb. and over inventory will serve as an early checkpoint for the
report.
Second, the March-May pig crop expectations are at +2%. If true, this
means that we will not get much supply relief until 2009. Historically,
we have had to adjust that number downward for death losses and upward
for imports from Canada to arrive at an expected slaughter two quarters
hence. The death losses should be much smaller, suggesting that
fourth-quarter slaughter could be more than 2% larger. Imports of both
market hogs and feeder pigs from Canada (See Figures 2 and 3.) have gone
below year-earlier levels and, thus, suggest that fourth-quarter
slaughter growth will be less than 2%. How those numbers balance will
be important for fall hog markets.
Third, analysts see a larger reduction of output in the future as
evidenced by the larger reductions in farrowing intentions. Those
reductions, though, are slower than I expected given the feed cost
situation we face.
High Futures Prices Aren’t Profitable
Which brings us to the elephant that remains in the room. Figure 4
shows cost and hog price projections based on Chicago Mercantile
Exchange (CME) Group futures prices on June 23. These include those
$99-plus Lean Hogs futures prices for next summer and note that they do
not cover costs. While that purple line representing projected hog
prices appears pretty close to the red cost line, readers must look at
the vertical distance between them to estimate losses per cwt. of
carcass – and that difference is significant. A 200-lb. carcass will
incur losses of $25.10 in June, $34.28 in September and $40-plus in
October and November. If you sell one pig per month at these costs and
prices through May (i.e. those June Lean Hog futures prices impact May
more than June), you would lose right at $300.
I do not see much relief in sight for this situation. There is at least
as much chance for the corn crop to get smaller as there is for it to
get bigger. Oil prices hit $140/barrel yesterday and that adds value to
ethanol and corn used for ethanol. Hog prices could be higher, but
these futures prices are optimistic relative to the prices I get from
basic supply-demand analysis. Excellent consumer demand or export
demand could help, but helping enough to alleviate these projected
losses is unlikely, in my opinion.
Communicating the Crisis
I spent Tuesday and Wednesday in Washington, DC, with National Pork
Producers Council officers and staff, and Dr. Robert Wisner of Iowa
State University and Mark Greenwood of Agstar Financial in Mankato, MN.
Our mission was to inform key members of Congress and the administration
(USDA, the White House, Council of Economic Advisors) of the serious
situation facing the pork industry. The midwestern floods have created
a teachable moment, it appears, as we got far more attention than ever
before.
NPPC is asking Washington for five things:
- Penalty-free release of non-environmentally sensitive land
enrolled in the Conservation Reserve Program (CRP). This has been
a controversial issue, but it appears to be gaining some support. It is
estimated that 12-15 million of the 34 million CRP acres could be
cultivated without detrimental environmental impacts. NPPC is asking
for this release by Aug. 1 to allow farmers to plan for the 2009-2010
crop year – and in hopes that some acres might get planted to winter
wheat to provide feed supply help as early as next June.
- Support the request by Texas Gov. Rick Perry to waive the
renewable fuel standard. My impression is that there is sincere
interest in reducing the standard or, perhaps, just pushing the numbers
out one year given this year’s tight supplies. That would mean the
standard for 2010 would be 9 billion gallons instead of 10.5 billion.
- Eliminate the blender’s tax credit. The amount of
agreement to “leveling the playing field” for corn buyers surprised
me. A more politically palatable alternative might be structuring the
credit so it is negatively related to corn prices – i.e., significant
when corn prices are low and zero when corn prices are high. The trick
is defining high and low – but it is possible and, I think, should be
pursued.
- Eliminate the import tariff. This goes hand-in-hand
with a change in the tax credit.
- Waive farm program rules to allow a harvestable crop to be
planted yet this year on acres that have not been planted or have been
lost due to weather. This is point 5 just because there probably
is not enough time to get it done at Washington, DC’s notoriously slow
pace.
Time to Get Involved
Now is the time to get involved whether you agree with these five items
or think something entirely different should be done. Congress will
have limited opportunities to take action over the next two months.
Please let your representatives and senators know what you think.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
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Financial Preview
$70 hogs and Losing
Money
We are in unprecedented times in the swine industry. For
the month of June, we will average over $140/head in revenue, which
historically is very profitable. But in today’s climate in the hog
industry, that translates into a loss of approximately $15/head or over
$6 million a day. This is an erosion of 2-3% equity on most balance
sheets. Since October 2007, the average swine producer has lost close to
30% of his/her equity in a span of just nine months.
Current estimates place feed costs going forward at over $110-$115/head.
That compares to $50-$60/head in the past. Breakeven costs today average
anywhere from $150-$160/head, depending on sale weights. In the future,
with corn at over $7/bu. and soybean meal at $400/ton, breakeven costs
will be close to $180-$190/head.
We also saw June 2009 hogs this week trade on the futures market at over
$100/cwt. on a carcass basis or $200/head. That would ensure a profit,
but only at a level of $10-$15 a head or 5-6% margin over your costs. As
I am writing this, I look back at less than 18 months ago, and we would
be happy with a $65/cwt. carcass price. Times have changed!
Calling on Capitol Hill – I spent Tuesday and Wednesday this
week with staff of the National Pork Producers Council in Washington,
DC, meeting with several members of Congress, and trying to give them a
lender’s view of the industry and what is happening currently. Below
are some of the items that I discussed with them:
- Production costs today are running between $155-$160 a head.
- Live hog prices are averaging $140-$145 a head, meaning that hog
producers are losing $10-$20 a head.
- Corn prices have increased from $5.99/bu. on the Chicago Board of
trade on May 30, 2007 to $7.49/bu., an increase of $1.50/bu. This
increase equates to a cost of production increase of close to $15 a
head.
- Soybean meal futures have increased from $341.50 a ton on May 30,
2007 to $417 a ton. This is an increase of $76 a ton or $5.85 a head.
- Projected breakeven prices with current feed prices are $185-$190
a head.
- Every month until June of 2009 on the futures market is showing
losses of at least $20-$25 a head.
- The swine industry has already lost $1.85 billion since Oct. 1,
2007.
- The cost of feed for the industry has increased to $115 million a
week more than in December 2006.
- The average swine producer has already lost 25% of his/her equity
since October 2007.
- Producers could potentially lose another 50-60% of their remaining
equity before things turn around – and lenders will need to make
difficult decisions regarding a number of operations.
- The working capital needs just to finance existing operations has
increased by almost $2.9 billion in the past year. This is causing
credit limit issues with lenders, higher interest rates for swine
producers and operating line restraints for producers.
- The United States has a projected short corn crop now and
rationing of the corn crop appears likely. The swine industry is using
many sources of feed to reduce their need for corn. Corn has gone from
80% of the diet in the past down to 60% of the diet. It is still,
however, the most important feed ingredient to the swine industry, and
it is vital that we have a supply of corn to feed our livestock.
- The swine industry in the United States is the best in the world
in terms of its cost competitiveness. Even so, unfortunately, the number
of farms will need to be reduced, because financially they cannot afford
to stay in business.
Time for Action - I wish I could portray these issues in a
different light, but unfortunately, I must provide you with an accurate
picture of the plight of the industry. Given this dire situation, I
encourage all of you to tell your story to your members of Congress. You
must get politically engaged to help the swine industry be viable.
The other point that I would like to make is that the agricultural
industry needs to work together and discuss the corn supply issue. The
lack of corn supply is not good for anyone in the long term. All
industries in the agricultural sector need to band together to figure
out how to work through this supply shortage. I am concerned that we are
at odds today and we need to work together.
On a final note, after spending two days in Washington, DC, with members
of the NPPC staff, it’s good to know that they are doing everything
they can to help keep this industry viable. They are working countless
hours on your behalf.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com
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Legislative Preview
Pork Needs Relief
from High Feed Costs
The National Pork Producers Council (NPPC) is calling on
the U.S. Department of Agriculture (USDA) to take steps to provide
relief from high feed costs. NPPC, in a meeting with Secretary of
Agriculture Ed Schafer, asked that the following actions be taken:
- Release immediately and without penalty non-environmentally
sensitive acres from the Conservation Reserve Program.
- Allow crop farmers to plant (at their own expense) a harvestable
crop on those acres that could not be planted this spring due to weather
conditions, even though the farmer may have collected a disaster payment
on the ground. This action also may require congressional approval, and
NPPC will ask Congress to act.
- Support a waiver of the biofuels mandate (Renewable Fuels Standard)
for ethanol as requested by Gov. Rick Perry of Texas.
- Support the elimination of, or significant reduction in, the
ethanol blender's tax credit.
- Support the elimination of, or significant reduction in, the tariff
on ethanol imported into the United States.
According to NPPC, “If more crops can’t be planted, and if there is
no relief from the ethanol mandate, feed costs will go even higher than
the record levels we’re seeing today, many livestock producers will go
out of business, meat supplies will fall and retail meat prices will
rise. That wouldn’t be good for the livestock industry, American
consumers or the U.S. economy.”
Pork Producers Ask for RFS Waiver — Citing the rising
pressures of this year’s corn crop and the prospect of significant
numbers of pork producers going out of business, the National Pork
Producers Council (NPPC) is asking that the federally mandated target
for corn-based ethanol production be cut in half. NPPC filed comments
this week asking the U.S. Environmental Protection Agency (EPA) to grant
the state of Texas a waiver of the Renewable Fuels Standard (RFS) and
that the “amount of biofuels – ethanol is the only viable biofuel
– that must be produced in 2008 be reduced to 4.5 billion gallons from
9 billion gallons.” NPPC said, “The U.S. government’s
intervention in grain markets, through the RFS, has created one of the
most severe economic crises to ever hit pork producers. The impact for
the pork industry and its customers will be devastating as herds are
culled, producers go out of business and pork prices skyrocket.”
Urge Immediate, Penalty-Free Release of CRP Acres — Over 130
organizations and companies are calling on USDA to allow for immediate,
penalty-free release of non-environmentally sensitive cropland from the
Conservation Reserve Program (CRP). In a letter to Secretary of
Agriculture Ed Schafer, the Alliance for Agricultural Growth &
Competitiveness stated that “stronger measures must be taken very soon
to ensure that grain and oilseed production more adequately meet the
demand for food and feed.” The letter also noted:
- For wheat, the department expects global stocks to remain at
historic lows, despite a projected increase in U.S. production. In
addition, disease problems in portions of the U.S. wheat crop currently
being harvested will reduce yields and quality.
- For corn, domestic production is expected to decline by 34 million
metric tons (37.4 tons) to 298 million metric tons (327.8 tons) in
2008-09, even though biofuel demand for corn will increase over the same
time frame. This dynamic helps explain the department’s estimate that
ending U.S. stocks for corn will fall approximately 50%.
- While production for soybeans will increase in 2008-09, USDA
reports expect that a 14 million metric ton (15.4 million tons) increase
in production will only raise stock levels by 1.3 million metric tons
(1.43 tons).
- Corn/wheat for feed usage are forecast to decrease by more than
12% for 2008-09. For animal agriculture to cut production by 12% will
require severe economic hardship on these producers, while further
pressuring consumer food prices to move even higher.
Those signing the letter included: Agricultural Retailers Association,
American Feed Industry Association, American Meat Institute, National
Chicken Council, National Grain and Feed Association, National Oilseed
Processors Association, National Pork Producers Council, National Turkey
Federation, Pet Food Institute and the U.S. Poultry & Egg Association.
Agriculture Secretary Schafer said USDA will make a decision in the next
two weeks on this issue.
Crop Report on Monday — USDA will release the
much-anticipated 2008 acreage report next Monday. The National
Agricultural Statistics Service (NASS) has announced several steps it is
taking to assess the impact that the extraordinary rainfall and flooding
in the Midwest is having on the 2008 crop. NASS is re-interviewing
producers this week in the affected areas of Illinois, Indiana, Iowa,
Minnesota, Missouri and Wisconsin to get a more accurate determination
of how much of the planted areas will actually be harvested for grain.
Congress Calls on USDA to Expedite Rule on Downer Cattle —
The fiscal year 2009 agricultural appropriations bill passed by the
House Agriculture Appropriations Subcommittee contains a provision
pressing USDA to expedite the rule governing non-ambulatory cattle –
downer cows. Congresswoman Rosa DeLauro (D-CT), chairwoman of the House
Agriculture Appropriations Subcommittee, said, “The repeated
revelations of cattle abuse occurring at livestock auction sites and
slaughterhouses are extremely troublesome. Not only are we again
witnessing the inhumane treatment of cows and the illegal slaughtering
of downed cows for the food supply, but also the distribution of
potentially contaminated meat into the school lunch program. USDA must
not only publish a proposed rule to close the loophole that allows
downer cattle to be slaughtered for the food supply, but they must
expedite this rule, so it can be implemented immediately.” This week,
another video regarding the treatment of downer cows at an auction site
was released by the Humane Society of the United States.
P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.
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Pork Industry Calendar
July 9 2008:
Great Lakes Manure Handling Expo, Molly Caren Agricultural Center,
London, OH; contact: http://ohio-environmental.org, Tami Combs at (614)
292-6625 or combs.155@osu.edu, or
Jon Rausch at (614) 292-4504 or Mary Wicks at (330) 202-3533.
July 14-16, 2008: Welfare &
Epidemiology Conference, Gateway Hotel & Conference Center, Ames, IA;
contact: WelfareAndEpi@iastate.edu
or call (515) 294-6222.
Click
here to get National Hog Farmer's complete pork
industry calendar.
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