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Dale Miller, Editor,
National Hog Farmer
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Market Preview
Have We Seen the Hog
Market’s Low Point?
Let’s hope so for two reasons. First, last week’s
prices are still not as low as the prices we saw in January! And
second, the pigs we are selling now ate some very expensive corn early
in their lives. Some computations using weekly corn, soybean meal and
hog prices and a pro-forma production budget show that hog finishers are
losing $40-70/head on November sales, depending on their pig-pricing
method and feed-buying practices.
Last week’s average negotiated net price fell to $51.35/cwt., carcass
($38.51/cwt., live), the lowest level since late March (see Figure 1)
and well below the cost of production. The negotiated net price
represents the total price received by producers on hogs where the price
is actually determined by some degree of seller-buyer interaction.
Therefore, it is about the best thing we have for a producer-received
spot price. It comes from the Prior-Day Slaughter report (lm_hg201).
The average total net price last week reached $56.77/cwt., carcass
($42.58/cwt., live), also the lowest level since March. This price
includes all pricing methods – negotiated, hog/pork price formulas,
other market formulas and other purchase arrangements. The big driver
of the $5.42/cwt., carcass difference in these two measures is the price
of “other market formula” pigs. The average price of those pigs
was $68.94/cwt., carcass last week, over $18/cwt. more than the
negotiated hogs and the result of producers’ pricing decisions last
summer when the Chicago Mercantile Exchange (CME) Group Lean Hogs
futures for December delivery were well above $70/cwt. That, in fact,
was the case as recently as Aug. 20.
This price differential – and its implications for producers’ bottom
lines – is one reason we have seen only limited sow liquidation in the
United States. Many producers took advantage of these prices and have
yet to lose much money. Others rode the cash markets and, as last
week’s negotiated price level shows, have paid dearly for that
decision.
Does that mean you should jump on the bandwagon now and hedge your hogs
for 2009? Absolutely not! The current “bandwagon” is not nearly as
attractive as the one these producers boarded last summer. The fall
months are historically a bad time of year to price hogs on futures
markets, since seasonally-low cash markets tend to pull down the entire
lean hogs futures complex.
What this does mean, though, is that you should know how to forward
price your hogs and be vigilant about watching for opportunities to lock
in profits on some portion of your 2009 production. My computations
for 2009 cash prices are actually yielding numbers higher than the
current CME Group contract prices. Some analysts are quite bullish for
2009. I don’t share that sentiment, but I do think better
opportunities lie ahead.
Now, back to the original question: Is the low in? As can be seen from
the lines representing five-year averages in Figures 1 and 2, the weeks
of Christmas and New Year’s are usually the worst. Holiday meat
orders are over and packer hours are usually cut back. That’s not a
good recipe for holiday cheer when it comes to hog prices. I really
hope last week was the low and this week’s slight rally in cutout
values gives us some hope that it was. Still, I think we’ll see more
weakness before year’s end. Not much, but some, so be prepared for a
few more weeks of very low spot prices.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
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Financial Preview
A Light at the End of the
Tunnel?
It seems that every month when I write this column, I am
shaking my head in disbelief at all the changes that have occurred. Corn
in certain areas of southern Minnesota is now selling below $3/bu. and
soybean meal prices continue to go down. But cash hog prices, today, are
not very promising. In fact, if you are on the open market, you are
likely losing $30-$40/head. Still, in looking at hog future prices on
the board today, there is potential to make some money if all things
stay equal. Unfortunately, that is a big “if.” I am writing this on
Sunday morning (Nov. 23), so it won’t be published until the 26th and
we all know how fast things can change. The point I am trying to make is
that there have been opportunities (even in the past 18 months) to
improve margins for your hog operation. I am very aware that this has
been hard to do and, maybe, that there’s even been some luck involved.
But I have also seen many of my clients take a proactive approach to
risk management. I will continue to stress the importance of risk
management because I think it will be critical to most producers’
success in the future.
Pork Outlook 2009 – I was fortunate to participate in a
webinar sponsored by JBS United feeds and Pfizer recently where the
general consensus was that we are going to see less total meat protein
supply in 2009. Pork, chicken and beef supplies are expected to decline
globally. I think the decline will be seen in the United States, too.
The big questions that remain are: “What will happen with demand? Will
export demand slip? What can we expect from the U.S. consumer?” In
2008, we exported over 20% of our pork supply. As the chart below shows,
China, Russia and Mexico represent 46% of our exports. My concern is
that these exports could slip in 2009. If we can stay close to the 2008
demand levels, I think the opportunities for profits in the pork sector
in ’09 will be very good.
Volatility will be the norm – One of the most frequently
asked questions I receive is, “When will it turn back to normal?”
Truth is, I am not sure what “normal” is anymore, and so my answer
to everyone, at least for now, is, “Volatility will be the norm.”
There are many factors that can affect the profitability of the pork
sector. To think things will stabilize for now is not realistic. I
stress to the people I work with that they need to take a much broader
view on what affects pork prices, including more than just the price of
feed and the pork supply. Other items also must be considered, such as
the price of oil, the value of the U.S dollar, chicken supply, financial
market implications for credit for exports, and the list goes on and on.
Now more than ever, you need to be a student of your business and look
at all factors that can affect it.
Giving Thanks – The week of Thanksgiving is always the time
of year where we give thanks for all the blessings we have. I know this
has been a tough year for the swine industry. But remember, we live in
the greatest country in the world where we have tremendous opportunity
for prosperity. I am also thankful that I get to work with many
producers who are the best at producing food for the world. What you do
to manage and make your operation better, every day, is a testament to
all of you. I hope you and your families have a Happy Thanksgiving
holiday.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com
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Legislative Preview
Group Urges the
Phase-Out of Ethanol Support
A coalition of livestock, meat, environmental and
taxpayer organizations this week called on the Obama administration and
the new Congress to repeal ethanol “subsidy” programs. The
coalition sited a national survey by Ipsos Public Affairs that indicated
that 89% of Americans are concerned by the high price of food. The
survey was commissioned by the members of the Food Before Fuel campaign.
The National Turkey Federation said, “Ethanol has been on the
government payroll for 30 years. After three decades of government
policies subsidizing and supporting the ethanol industry, we find
ourselves at the end of 2008 with more questions than ever before about
the wisdom of this course.” Members of the coalition include the
American Meat Institute, Environmental Working Group, National
Cattlemen’s Beef Association, National Chicken Council, National
Restaurant Association and the National Retail Federation.
Ethanol Tax Credit – Success Story — As the coalition was
calling for the repeal of ethanol support programs, a new report
released by LECG, LLC indicated that for every dollar invested in
America’s ethanol industry in the form of the federal excise tax
credit, there was nearly $5 returned to federal, state and local
government and the economy as a whole. According to the study the
ethanol industry has “generated an estimated $33.4 billion (2008$) in
tax revenue for the federal government and nearly $17 billion (2008$) of
additional tax revenue for state and local governments since 1978,
reduced American’s tab for imported oil by $97.5 billion, helped
reduce farm program payments by more than $3 billion annually since
2006, and put some $66 billion more into the pockets of Americans in the
form of increased household income since its inception in 1978.” The
report was sponsored by the Renewable Fuels Association.
Advanced Biorefinery Guaranteed Loans — USDA announced that
applications are being accepted for loan guarantees under the
Biorefinery Assistance Program that was authorized by the 2008 farm
bill. The program is designed to promote the development of new and
emerging technologies for the production of advanced biofuels. This
program provides loan guarantees for the development, construction and
retrofitting of viable commercial-scale biorefineries producing advanced
biofuels. The program provides $75 million in fiscal year 2009 and $245
million in fiscal year 2010. The loan guarantees are not to exceed $250
million per project.
Pork Checkoff Vote — USDA’s Agricultural Marketing Service
(AMS) will conduct a Request for Referendum on Dec. 8, 2008 through Jan.
2, 2009, to determine if producers want a referendum on the pork
checkoff program. If a minimum of 15% of eligible producers request a
referendum, then AMS will hold a referendum.
Chilton & Jett to Lead Obama AG Transition — Bart Chilton and
Carole Jett will lead the Obama transition team at USDA. Chilton
currently is a member of the Commodity Futures Trading Corporation
(CFTC) and served as deputy chief of staff to Secretary of Agriculture
Dan Glickman. Jett retired this spring from USDA’s Natural Resources
Conservation Service. She had been a career employee.
Congressional Leadership for the 111th Congress — The
Democratic and Republican caucuses this week selected their leadership
teams for the 111th Congress. The Senate leadership will remain
Senators Harry Reid (D-NV), Majority Leader; Dick Durbin (D-IL),
Majority Whip; Mitch McConnell (R-KY), Minority Leader; and John Kyle
(R-AZ), Minority Whip. In the House of Representatives, Nancy Pelosi
(D-CA) will continue as Speaker with Congressman Steny Hoyer (D-MD) as
Majority Leader. Congressman John Boehner (R-OH) will remain as
Minority Leader with Congressman Eric Cantor (R-VA) serving as the new
Minority Whip. In a very tough vote, Congressman Henry Waxman (D-CA)
ousted Congressman John Dingell (D-MI) as Chairman of the House Energy
and Commerce Committee. This could cause a major change in direction on
environmental and food safety issues that come before this committee.
P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.
Pork Industry Calendar
Dec. 4-5, 2008: National Swine Improvement
Federation Annual Conference, Embassy Suites Hotel, St. Louis, MO;
contact: Glenn Conatser at gconatse@utk.edu or go to www.nsif.com.
Dec. 5-6, 2008: International PRRS Symposium, "PRRSV Reverse
Genetics: From the Laboratory to the Field," Downtown Marriott
Hotel, Chicago, IL; contact: http://www.prrssymposium.org.
Click
here to get National Hog Farmer's complete pork
industry calendar.
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