I attended the National Pork Industry Conference last week in Wisconsin Dells, WI, and attendance was very high again this year and the atmosphere was euphoric with extremely strong hog prices and continually dropping feed costs.
The more I discuss crop conditions with individuals from across the United States, the more I believe we have the potential for a record corn crop and incredible margins in the hog industry for 2015.
The Hogs and Pigs report was released on June 27, followed by the crop progress report on June 30. These two reports have changed the dynamics of the level of profitability in the industry overnight.
First, I would like to comment on the Hogs and Pigs report. Current inventory was reported at 62.1 million head, which was down 5% from the previous year. More importantly the pigs saved per litter were reported at 9.78 pigs for the March-to-May period, compared to 10.31 the previous year. This reflects the challenges with porcine epidemic diarrhea disease virus (PEDV) and explains the lower inventory numbers and is the driver for the bullish report.
The crop conditions report was just as bullish for pork producers. The national corn crop was reported at 75% good-to-excellent versus 74% a week earlier. I believe this trend will continue. With Minnesota finally drying out, this is one of the few years I remember crop conditions actually improving through the summer. Typically, some excessive heat will stress the corn crop somewhere within the United States, which hasn’t been the case for far.
U.S. farmers will produce a record number of bean acres this year and 73% of the crop remains in the good-to-excellent category. In addition, world stocks of both corn and beans are at very high levels.
In my March column, margins were at $68 per head for the next 12-month period. I felt we would not see this record margin surpassed, however it only took another four months to do so! Since the crop report, November soybeans have fallen to $10.46 and December corn to $4.20. During the same timeframe, hog margins have increased from a very profitable $48 per head to $72 per head. That’s a $24 increase in 45 days!
PEDV has changed the hog world as we know it and many individuals have been second-guessing their marketing strategies as a result. There has also been buyer’s remorse with margin management with producers locking-up a substantial amount of their production earlier this year. Believe me when I say we remember this: we and our analysts were working feverishly to approve additional advances to cover margin calls.
I have one very good takeaway from the NPIC: PEDV, although still prevalent, has seen a reduction in breaks since June. When looking at the deferred contract, we have a range of $47-$66 profit per head for the fourth quarter of 2014 and first quarter of 2015. I am asking clients if they think this level of profitability for those two quarters will materialize if the incidents of PEDV have truly fallen.
Discussing marketing strategies with producers continues to evolve over time. Decisions made prior to PEDV may be different for most post PEDV. However, I strongly encourage everyone to continue with a risk management plan and continue to re-evaluate that plan during times of significant change.
What is the right strategy? There is not one right answer. Part of the answer depends on each individual’s tolerance of risk, capital position and the willingness of their lender to provide capital for margin requirements. The only “right answer” is implementing a plan that will work for you.
In closing, I know there are crop farmers who thought we would have high corn prices for the indefinite future. Remember, there can be events over which you have no control that will impact your operation. The lack of rail access did just that for grain producers in the Upper Midwest. Will PEDV strike again this winter and will it be at the same devastating levels as last year? What you need to remember is to control what you can. Right now you have the opportunity to have your best year ever!
Steve Malakowsky has more than 16 years of experience with AgStar Financial Services. For more insights from Malakowsky and the AgStar swine team, including their weekly Blog, log on to AgStar.com. If you’d like more information on AgStar’s Margin Manager Tool check it out at AgStar.com/MarginManager.