As we launch into a new year, it is clear that 2011 will indeed be a challenge. While the obvious watchword is “costs,” there could indeed be other bumps in the road ahead. Our encounter with the H1N1 influenza virus and the poor quality corn in the 2009 harvest are good examples. But positive occurrences happen, too. Good quality corn in 2010 and attending to pig supply issues are in our favor. Bottom line: “stuff happens” and this year will be no different.

First things first – the one factor that we can see pretty clearly at present is that cost minimization will be a challenge. Figure 1 shows forecast costs and prices based on Chicago Mercantile Exchange (CME) Group Lean Hogs, corn and soybean meal futures at the market’s close on Monday, Jan. 3. In spite of what may well be record-high hog prices (at least for the annual average), the year, at present, promises to be only a bit better than breakeven for the average Iowa farrow-to-finish operations represented by the Iowa State University estimated costs and returns series.

The cost estimates for 2011 are truly historic. The current forecast for hogs that will be sold in July 2011 is for costs to average $84.14/cwt., carcass weight, assuming purchases of cash corn and soybean meal and no successful cost mitigation from using futures, options, contracts, etc. That is over $3/cwt. higher than the highest actual cost estimate on record, $80.87/cwt., carcass, for hogs sold in August 2008. In fact, Monday’s futures markets say that hogs sold from May through year-end (2011) will all cost more to produce than those previous record-high hogs.

Will there be a chance to reduce costs by buying corn or meal cheaper than current price levels? I doubt it given the almost universal bullish sentiment in the trade. That unanimity, of course, is also a warning sign – when everyone thinks something is going to happen, frequently it does not.

The current situation is heavily influenced by speculation, a recovering world economy, rising oil (thus gasoline and thus ethanol) prices, a weak U.S. dollar and, last but certainly not least, a looming battle for acres. All of those point to continued strength in grain markets. I fear that there will be little opportunity to reduce projected feed costs for hogs sold through the end of this crop year in August.

But there is a bright side – hog prices. National average “net” hog prices improved by $4.34/cwt., carcass, from November to December, a welcome counter-seasonal price move that assuaged a bit of the pain of that big November decline. And, as can be seen in Figure 2, current futures imply hog prices of over $92/cwt., carcass, for a few weeks next summer and an annual average price of $81.69/cwt., carcass, for western Corn Belt 51-52% lean hogs.

Figures 3 and 4 in today’s report show several analysts’ predictions for commercial slaughter and hog prices based on last week’s quarterly Hogs and Pigs report from USDA. Note that all forecasts except for those from Iowa State University are generally below the current level of CME Lean Hogs futures prices. It appears that the futures markets are still trading a strong pork demand scenario for 2011. That may or may not pan out, but decent profits are still available for the second and third quarters.

And finally – our data tables are missing a few observations due to holiday disruptions. We hope to have the tables full of updated information next week.

Happy New Year!
We know that 2011 will have its share of challenges, but we wish each and every one of you the best this year. As I detailed above, current circumstances point to a challenging year from a business point of view, but there is so much more to happiness. Choose now to invest this year in riches that do not spoil – the love of a spouse, the devotion of parents, the smiles of children, the wisdom of the Creator. Regardless of the price of hogs or the cost of raising them – 2011 can be a rich one for you and yours!

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com