Rising grain prices could quickly eliminate the narrow margin of profit in the hog market, according to Don Close, market analyst for Pioneer Hybrid Marketing Services, Des Moines, IA.
Based on the December USDA Hogs & Pigs Report, Close predicts cash hog prices will be $35-38/cwt. in the first quarter; $39-42/cwt. in the second quarter; $38-41/cwt. for the third quarter; and $34-37/cwt. in the fourth quarter of this year.
Close's hog prices are conservative, as compared with USDA price projections. He is skeptical about price improvements, he says, because the industry may not follow through with continued contraction of sow numbers and farrowings.
Lowered Grain Estimates On the grain side, Close cites the mid-January supply and usage reports from USDA. The agency lowered its estimates for 1999 acres planted, yield and grain stocks for both corn and soybeans. The report is the first since August 1996 that shows there has been any contraction in grain inventory.
USDA's price projections range from $1.70 to $2.10/bushel for corn and from $4.50 to $5/bushel for soybeans.
"Our perspective on the grain complex is that we've probably seen the worst of the market," Close says. "The risk of this market going substantially lower is relatively remote."
There are still large stocks of corn, soybeans and wheat in the country. USDA's Dec. 1 grain stocks report shows Iowa and Illinois each storing about 2 billion bushels of the three main feedgrains.
In addition, Midwestern farmers have large quantities of grain on which they have already received their federal loan deficiency program payment. That makes plenty of grain easy to move and available to livestock feeders, Close relates.
While grain prices may not rally in the near term, Close suggests locking down feed prices while grain is cheap and plentiful, especially in the Midwest.
"The margins in this market look like they are going to be pretty tight," he says. "The room for slippage on hog prices is pretty slim. The opportunity for increased cost of production - if we do see these grain prices rally - can get away from us pretty quick."
As spring planting approaches, the weather may be the determining factor in profit and loss, he says.
"If there is anything that can accelerate grain prices, weather is going to be a real hot item this spring," Close says. "Grain prices could get a little higher; I'm not optimistic on hog prices; use the opportunity to lock in some profit."