The title line of Ella Fitzgerald's classic, "How High the Moon," keeps coming to mind these days. Just how high is "high" in the grain markets? And how high will high be regarding hog markets in the coming months and years?
There seems to be no respite from the price increases with every corn, soybean and soybean meal contract hitting contract life highs on Wednesday. In some cases, these are all-time highs.
While I thought many months ago that grain prices were going up dramatically, I didn't foresee the magnitude of this rally in corn and beans. Wheat futures prices continue to rise, as well, and those higher wheat prices could have a big impact on corn and beans.
The key wheat contract is the Minneapolis spring wheat contract, which saw its third straight limit-up move on the March and May contracts on Thursday. The reason the spring wheat contract is so important, of course, is that planting decisions are still being made for that crop, while the winter wheat planting decisions were made last fall. The number of acres of spring wheat planted in Minnesota, the Dakotas and Montana will impact planted acres for soybeans and barley. Fewer soybean acres in those states will push soybeans onto more acres that could have been planted to corn in other parts of the Corn Belt.
Figures 1 through 3 provide a long-term historical perspective on corn, soybean meal and lean hog prices. They show monthly data for the nearby futures contract since 1960 for corn and meal and since 1970 for hogs. The Live Hog contract prices for 1996 and before were converted to Lean Hogs carcass-based prices using a dressing percentage of 73%.
The only record remaining on the corn chart is the 1996 spike. Prices are now within 20 cents of that level. It is not likely that enough good news for soybeans will come out of South America, soon enough to prevent corn from setting all-time record highs on the futures market.
Soybean meal is not in the rarified air of corn prices, but has only two spike highs standing between it and new record-high prices as well. This could be the first ingredient to break -- if we get news confirming a big South American bean crop. But even that would not break soybeans or soybean meal futures much because they must stay high enough relative to corn to get U.S. acres planted to soybeans.
It is also clear from Figures 1 and 2 that corn and soybean meal prices could be going through the same kind of quantum change that happened in 1973, when oil prices exploded, driving prices for virtually all goods higher, and, the era of world trade in grains began.
Finally, hog prices are lagging this upward shift in grains, as they should. Higher input costs get captured by downstream users only after output is reduced. We are in the early stages of that cutback at present and will not see the full results until 2009 or 2010. The long-term resistance level for Lean Hogs is at or just above the $90 level. I would expect prices to exceed that level by 2009, if this liquidation continues at the pace I expect. Lean Hogs prices above $100 are very possible in 2010 and beyond, if feed costs stay on this new, higher plateau.
Why the Low Sow Prices?
What was the deal with the flood of sows that drove prices so low the week of Jan. 25? Anecdotal evidence indicates there was indeed a flood of sows that week, but USDA slaughter data released on Thursday notes that U.S. sow slaughter was not particularly large and was, in fact, lower than the previous week (see Figure 4). Canada's sow slaughter for the same week was 2,309 head -- about the "normal" level. Imports of cull sows and boars from Canada that week totaled 9,758 head, the second highest weekly total since January 2007, but not enough larger to cause a flood of U.S. slaughter.
So why the extreme low prices? Slaughter is not necessarily supply. My contacts indicate that the real problems that week were two-fold. First, sausage demand is not very good during January and February and sausage manufacturers did not want to freeze product. That spells soft sow demand at a time when producer offerings were high; a perfect recipe for prices to free-fall.
Second, the mix of sows hitting the market was dominated by light sows that are not preferred (and pretty much not even wanted) by sausage manufacturers. This is probably a fact of life that we will have to get used to, given the price of feed and the low value of sows. It simply doesn't make any economic sense to use expensive feed to put pounds on these sows -- unless they become much more valuable.
Some suggested that we just had more sows than could be killed. My data disputes that argument. My update of slaughter capacity last August indicates that U.S. sow slaughterers could handle 19,305 head/day or just short of 100,000/week. If that's so, why did weeks of 69,000, 70,000 and 68,000 cause so much trouble?
When I update slaughter plant capacity data, I ask: "How many can you process if hogs are plentiful and margins are good?" It is obvious to me that the reason sow slaughterers did not process more sows those weeks was that one of those conditions -- hog availability or margins -- was not being met. It had to be the margins. Sow slaughterers simply were not going to kill sows that they could not use in the short run and, faced by far more sows than they needed, reduced bids accordingly.
But there is some good news. It now appears that sow offerings have slowed. We are getting closer each day to hot dog and bratwurst season and the kick they provide for sausage material demand. Sow prices have rebounded a bit and will, in my opinion, continue to do so. The Canada-U.S. pork sector still needs to cut sow numbers, but we probably shouldn't try to get it done in a week or two. Sow prices that week in January sent a very clear signal to "slow down!"
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.