“If it weren’t for bad luck, we’d have no luck at all.” That line from the old Hee Haw song skit “Gloom, Despair and Agony on Me” kept coming to mind this week. It may not have come to you less culturally indoctrinated readers, but it came to mine.
Deferred Chicago Mercantile Exchange (CME) Group Lean Hogs futures reached record highs with June 2009 approaching $96/cwt., carcass. Figure 1 shows the chart of weekly prices on the nearby contract and it is plain to see that we have never been in this rarified air before.
The futures are reacting to higher corn and soybean meal prices, of course, and are being more logical in that reaction than in past months. Several times over the past year, nearby lean hogs futures would rise when corn prices rose. Perhaps that was the separate markets competing for speculative fund money, but it doesn’t make a lick of economic sense since there are such time lags in pork production.
This week’s rise was different, with the deferred contracts impacted significantly more than the nearby contracts. Someone is figuring out that it takes awhile for these costs to have an impact and that has brought a bit more economic logic to the equation.
Still, the record-high prices for next summer may not be profitable. Figure 2 shows my cost forecasts based on corn and soybean meal prices on Tuesday, June 17. July 2009 stands at a record $96.79/cwt., carcass, higher than the corresponding lean hogs futures price even without a basis. Those futures prices may not be right, but they have to be at least respected in your current planning.
And the reaction has been swift. I have had reports of a large number of entire sow herds being sold for slaughter in the past two weeks. One Midwestern buyer reportedly bought over 14,000 sows last week and the smallest operation was 1,200 sows. I had a report today that sows are booked for at least a week and more likely a week and a half out.
Perhaps most important is the news that more and more of these sows are still pregnant at the time they are sold. There is a major difference between selling dry sows and selling “piggy” sows, and we usually see major shifts in the breeding herd the quarter after we hear reports of piggy sows in slaughter plants.
New Pig Crop Report Next Friday
USDA’s June Hogs and Pigs Report will be released next Friday afternoon. I expect the U.S. breeding herd to be 2% lower than last year and the market herd to still be 5-7% larger, given the size of lightweight inventories in March and March-May farrowing intentions. Those numbers would not change my supply or price forecasts through June 2009.
I still do not expect cash hog prices to reach the levels that futures are now offering, at least through April 2009. October and December futures reached new contract life highs on Friday morning, and I think producers should be watching those contracts for signs that the rally has run out of steam – thus signaling a selling opportunity.
February and April Lean Hog (LH) futures are also at contract life highs and I would be watching for pricing opportunities there as well. Some coverage before the report next Friday would be prudent – perhaps out of the money puts to protect against a bearish surprise.
Grain Situation Looks Bleak
The grain situation is bad and far from safe. The condition of the corn crop last week was below the corresponding week’s value in 2002, the year with the worst-ever average full-season corn crop condition. USDA’s Acreage report will be released on June 30 (I should have analysts’ pre-report estimates in next week’s NAP) and the trade is talking about 1-2 million fewer corn acres and 2-3 million fewer soybean acres than the April 30 Planting Intentions report indicated. It will take a major miracle for either of these crops to reach their long-term trend yield, so lower-than-expected supplies are a given, I believe.
Ethanol Flinching at Corn Prices, Too
Finally, hog producers are not the only ones hurting with $7-plus corn. There were several rumors of ethanol plant cutbacks last week as gross margins have plunged since June 1. Corn costs are part of that, but a sharp drop of the ethanol price (from $2.46 to $2.33/gal. in Iowa) two weeks ago was the biggest contributor. That price recovered to $2.55/gal. last week, but expect to hear this more often as corn and natural gas prices continue to rise.
This factor underscores another issue that will be important: The “off” switch is much more effective and timely for ethanol, food and export uses of corn. If short-term rationing is needed, prices have to go high enough to cause these users to back off and that will mean prices will be very high indeed.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.