Changing times call for changing strategies in buying and selling.
The time-honored strategy of buying low, converting efficiently and selling high is taking on new meaning in 2008, according to a leading agricultural economist.
“What constitutes ‘low’ and ‘high’ has changed considerably in the last year,” notes Steve Meyer, president of Paragon Economics, Inc., who spoke at the 2008 Iowa Pork Congress.
While today's escalating corn prices are challenging the all-time highs set in 1995-96, Meyer suggests some strategies to manage input costs. Start by using existing feed inventories, and consider using distiller's dried grains with solubles (DDGS) in your hog rations.
“There have only been a few times when DDGS relative to corn have been a good deal for hog producers, but they can work now,” states Meyer, author of the Market Preview column in National Hog Farmer's weekly e-newsletter, North American Preview. He notes the ethanol byproduct can comprise 10-20% of a hog's ration without hurting performance. “We can't hang our hat on DDGS, however, because if the product gets too inexpensive, cattle producers will bid it away.” The biggest challenge with alternative feed products is that they are all priced off of corn, says Meyer, who advises pork producers to consider buying call options. Call options aren't cheap, but don't discount them.
“They are an insurance product that puts a lid on corn prices and can help prevent a bigger train wreck if corn goes higher,” he says. “Remember, now is not the time to be aggressive; it's time for defense.”
Meyer says grain prices in 2008 will depend on these factors:
South American soybeans: “It appears that beans are driving the boat,” he says. Rains have delayed plantings in some areas, but growers expect good yield potential this year.
U.S. corn production: With the battle for acres continuing, it's not clear how much land will be devoted to corn production in the United States in 2008. However, high corn yields will be critical to meeting market demand for food and fuel, says Meyer.
Drought risk: The risk of drought normally follows a 19-year cycle, according to Iowa State University Climatologist Elwynn Taylor. The level of risk for serious drought in Iowa and parts of the Corn Belt doubles during that cycle, which is now occurring.
Meyer says cutbacks in the U.S. swine industry can be expected in the months ahead. Herd reductions are already occurring in Canada, where analysts expect the sow herd to eventually be trimmed by 25-30%.
“These are challenging times, and things could get worse before they get better,” acknowledges Meyer. His advice: feed pigs as cheaply as possible and keep playing defense.
“We've weathered hard times before and we can do it again,” he comments.