I do not even pretend to understand everything about what is going on with U.S. financial institutions and the proposed bailout or rescue or support or whatever you want to call it by the federal government. What I think I understand is this: Mounting defaults on mortgages cast huge doubts on the value of many mortgage-based debt packages. Those doubts caused institutions to quit buying the packages, meaning that dollars are no longer moving and no values can be determined. That has caused the entire system to grind to a virtual halt and that means that dollars are not available in the credit market.
Much of that is above us mere mortals - for now! If the situation continues, though, the halt of trades on Wall Street and in international financial markets will mean no credit for national manufacturers and, eventually, main street businesses. There is still time to keep this from getting that far, but the time period is indeed finite.
Robert Dieli, a friend of mine and the owner of Mr. Model Online, a macro-economic forecasting firm and website, tells me that there is an appropriate role for the federal government to play in this crisis and that is the role of a market maker - one who steps in and begins the transaction process at some price level. The market may move either way from that point, but someone has to step in and begin the process of assigning value to these questionable assets. They are not all worthless, but you can't sort through them efficiently without a starting place. Bob, like me, is pretty much a free market economist who dislikes any unnecessary government involvement. So, since he normally agrees with my perfectly reasonable biases, I tend to listen to him and what he says makes sense. I don't like our tax money being used that way, but I don't know that there is much choice at this point.
Talk to Your Lender
What does it mean for pork producers? Financing could get tight. So, an industry facing 10-12 months of losses in the next 15 might find additional capital hard to come by. Do you have a plan in place? Will it survive your lender not being able to access sufficient capital? I don't want to sound doomsday, but you need to be talking to your lender about what is possible over the next few months.
This situation could be even more limiting to the grain sector. U.S. corn and soybean producers are looking at unprecedented up-front costs to plant next year's crop. Large capital requirements and limited capital availability do not mix. At best, they mean the cost of capital will rise, making breakeven costs even higher. At worst, they could mean some acres do not get planted.
Last spring, I heard of an active secondary market in land leases in some areas. Some lease holders could not access sufficient capital to plant a crop, so they sold the leases to others who could. That scenario could play out in spades in 2009, especially at record-high lease rates.
Mark Greenwood of AgStar Financial Services has pointed out that one reasonable strategy for pork producers to handle high feed costs is to backward integrate into corn and soybean production. Everything that goes around comes around, right? If you have the labor and machinery to do that or can access them through custom farming arrangements, a secondary lease market may provide such an opportunity - provided you can access the capital necessary. Now is the time to explore the possibility and make plans if you are interested.
Will Demand Hold?
Hog prices have stabilized over the past couple of weeks. Some believe that will be the case for the rest of this year, but I am not in that camp. Robust demand can only go so far and if Friday and Saturday slaughter this week are equal to those of last week, the total will be near 2.35 million head. That's another record for the respective week and the third time ever that a September week has seen over 2.3 million. And all three of those weeks have been this year. Unless demand is truly exceptional, it will be very difficult to hold these price levels as 2.4 or even 2.5 million hogs show up at U.S. plants each week from October through December.
Expectations for the Pig Crop Report
The results of DowJones survey of hog market analysts' asking for their expectations for today's quarterly Hogs and Pigs Report appear in Figure 1. Analysts expect the breeding herd to show a larger, but by no means robust, decline relative to last year. They also expect the market herd to remain significantly larger than last year, even though the Sept. 1 inventory will be far closer than in the last two quarters. That, of course, is primarily due to comparing to very large numbers one year ago.
These numbers indicate that analysts expect market hog supplies to get much closer to year-ago levels come mid-November (i.e. the 60-119-lb. inventory up only 1.9%). But they also predict that farrowings may only decline 4% relative to last year. Combine that with recent quarters' 1% growth in litter size and the numbers suggest March-August 2009 slaughter just 3% smaller than this year. That would be a very anemic reduction in terms of price impacts and forecasted costs near $80/cwt., carcass.
The report will be released at 2:00 p.m. CDT today. Watch your inbox for a summary of the actual report.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com