The feedgrain price situation has been the talk of the meat industry this week with quite a bit of speculation as to both the short- and long-term impact it may have. I think it is worthwhile to think some of this through so producers can begin to develop some strategies for the future.
Figure 1 shows my now-familiar estimates of the cost of the corn and soybean meal needed to make a 16% crude protein pig diet. The cost went up another $6/ton last week to reach $106.97, its highest level since July 2004, when the cost was in a free-fall as the corn crop was making rapid progress toward setting a record.
In addition, corn and soybean meal futures rose again last week to push the forecasted diet cost higher with the peak now at $124.19/ton next June. Allowing another $30 or so for vitamins, minerals, additives, grinding and mixing, this would put feed costs at over $150/ton next summer.
Chicago Board of Trade (CBOT) corn futures for the deferred contracts have risen by 8 cents or so this past week, putting a more normal December-to-December "carry" into this market. So, the forecasted costs shown in Figure 1 for late 2007 are a bit low for today's market. Suffice it to say that higher feed costs are on the way sooner than we had expected.
Impact on Feeder Animal Prices
One of the first reactions we would expect would be a decline in feeder animal prices, but the impact has been pretty slow thus far. Western Kansas cash feeder cattle prices have fallen by about $10/cwt. since mid-September, but prices for weaned pigs and feeder pigs haven't reacted much yet.
Figure 2 shows both spot and weighted average (includes contracted pigs) prices for both classifications. Note that our information for spot feeder pig prices is quite sketchy. Those straight segments in the spot 45-lb. feeder pig line represent weeks for which no price quote was available. The weighted average price is heavily influenced by the deferred Chicago Mercantile Exchange (CME) Lean Hog futures from which many pigs are priced. The recent decline in futures prices can be clearly seen in this graph.
Weaned pig prices are still rising in a more or less normal, seasonal manner at present. The vertical dashed lines have been added to help you compare price action during the second week of October for the past three years.
The big impact of higher corn prices on feeder markets has been on CME Feeder Cattle futures, which have fallen by well over $8-11/cwt. (depending on the contract) since their peak in early September. The same would likely be true if we had a feeder pig futures market.
Tempering Market Weights
I think the most likely short-term impact on the hog business will be a slowing or cessation in the growth of market weights. But discerning the effect of the now-higher corn prices will be difficult because we have been running quite close to year-ago levels for much of 2006.
Figure 3 shows the long-term trend in hog carcass weights. The only time that this upward trend has flattened since 1986 was in 1995 and 1996 when corn prices went to record high levels. But note that carcass weights did not decline in those years; the rate of growth just slowed. Note also that carcass weights in August of this year went below those of last year (marked by the vertical lines in Figure 3), and it appears that carcass weight increases have already slowed. Figures 4 and 5 confirm this.
Figure 4 presents the average weight of all hogs slaughtered under federal inspection. It includes sows, boars, top barrows and gilts and light hogs. Weekly figures for 2006 have run very near those for 2005 since May. Note how high both lines are relative to the average carcass weights for 2000 through 2004 -- a function of the increase in carcass weights over that period.
Figure 5 presents the average carcass weight data from the mandatory price reporting (MPR) system for barrows and gilts. It is based on data only from plants that slaughter more than 100,000 head/year and, thus, omits data for the many small plants that slaughter roaster pigs, lightweight and "off" hogs. And yet the year-over-year pattern is almost identical to that for all hogs with weights this year being quite close to those of last year since March.
So why were weights not rising even before corn prices took off? First, I know that some packers have imposed larger discounts on heavy hogs and that may have caused producers to be much more careful in sorting, thus reducing average weights. Second, I wonder whether some of the porcine circovirus-associated disease (PCVAD) problems are manifesting themselves in lower average daily gains, thus leading to final weights very near those of one year ago.
Higher feed prices may be additive to these in the future so I look for, at most, flat carcass weight growth in 2007.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.