It's not often that information trumps the Hogs & Pigs Report, but that was certainly the case on Friday as USDA released the highly anticipated Prospective Plantings Report for the 2007 crop year. The key data from the report appears in Table 1 below.
The critical number for pork producers, of course, is the planned 90.454 million acres of corn (Table 1). That is a huge increase of over 12 million acres (15.4%) relative to 2006 and would be the largest area planted to corn since 1944. The number includes sizable increases in the Dakotas and a number of southern states (planned cotton acres are down 3.1 million acres or 21%).
The biggest "victim" of higher corn plantings is, quite logically, soybean acres. At 67.14 million acres, that's 8.4 million acres (11%) lower than in 2006. Wheat plantings are expected to cover 44.5 million acres, 3.9 million (9.7%) more than in 2006.
None of these directions were any surprise at all, but the magnitudes of the shifts were definitely unexpected. Table 1 includes the average of analysts' pre-report estimates. It is obvious that the actual numbers were well beyond those averages. Planned corn acres came in just below the highest of the analysts' estimates and wheat acres came in above the highest estimate.
Not surprising, corn futures contracts through the 2007-08 crop were limit down on Friday and some analysts believe Monday may see another limit-down move. In a rather goofy occurrence, though, soybean futures were sharply lower on Friday as well. It's true that soybean stocks are record-large, but one would think that 8.4 million fewer acres of soybeans would be supportive to prices. It is possible that soybeans simply got caught up in the negative psychology of the market. It is also possible that some long position holders saw the potentially larger corn acres and became worried that the big switch from soybeans to corn would not materialize.
With all that said, my judgment is that we are not in the clear yet on corn prices. Big planting intentions are a good first step and they reinforce my faith in the power of markets. But they don't do anything to keep things dry enough to get a crop planted or moist enough to get a crop made. Trend yield will give us a crop of just over 12.4 billion bushels and that will just keep 2008 carryout stocks even with 2007. This is still a weather market and we are still going to use a bunch of this corn to make ethanol.
Producers should watch this market for buying opportunities. Another big move down on Monday would put corn futures at levels not seen since January. "Buy low" is still the strategy, but the definition of low has changed. This might be as good as it gets for a while.
Pig Crop Report = No Surprises
The Hogs & Pigs Report was another yawner -- and that's fine by me. Modest growth in the breeding and market herds, very manageable supplies this summer, and the possibility of lower (or at least no larger) farrowings over the next two quarters, all spell continued strength for hog prices -- provided the 180-lb. and over count is not a harbinger of things to come.
I can't recall ever seeing as big a swing in the "versus-year-ago" number for consecutive weight classes as exist between this report's figures for the 180-lb. and over (103.8%) and 120-179 lb. categories (99.9%) [See Table 2]. The 180+ number agrees quite well with March slaughter. The trouble is that the big drop to the 120 to 179-lb. category does nothing to help us explain this recent surge. Could our "steady as she goes" production system really have that big of a glut of pigs over a 6-7 week period?
My fear is that the answer is "no" and we are seeing the beginning of substantially higher supplies. If that is the case, producers lied through their teeth about the under-179 lb. inventories, but I don't really believe that either.
The fact remains that we first began using circovirus vaccine last October and November on pigs entering nurseries and finishers and that means that this surge could be the first of those pigs. Add in the greater availability of vaccine since then and one has to be concerned that this is not just a six-week surge. I've seen surges before, but 100,000 head/week is a doozey of a surge.
My price forecasts, based on 2006 prices and this Hogs & Pigs Report, are still $3-$5/cwt. carcass below the prices of Chicago Mercantile Exchange (CME) Lean Hogs futures contracts for the remainder of this year (Figure 2). There is a long-standing tendency for summer contracts to rise through April, so the futures market could provide good pricing opportunities again soon.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.