Since June 9, the day USDA issued its latest estimate of the 2011 corn crop and dropped its forecast of projected year-end 2011/2012 crop year carryout stocks by 205 million bushels – to 695 million bushels, only 5.2% of projected total usage – pork producers’ economic prospects for the next year have improved dramatically! Go figure.
The ink on the June 9 World Agricultural Supply and Demand Estimates had barely dried when corn futures prices began to fall. Chicago Mercantile Exchange (CME) Group Corn Futures for July closed pit trading on June 10 at $7.77. They closed Friday afternoon at $7.00. New crop December futures dropped from $7.09 to $6.49 over the same period. All new crop contracts are now well below the $7 level; they were all above that level at the time of the report.
What has Changed?
Not a lot has changed, but a few factors have driven the selloff. First, the Goldman roll, a time period in which commodity funds led by the Goldman-Sachs fund, rolled nearby contracts into more distant contracts to avoid delivery, squeezes, lower volume and limited liquidity that can happen to spot month futures. That action usually depresses the front month contract, but can sometimes bolster prices in distant months. Not this time. The entire complex followed July lower.
Second, oil prices have fallen sharply. NYMEX Crude Oil futures for July fell from $101.93/barrel on June 9 to close at “only” $93/barrel on Friday. None of the actions being taken in Washington regarding ethanol policy will unhitch corn from crude oil given the existence of 15 billion gallons of ethanol-distilling capacity (see point #3). Lower oil means lower corn.
Third, it was a very tough week for the ethanol lobby. The Senate voted 73-27 to immediately end the blenders’ tax credit and ethanol import tariff, a move expected to increase federal tax revenues by $6 billion per year. Both of those ethanol incentives were due to expire at year’s end anyway, but the vote is the first tangible evidence that ethanol’s Washington, DC honeymoon is over. The change will not have dramatic impacts on ethanol output or corn usage for ethanol, but it should reduce the amount that ethanol blenders are willing to pay for ethanol and, consequently, reduce the amount that ethanol producers will pay for corn to go into ethanol. They are a minor part of the pressure on corn prices.
The 10-ton gorilla, though, is still the renewable fuel standard that mandates the blending of 12.6 billion gallons of corn-based ethanol this year. That policy feature will keep corn moving to ethanol distilleries and maintain the level of corn usage for ethanol. And it grows by 600 million gallons for four more years when it hits the current maximum of 15 billion gallons in 2015.
In spite of this continuing driver of corn usage for ethanol, the ethanol lobby is now campaigning to capture at least some of the $6 billion it has received in tax credit subsidies to fund infrastructure, such as pipelines and blender pumps. To this I will add only the following – a subsidy by any other name is still a subsidy.
The sell-off in corn and soybean meal future plus a $2-$4/cwt. rally of Lean Hogs futures increased projected producer returns for the next 12 months by roughly $9/head. That’s the good news. As can be seen from Figure 1, the bad news is that my model still projects a loss of just over $1.00/head, on average, for June 2011- May 2012.
Could these projections get better? Yes, possibly, but they also could take a turn for the worse.
Fewer Cattle Gives Pork a Bump
The pork and hog demand side got a bit of a shot in the arm on Friday when USDA’s Cattle-on-Feed report showed May feedlot placements nearly 11% smaller than one year ago. That figure compares to analysts’ average pre-report estimate of -7.5% vs. 2010. Feedlot inventories are still 4.1% higher than last year, but that number is less than the +5% or so of recent months and the +5.5% average pre-report estimate. I’ve been expecting a significant tightening of cattle supplies for a few months and this finally confirms my expectation. Tighter fed cattle supplies and higher beef prices should be here by late fall. Higher beef prices are a positive for pork and hog demand. And that positive impact could be even larger if chicken companies continue to set fewer eggs as they have done the past five weeks.
The hog supply side is uncertain, but we will get a new read on it this Friday when USDA releases its June Hogs and Pigs Report. The March report has, so far, been very accurate.
Finally, feed costs are now primarily a function of weather. Good weather from here on will result in the higher yields necessary to keep corn and meal prices near or, perhaps, slightly below their current levels. There is still plenty of upside potential for these prices, though, should weather not be cooperative. We need a lot of heat units and some timely rains to realize the excellent yields we need to keep feed costs reasonable. Late planting has left crops in many areas very susceptible to an early freeze.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.