My lamentations over the future of feed costs in an "ethanol or bust" world probably have gotten on a few people's nerves -- until the past two weeks. Chicago Board of Trade (CBOT) December corn futures closed on Thursday 27¢/bu. higher than last Friday, 36¢/bu. higher than the Friday prior to that, and 61¢/bu. higher than on Sept. 14 when the current rally began.
Cash corn skyrocketed as well. The weekly average price for #2 yellow corn at Omaha averaged $1.97/bu. the week ending Sept. 15. That same price closed on Thursday at $2.79/bu.
The driver on Thursday was USDA's Crop Production report that was a shocker, to say the least. The report confirms our concern over feed costs and puts them squarely in the spotlight as a dominant factor for feeder-animal prices for the next few years. That includes both feeder cattle and feeder pigs.
The report included a lower estimate of U.S. corn production, down 2% from the Sept. 1 report on a reduction of both estimated yield and harvested acres. 2006/07 ending stocks are now pegged at just less than 1 billion bu. The result is USDA raised its 06/07 marketing year average corn price by 25¢/bu. That puts its latest forecast more than 60¢/bu. (the mid-point of USDA's range) higher than that of 2005/06.
The other big driver of corn prices has been the huge rally in wheat prices. CBOT December wheat futures closed today at $5.155/bu., down 15.5¢/bu. Meanwhile, March and May 2007 wheat futures were down nearly 20¢/bu. But December wheat futures are still nearly $1.50/bu. higher than they were as recently as Sept. 1. Wheat is used as a feed ingredient much more in other countries than in the U.S., thus making the corn for wheat trade-off a driver of the corn market.
Of course, developments in the ethanol business will be the major factor in the corn market beginning in late 2007. Curiously, USDA changed neither ethanol nor export usage of corn from the levels it published in September in today's World Agriculture Supply and Demand Estimates.
USDA also increased its estimates of soybean acres to be harvested (from 73.9 to 74.5 million acres) and soybean yield (41.8 to 42.8 bu./acre). That increased the estimated 2006 crop by nearly 100 million bu., to 3.189 billion. And CBOT soybean futures for the 2006/07 crop year closed today 14-18¢/bu. higher, which pulled meal prices up about $6/ton.
The net effect of these price changes can be seen in Figure 1, which shows the actual and predicted (from CBOT futures and historic basis for Omaha corn and Decatur 48% soybean meal) cost of the corn and bean meal to make a 16% crude protein hog diet. As of Thursday, the forecasted feed costs exceed the levels of July 11 when markets were still under the threat of dry weather. Thursday's forecast feed costs were roughly $17/ton higher than just one month ago. That figure would mean hog-production costs would be about $5 to $7/cwt. live higher than just one month ago.
Will the string of profitable months be able to withstand this run-up in feed prices? We doubt it. While cash-hog prices have been hanging in at around $63, we normally see a $3 to $5/cwt. carcass decline from mid-October to December. Adding $5 to $7/cwt. live to costs and taking hog price down to around $60/cwt. carcass ($45/cwt. live) will probably cause red ink in either November or December.
That would still mean we've just witnessed the longest string of profitable months in history. The string stands at 32 and October will almost certainly remain in the black on the ISU Estimated Costs and Returns -- tying the record of 33.
Plans for Packing Plant Cancelled
Maple Leaf Foods announced Thursday its cancellation of plans to build a new packing plant in Saskatoon, Saskatchewan. It cited estimated costs much higher than expected and the continuing difficulties the strong Canadian dollar is causing for the Canadian pork industry.
We had expected an announcement such as this from the Canadian pork-packing sector and won't be surprised to see more of the same. Though Canadian slaughter for the week ending Sept. 30 was 2.2% higher than last year, YTD slaughter north of the border is down 2.5% from one year ago and the sector is operating far below estimated capacity (see Figure 2).
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com