Has there ever been a more dynamic time for grain and livestock markets? I don’t think so. The financial prospects of pork producers seem to change by the hour – or at least by the day -- and I’m not sure I can remember when long- and short-term situations changed so quickly, often in opposite directions! I feel whipsawed at every turn, and I don’t have nearly as much at stake as most of you. Let’s consider what has happened recently.
Last week’s discussion of (and surprise at!) a bullish response to what appeared to be a slightly bearish crop report was just a primer for what was to come. Corn futures prices are now roughly $1/bu. higher than they were on Aug. 11, the day prior to the August Crop Production report. Soybean meal futures prices are roughly $30/ton higher.
Why has this reaction occurred? First, the crop remains immature from an historical perspective and quite at risk for an early frost. But the trade analysts knew that going into the report. Perhaps thinking of the immature crop in terms of a forecasted 155-bu.-per-acre yield instead of a 148.5-bu.-per-acre yield provided a dose of cold water on this issue. Still, these early frost concerns are well founded and indeed persist.
Second, it has turned dry in some areas. Rain has been less regular in many areas and an immature crop needs all the help it can get.
Third – and I think this is the factor that has really come into play – this report provided a dose of absolutely frigid water concerning next year’s crop, and what it will have to be to meet all of the demands that will be placed upon it. The 2009 carryout is now forecast at 1.133 billion bushels, over 400 million bushels less than this year. The cost of planting an acre of corn next spring could well be over $700. That is a lot of money (borrowed?) to put at risk relative to the cost of planting soybeans.
The Renewable Fuel Standard will require another 1.5 billion gallons of ethanol, thus diverting another 535 million bushels of corn, regardless of the price.
There will be about 1 million acres coming out of the CRP (Conservation Reserve Program) this fall but a) some will be bid back in, b) some will be acres not suitable for corn and soybean production and c) it will be too late for much of it to be farmed in 2009 even if the owner wants to do so.
Expectations of future economic events count in economics and are critical to the process of discovering prices, rationing supplies, etc. It is a good thing that the market looks ahead, even when it costs us in the meantime.
Hog Futures Weaken
While corn and bean prices have rallied, hog futures have softened a bit even as cash markets have been excellent (Fig. 1). That makes sense for the deferred futures market as higher current hog prices and lower prospective grain prices likely caused some producers to scrap liquidation/reduction plans or at least put them on hold. I do not think the recent record-high cutout values and hog prices can hold in the face of seasonally higher slaughter, but higher values now could well mean higher values through the fall. The average national net price so far in August has been $84.96. A “normal” seasonal pattern tells us that December hog prices will be about 18% lower or just below $70/cwt carcass. But given the abnormality of the seasonal pattern thus far, just why should we expect a normal seasonal decline this fall?
Sow Prices Befuddle Economist
Little of our logic works. Like this one: Prices for big sows (see Fig. 2) have doubled in four weeks, are trading in the mid-$50s this week, and one sow buyer tells me he expects to see sow prices in the $60s next week. So, producers must have decided to quit selling sows, right? Wrong. We still slaughtered 68,410 head the week of 8/9, 7.7% larger than last year. Year-to-date sow slaughter is still up over 9% from 2007 and sow slaughterers report that sows are not in short supply. In fact, there seems to be more of them available at these higher prices. Okay, one piece of logic works. The driver on sows is demand, which is largely due to prices for trimmings and those are most likely being driven by exports.
Need Weekly Export Report
A big part of why the logic fails is that we cannot see the man behind the curtain, exports, on anywhere near a real-time basis. We do not have weekly export reporting like that of the beef industry because the writers (and I was one of them!) of the 2000 mandatory price reporting legislation believed that it would provide a strategic advantage to our competitors if they knew what was going on week to week. The U.S. beef industry did not have the same worries since, at that time, it was virtually the only exporter of grain-fed beef.
Times have changed. We are now exporting more than 25% of our production. Weekly information may provide some advantages to our competition, but this segment of sales is so important that we should not continue to learn its details two months after the fact.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com