Good growing conditions and what some feel is an ambitious yield estimate from Informa Economics pushed corn futures prices lower last week, providing some much-needed good news for pork producers. See Figure 1.
Informa’s estimated national corn yield of 152 bu./acre, released on Monday, was a big driver in the price decline that saw new-crop December corn futures fall 73¢/bu. or almost 10% through Thursday. Warm, sunny days and rains in much of the Midwest also helped, even though USDA’s Monday estimate of crop conditions improved only slightly, with 62% of acres rated good or excellent, 1% more than last week. That improvement finally puts this year’s ratings above those of 2002 – the year with the record-worst, season-long average percentages in the good-excellent crop categories.
The sell-off extended to soybean and soybean meal futures early in the week, but both of those markets rallied to recapture much of the lost ground by Thursday. A major factor at play in soybeans is the value of the U.S. dollar relative to the Brazilian real. The dollar price of soybeans must get high enough to offer Brazilian producers enough reals to make them plant more soybeans this fall. Dr. Robert Wisner of Iowa State University thinks that this target price is in the $15-$16/bu. range, so don’t be surprised to see soybeans stay in that range – and cause meal to remain in the $425-$450/ton range.
USDA’s monthly Crop Production and World Agricultural Supply and Demand Estimates, released Friday morning, showed the estimated national corn yield at 148.4 bu./acre, 0.5 bu. lower than USDA’s June forecast. USDA increased the carryout for the 2007-08 (i.e. current) crop year by decreasing ethanol usage (due to delays in plant openings) and feed and residual (due to higher-than-expected corn stocks in the June 30 crop inventory report).
The 155-million-bushel increase in ’07-’08 corn carryout stocks falls straight to the carryout for the ’08-’09 crop year, increasing it from June’s estimate of 673 million bushels to 833 million bushels or 6.7% of total projected usage. That is 1.6% higher than USDA’s June estimated season-ending stocks-to-use ratio, yet USDA increased its estimated season average farm price by 20¢ to $5.50-$6.50/bu. of corn. Should that price increase hold, it would mark another positive shift of the corn demand curve, since June’s 5.1% and $5.80 (mid-point of June’s $5.30 to $5.60 range) was almost precisely on the demand relationship that USDA has apparently used since last summer. The new price range is still far below futures price levels, however, suggesting that the trade is still expecting stronger corn demand than is USDA.
The net impact of the week’s price changes was a small decline in projected hog feed costs (see Figure 2).
High Hog Slaughter Continues
Federally inspected hog slaughter continues to trend toward year-ago levels. That’s the good news. The bad news is that 24 out of 27 weekly slaughter totals this year has set new records for the respective weeks (see Figure 3). Further, USDA’s June Hogs and Pigs Report says that the remainder of 2008 will see more of the same. My projections using the June data say that every week’s slaughter for the remainder of this year will be record large.
One question these high summertime slaughter runs raise is whether we will have a packing capacity crunch this fall. Forecasted slaughter runs will be at or beyond 2.5 million head in December (see Figure 4). Packer capacity as of last August was 428,335 head/day, meaning that packers would have to operate in excess of 5.8 days/week to handle the large fall runs. My packer contacts say capacity will not be an issue – but I’m afraid operating at those high rates will mean wide packer margins and, consequently, lower hog prices than would otherwise occur.
Keep Marketings Current
The key for fall slaughter will be to reach the fall with marketings as current as possible to keep weights from climbing if capacity becomes an issue. Producers got current, I believe, this past spring when slaughter surged and weights went below year-ago levels. They need to remain very current through the summer and into the fall if we are to keep capacity from becoming a significant issue.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.