I pose the question since it is again raining outside my office window. This spring reminds me of 2009, when we had a very late start to planting and we were on pins and needles all summer to see whether we would get a good crop. We actually had great yields that year, but the quality of the corn was a significant problem. We are in need of a record crop, but it’s not off to a good start. Time will tell what will happen with this year’s crop.
Many livestock producers are very concerned about the current supply of feed and they have questions about the best approach going forward. There is very little margin for error and considerable anxiety in trying to figure out the best approach to managing the risk.
We work with many producers across the United States. Many have corn coverage until fall, but after that it drops off significantly. Everyone is hoping for an opportunity to buy corn at a lower price.
It's also a good idea to make sure you have some physical ownership of corn going into this fall. Ideally, you would have too much corn on hand going into the fall. I realize this takes capital. As a lender, it's my opinion that having your feed needs covered going into the fall is a good position because supply could be tight. Think of it as insurance – you hope you don’t need it, but you have it just in case.
Cash Hogs at Historic Highs
Figure 1 is a historical chart concerning cash hogs. As you can see, we are at historical highs for 2011. Record export demand has helped keep prices strong. In addition, supply has been somewhat tight, forcing packers to bid up to keep their supplies coming into the plant. Packers have worked hard at trying to improve their margins, but until they see more pigs coming to town, that might be hard to do.
Another issue that has occurred in the last 30 days is the amount of hedge profits or market-to-market profits that have occurred as hog futures dropped (Figure 2). Many producers have developed a disciplined approach to managing their margins by using the Chicago Mercantile Exchange (CME). In a period of a week, we saw significant pay down on operating lines because margin money was coming back from CME. This is somewhat of a mixed blessing. You like the margin money coming back, but on the other side of the equation hog margins going forward do not look as good as they did a month ago.
Cold Storage Report – All Meat Proteins
The recent cold storage reports contain some good news and bad news. Total pork in cold storage was down compared to a month ago (Figure 3). That’s the good news. The bad news is that total pork in cold storage is more than 12% above where we were at a year ago. The other part of the bad news is that beef and chicken supplies in cold storage are also building. Beef in cold storage is up close to 20% from a year ago (Figure 4) and poultry supplies are up over 18% from 2010 (Figure 5). All three meat proteins are up double-digit percentages compared to a year ago and that’s cause for concern. Higher feed prices are driving up cost of production for all. The problem is when supplies are building it could be increasingly difficult to keep charging higher prices. I encourage everyone to pay attention to the three meat protein sectors. When competing proteins are building supplies, you can be sure it will put some pressure on pork prices. It is an item worth watching.
Thanks to Frontier Risk Management and Professional Ag Marketing for helping put the charts together for this column.
Click to view graphs.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com