Chicago Mercantile Exchange (CME) Group Corn, Soybean Meal and Lean Hogs futures as of Friday, June 4 say there is more to come. My costs and returns model, which are based on the historical Iowa State estimates, have profits of roughly $30/head for June, July and August, and nearly $23/head for September. Current future markets would even provide profits of $5.72/head and $6.87/head, respectively, for November and December – two months that frequently bring red ink, even in good years.
So, is the futures market right? As I have pointed out many times, I find it difficult to argue much with futures markets. They represent a great melting pot of economic information and analysis, all backing real money making real bets on what prices will be in the future. I know of nowhere that more information and analytical talent interact to give us a prediction of the future. That doesn’t mean futures markets are always correct. It only begs the question, “What is a better predictor?”
Good Numbers Needed in Hogs & Pigs Report
USDA’s survey of June 1 hog inventories is underway. Last June’s survey included 9,200 pork producers. March’s survey covered 8,700, so I presume that this year’s June survey will go to roughly 9,000 producers. USDA samples large producers more heavily than small producers since they hold a larger share of total inventories. Responses were received from about 7,600 producers in June 2009 and about 7,000 producers in March 2010.
A personal plea: If you are one of the surveyed producers, please do your best to provide accurate information. The report will impact the hog markets and will be no better than the survey responses received. Garbage in, garbage out applies to more than just computers.
Report Card on March Pig Crop Estimates
So, how has the March Hogs & Pigs report performed so far? In spite of some weeks in which slaughter was below the predicted levels, the cumulative difference between actual U.S. federally inspected (FI) hog slaughter and the levels I had predicted since March 1, based on the March report, has been a very reasonable -1%. And that includes last week’s -14%, which was caused by a mismatch between the weeks in which Memorial Day fell in 2009 and 2010. Figure 1 shows the actual and predicted weekly totals.
If slaughter remains reasonably close to the level predicted by the March report, though, the year-over-year shortfalls will get larger over the next three months. I have weekly slaughter down 4.5% from 2009 levels for August and September. Assuming a price flexibility of -2 to -3, the change in supply would drive prices 9 to 13.5% higher than last year.
But there are two additional challenges to computed expected prices. First, last year’s prices were artificially depressed due to lingering impacts of H1N1 influenza virus, primarily in export markets. Adding even 13.5% to the prices of last August and September doesn’t even get carcass-weight prices to $60/cwt., a level that is ridiculously low based on prices so far this spring. We could throw out 2009 as an odd-ball year and use 2008, though then we would be factoring in the greatest surge of exports in history and would put some weekly prices above $100/cwt., carcass. Averaging the 2008 and 2009 weekly prices and then applying the expected price change puts cash hogs in the upper-$70s in August and upper-$60s in September – levels still lower than current futures market prices suggest.
The second confounding factor is hog weights. Last summer’s cool weather added 2 to 3% to pork production. While few can believe we could have another summer like 2009, this year has been cool so far and weights have actually been 1 lb. higher than last year in each of the last three weeks. At present, it is looking risky to assume that lower weights will provide even more year-on-year strength for hog prices.
Come See Us at World Pork Expo
Please stop in and see us this week at World Pork Expo in Des Moines. National Hog Farmer will be in booth 623 in the Varied Industries Building and our staff would love to visit with you. I will be hanging out primarily in the press center on behalf of the National Pork Board and National Pork Producers Council. This is one of my efforts to fill the large shoes left vacant by University of Missouri Agricultural Economist Glenn Grimes’ retirement. I’m a bit nervous about it, too.
The National Pork Board is also hosting a noon luncheon on both Wednesday and Thursday, which will feature a weather outlook by Elwyn Taylor of Iowa State University and a crop and hog price outlook by yours truly. Join us in the upper level meeting rooms on the south side of the Varied Industries Building for barbecue and prognostication.
It will undoubtedly be a happier group of pork producers trekking to Des Moines this week. Latest estimates from Iowa State University tell us that average Iowa farrow-to-finish operations buying cash grain and selling cash hogs made $39.10/head on market hogs sold in May. That figure follows profits of $27.33/head in April and marks a quick and dramatic turn from losses as recent as February.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.