Last week Dale Miller sent me a reminder that I had a column due for the coming week. I was on my way to Nashville to speak at the Financial Management conference at the time (June 15), so I began writing. I wanted to include the most-current information available and still meet the deadline. Then I received an apologetic note from Dale saying he'd misread the calendar and the column really wasn’t due until June 24. The changes in those 10 days are shown in the two charts attached.
Let's start with cash hog prices. The weighted average yesterday (June 23) hit an all-time high of over $103/cwt., carcass, which equates to over $212/carcass (Figure 1). In that short time span, we saw cash prices improve by over $20/ head. In addition, as we look at the corn crop in the Midwest and consider all of the cold, wet weather we have had, most everyone would have guessed corn prices would go up. Didn’t happen. Since the beginning of June, corn prices have dropped nearly $1/bu. Looking at the 12-month crush margin for midwestern producers on Wednesday (June 22), it stood at over $17/head (Figure 2).
All I can do is shake my head and think that if I was trying to manage risk on my own swine operation, I am not sure that I would ever get any sleep. The level of volatility in the markets is unprecedented and it takes a lot of time, talent and discipline to withstand such volatility. And it takes a lot of money.
We track our hedge and operating loans closely. In May, when futures dropped, we saw a tremendous amount of money come back to pay down hedge and operating lines. I told our credit group that it's not necessarily a good thing because the actual end margin for the producer is heading in the wrong direction. I always remind them that having margins calls is not a bad thing. In fact, the market is actually going in your favor, I explain.
By the way, our hedge lines have gone up again and I hope they keep going up because the market is heading in the right direction. The other crazy thing, as I write this on June 24, by Monday, when the article is sent out, the margin could be back to where it was last week. Then, again, it could be better! Markets will continue to be volatile and you will need to continue to manage margins to be successful.
Feed Costs and Diet Formulations
Most of you who know me know that I was in the feed business for 16 years before I took my position at AgStar. I still have a passion for trying to understand diet formulations and learning what producers are doing to try to manage diets with corn costs so high.
In 2007, most producers were probably feeding close to 10 bu. of corn and 150 lb. of soybean meal per finished pig. When I was selling feed, a standard diet was 1,525 lb. of corn, 425 lb. of soybean meal and 50 lb. of premix per ton.
Today, as I look at diets, I find some producers are down to 6 or 7 bu. of corn per pig. One producer is below 5 bu. of corn per pig marketed. Producers are using distiller's dried grains with soluble (DDGS), wheat, wheat midds, corn germ, bakery byproducts, and other alternatives to try and reduce feed costs, while still trying to achieve optimum performance. This is a delicate balancing act because some dietary alternatives do impact meat and fat quality. Some packers are concerned about belly quality (bacon). Talk to and work with your packer to make sure you are continuing to provide a superior quality product for consumers. Remember, if demand for pork drops because of quality issues, that demand will be difficult to win back. Quality pig care and quality feed are very important factors to the success of our industry.
Click to view graphs.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com