If I told you that you could lock up a calendar year’s production of market hogs and average $20/head profit for every one of them, would you take it? There is no right answer to that question because it depends on a lot of factors. Included in that list of factors is your attitude toward risk, your financial position, the stage of life that you are in (young people can take more risks because they have more time to recover if it doesn’t pan out), the viewpoints of other owners, and the profit opportunities that you could tap if you free up time, energy, capital, whatever by making a decision now.
But that opportunity is at hand – or at least it was earlier this week before USDA’s Acreage and Grain Stocks reports pushed corn prices sharply higher. On Monday, my production model said that producers could lock in corn, soybean meal and hogs to earn just over $22/head for the remainder of 2010, $16.53/head for all of 2010, and $20.49 for July 2010 through June 2011. Those figures have deteriorated just a bit this week – to $19.27, $14.85 and $19.15, respectively. The costs and prices that result in those returns appear in Figure 1.
A savvy producer told me today that his company is very excited about the margins being offered right now and will lock them in for a high proportion of production. This guy is, I believe, somewhat risk averse, but I also know that his viewpoint on risk got him through the past two years relatively scot free.
A reasonable question is “Where would these kinds of profits leave me, financially, one year from now?” That can’t be answered for your individual farm, but Figure 2 shows how accumulated profits would look given these forecasts – based solely on futures market prices.
If a producer has production parameters comparable to those used by Iowa State University economists in their Estimated Costs and Returns series, he/she could recoup $380.22 of the accumulated profits lost over the past two years from March 2010 through July 2011. That represents nearly 60% of total losses in just 17 months.
It is difficult to forecast either costs or returns beyond next summer with the data we currently have in hand, but it is very possible that positive returns will remain through Q4 of 2011, allowing further recovery of financial positions by many pork producers.
The moral to this story is that managing margins is a good business practice that has positive impacts on profit variation, financial position, sleep and, in some instances, marital bliss. Even more, it does not necessarily mean an excruciatingly slow, painful climb back from the financial abyss. Today’s markets are offering a rather quick recovery.
As Figure 3 shows, current forecasts say that 2010 will be the fourth-best profit year for farrow-to-finish producers since 1990. Further, the next 12 months will rank third – behind only 2004 and 2005 – in terms of profit per head.
Keep an Eye on Crop Reports Going Forward
This week’s crop news has been generally bullish. USDA’s estimate for corn acres was over 1.5 million below the trade estimates. Estimates for June 1 corn and soybean stocks were below the trade estimates as well. Monday’s Crop Progress reported lower good/excellent ratings for the third straight week, with soybeans dropping below year-ago levels.
Rain indeed makes grain and this crop still looks to be a good one, but too much rain has put many acres in some peril and there is still talk of La Nina driving summer temperatures high enough to hurt.
This week’s rally will not last if this crop develops well in weeks to come. USDA will release its July Crop Production and World Agricultural Supply and Demand Estimates on Friday, July 9. That report may contain adjustment to yields for both soybeans and corn even though the first objective (i.e. based on plant counts, ear counts, pod counts, etc.) yield estimates will not come out until the August report.
I really don’t think there is a lot of topside risk, but protecting against a huge disaster with out-of-the-money calls, perhaps paid for in part (or in total) by writing puts or calls still seems like a good strategy to me; $3.80 corn and $260 soybean meal aren’t as attractive as the prices paid last week, but they are not a disaster either, especially with decent hog price prospects. On the other hand, corn at $5/bu. and soybean meal at $400/ton, although unlikely, would leave a mark for sure!
Our Production and Price Summary Tables will return next week!
Happy Birthday Dear USA!
Please accept our wishes for a happy and safe Independence Day holiday! Print off a copy of the Declaration of Independence (it can be found at: www.ushistory.org/declaration/document/) and read through it this weekend. As you read the lengthy list of grievances that the colonists held against the British Crown, I think you will get an idea for the immensity of that fateful decision 234 years ago. What a vision for liberty and self-governance!
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.