Friday’s Crop Production and World Supply and Demand Estimates (WASDE) reports from the U.S Department of Agriculture (USDA) contained mixed news for U.S. or Canadian pork producers. USDA’s latest forecasts for the corn crop called for lower yields and production and higher prices, while the soybean yield and production forecasts were higher than forecasts in August, as were forecast prices of soybeans and soybean products. Tables 1 and 2 are updated supply and utilization tables for corn and soybeans, respectively.
The 2010 average corn yield is now estimated to be 162.5 bushels/acre, down 2.5 bushels from last month and lower than the average pre-report estimate of 163.1 bushels/acre. USDA did not change its estimate of harvested acres (perhaps they believe that water-damaged acres will still be harvested but will negatively impact the average yield), but the lower yield put the estimated crop at 13.16 billion bushels – smaller than last month’s 13.365 billion-bushel estimate – but still 50 million bushels more than last year and still a new record corn crop.
Lower production, lower beginning stocks (due to increasing ethanol use and exports for the current crop year) and higher forecast 2011 exports offset a 100-million-bushel reduction in feed and residual usage to drop projected 2011 year-end stocks to 1.116 million bushels, nearly 200 million bushels lower than the August estimate. That level of stocks represents only 8.3% of projected usage, the lowest ending stocks-to-use ration since 1995-96. You may recall that year saw record-high prices that were not influenced by $140/barrel oil!
USDA increased their forecast range for the national weighted average farm price for 2010-11 corn to $4.00 to $4.80/ bushel. As can be seen in Figure 1, the midpoint of that range would represent the highest such price in history.
Some may ask how a $4.40/bushel price could eclipse the average price of 2008 when corn futures went above $7.50 and Omaha cash corn went above $7.00. The reason is the nature of the national weighted average farm price. It is the average of monthly prices weighted by monthly marketings – the latter of which are still heaviest at or near harvest. Those $7-plus prices in 2008 occurred in July when the market was trying to ration the existing corn supply over time and among uses in order to have enough grain to reach fall harvest. They counted far less in the national weighted average price than did the $3.10/bushel corn of the fall of 2007.
Soybean Yield Forecast Improves
Table 2 shows USDA’s September figures for soybeans. USDA forecasts the soybean yield to be 44.7 bushels/acre – up from the August forecast of 40 and nearly a full bushel higher than the average pre-report estimate. That record yield will provide a total crop of 3.485 billion bushels, also a record. Higher exports, though, pushed USDA’s projected carryout to 350 million bushels, down 10 million from last month. Those stocks will put the year-end stocks-to-use ratio at 10.6, over twice as large as this year and last.
In spite of larger supplies and reasonably healthy year-end stocks, USDA increased its price forecasts for beans, bean meal and bean oil from the August levels. The reason is simple: Soybeans must keep pace with corn prices in order to get acres planted next spring. That fact is especially true this year with wheat poised to compete effectively with beans next spring as well. Bean meal is now projected to average $270 to $310/ton, only slightly lower than this year’s projected average of $310/ton.
Hog Price Impact
What is the impact? Obviously, this report was negative for expected hog profits in the coming year. Higher corn and meal prices have pushed my forecasts of 2011 breakeven costs to over $70/cwt carcass weight, up from the low $60s back in June. While hog futures prices remain strong (every 2011 contract made contract-life highs last Thursday!), these higher costs show red ink for pork producers in Q4-2011, and have driven average forecast profits down to only $5.31/head for the year. That number was above $20/head back in June.
The reduction in profit expectations will have one positive impact: It will slow sow herd expansion and very likely make it smaller than it otherwise would have been. That has little impact for the first three quarters of 2011, but may keep the fourth quarter from being the wreck it might have been if producers had swung back to expansion mode quickly or aggressively or both.
So what can you do? Continue to manage margins. While your view of an “acceptable” margin may remain intact, you may have to adjust your idea of what is “realistic” for 2011. It will take a major hog price rally or big grain collapse to get margins back to June levels. I doubt that either will happen so I would not recommend waiting for $20-plus projected margins.
As always, balance what the market is offering you with your financial position and comfort level with risk. Many of you are in a much better risk-bearing position now, but profit offerings for the next three quarters are not at all bad. And remember that you don’t have to pull the trigger on everything at once.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.