The news this week revolves around the corn market and the impact of USDA’s big surprise in last Thursday’s Grain Stocks report. In case you missed it, USDA said in that report that year-end (e.g. Sept. 1) corn stocks were 1.708 billion bushels, 322 million more than was in its September World Agricultural Supply and Demand Estimates (WASDE) report and 300 million bushels more than the average pre-report estimate of 1.407 million bushels.
That increase is a complete reversal from the June stocks report that said corn inventories were 300 million bushels smaller than expected. It also implies the lowest summer feed usage since the 1970s, which puts feed and residual use for this past crop year at about 5.2 billion bushels.
The “found” supply offsets some of the concern over 2010 corn yields, but it also raises questions about the source of the corn in question. USDA says it has accounted for this year’s early harvest and kept 2010-11 corn out of the year-end 2009-10 stocks numbers. Most analysts are not buying into that explanation, however, since new crop corn was being widely used to blend with poor quality old-crop corn. Add that to the needs of southern poultry growers for higher quality corn and it is difficult to see how some crop-year crossing has not occurred.
Jerry Gidel of North American Risk Management in Chicago points out that some “year crossing” occurred in 2007, so there is some precedent. The quality situation of last year’s remaining supplies adds another huge incentive to mix corn across crop years.
And then there is the yield factor. Many reported corn yields are below expected levels. Brokerage firm FC Stone is the latest to predict a lower yield, dropping its estimate from 162.9 to 159.2 bu./acre. That drives Stone’s estimated crop from 13.195 billion down to 12.891 billion. Other brokerages/analysts have made similar reductions in recent weeks. USDA’s October estimate will be released this Friday, Oct. 8, at 7:30 a.m. (CST).
The impact of the extra corn has been quite dramatic. December corn futures fell from a close of $5.00/bu. on Wednesday to $4.65-3/4/bu. on Friday. But it is important to note that corn futures were already retreating before this last shock, having fallen 21-3/4 cents from Friday, Sept. 24 through the close on Wed., Sept. 28. Over the same time period, November soybeans fell by roughly $0.70/bu., and December soybean meal fell by $27.50/ton.
So what does this mean? First, it is a welcome opportunity to buy some lower-priced feed ingredients. Figure 1 indicates that my feed cost index (the corn and meal needed to make a 16% crude protein diet) fell by nearly $25/ton for feed purchases from now through the first half of 2011. The index is still $30-$40/ton higher than one year ago, but this price decline pulls us away from the highest projected costs since mid-2009 and took about $2.50/cwt., carcass, off my estimated breakeven market hog production costs for 2011. That cost estimate now stands at $70.13/cwt., carcass. That is not low by anyone’s measure, but the decline is the first we have seen since June.
The drop in projected feed prices pushed projected hog profits higher in spite of a weakening of Lean Hogs (LH) futures (Figure 2). Projected profits of $6.29/head for all off 2011 can be considered “good” only in the context of the 2007-2010 losses, but that number is over $2 higher than just one week earlier.
The drop in LH futures was driven by a $2.37/cwt. decline in the weekly average cutout value, the general negative sentiment that the corn market created in the commodities space and, to some degree, the negative impact of commodities funds’ rebalancing in the face of lower grain prices.
Last week’s cutout value was $88.43, the lowest since late July. But cash hog prices remained quite strong last week with the national net negotiated price – which I consider to be the national spot price – falling only $0.04/cwt., carcass, to $83.06 and the national net price for all purchase methods (i.e., the average price actually received by producers for last week’s slaughter) falling only $0.18/cwt., carcass, to $81.28/cwt. If the cutout value weakness continues, I expect packer bids to fall this week.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.