farmgate: What Do Pork Prophets Say About Pork Profits?
$4 corn gave pork producers plenty to worry about. Their primary feed expense had risen 80% in 6 months. The breeding herd had continued to grow in each successive USDA report. Prices were softening and profit margins were growing thinner. About crunch time, the pressure seemed like it might have been easing up. Has it?
There are many factors that interconnect to determine pork profitability; such as marketing weights, the breeding herd, import/export trade, and of course, feed prices. We’ll solicit the thoughts of the Cornbelt pork prophets to get a handle on your pork profits.
Market weight was one of the points covered by Glenn Grimes and Ron Plain at the University of Missouri in their latest newsletter. They say weights have hit the high for the year, with lower weights expected every month until late summer, a trend that will help solidify prices.
Breeding herd numbers are determined, in part, by gilt and sow slaughter, which has not been very high. Grimes and Plain say it continues to run at a level that indicates the probabilities are low that producers are reducing the breeding herd at a very slow rate if at all. In fact, an Iowa/Missouri study found that large producers plan to increase marketings in 2007 and 2009, compared to 2006. Marketing specialist Darrell Mark at Nebraska believes the current pork inventory is closely related to corn prices, “Overall, total inventory was estimated at 61.103 million head, up 1.3%. Despite close to three years of consistent profits, hog producers did not expand as rapidly as they historically have in response to these profits. The moderate growth in recent months was likely due to corn price variability.”
Corn prices have faded from the $4.25 highs at the CBOT in late February, to the current cash prices in the $3.30-$3.50 range. Those prices could further ease with good planting weather, ensuring the acreage will be near the expected 90.454 million. At the University of Nebraska, marketing specialist Darrell Mark strongly urges producers to lock in corn prices as they have faded following the acreage report at the end of March. “The volatility of corn prices throughout the winter and the uncertainty of corn planting intentions ahead of the Prospective Plantings Report likely held breeding herd growth down in recent months. (The) Hogs and Pigs report pegged the hog breeding herd at 6.081 million head, up 0.9% from last year. While that is slightly above the average pre-release trade estimates, it is likely lower than would have resulted if corn prices had been lower and less volatile.” But Mark acknowledges that buying expensive corn is distasteful, “While locking in corn prices at current levels is not attractive by historical standards, it could be profitable for pork producers. Breakevens in the low $60/cwt range (lean weight basis) are possible for producers with modern technology. Importantly, with lean hog futures prices in the mid-$60s to mid-$70s through the remainder of the year, profits could be locked in. To actually have these profits protected, though, protecting against possible corn price increases will be necessary.”
Futures prices for hogs were healthy, despite some negative fundamentals. Grimes and Plain say it was possible to lock in a price between $50 and $51 per cwt live using the futures market for the remainder of the year with average basis. At the University of Nebraska, pork specialist Al Prosch says even the most efficient producers are in jeopardy of lost profits, “Lean hog futures prices are taken from the Chicago Mercantile Exchange. For Nebraska lean hog futures price plus a negative $2.00 basis value is used. Periodically, numbers were revised with current data, and the profitability of Nebraska average producers and the top ten percent of producers were calculated. Average producers had a period of loss in early 2004 when feed prices rose sharply. The top 10 percent of producers were near breakeven. However, this represents only producers who would have had to buy feed on each increment of rising prices. It quickly illustrates the value of cost controls and forward planning and contracting.”
Canadian hogs are still a significant factor in the US pork market and Nebraska pork specialist Mike Brumm says, “In 2006, US producers imported just under 5.9 million feeder pigs from our neighbor to the north. Imports to date this year are running ahead of last year’s record pace.” But exports are strong as well, says Brumm’s colleague Al Prosch at Nebraska, “Pork exports have continued to increase year over year for 15 years. The increase since 2004 has been dramatic. Continuing that performance (exports are off to a strong start in 2007) will be important. January 2007 pork exports were up 17 percent over January 2006.”
Regional issues could play a significant role in the 2007 pork industry. Nebraska’s Darrell Mark notes that corn is being planted in the southeast early and in good soil conditions and southeastern farmers are the only ones planning increases of soybean acreage. Those factors should combine to allow sufficient supplies of low priced corn and bean meal for the pork producers in the Southeastern U.S. Another regional issue is identified by former Nebraska pork specialist Mike Brumm who said there are structural changes underway in Cornbelt pork production. “Iowa and Minnesota are the leading states for importing of feeder pigs as evidenced by the disparity between the breeding herd and kept for finishing inventory expressed as a percentage of the US inventory. These imported pigs come from Canada, Nebraska, Missouri, Oklahoma, North Carolina and lately, Illinois. In the past 3 years, Illinois farrowed more pigs than were finished in the state, with the excess pigs exported out-of-state, most often to Iowa and Minnesota. The shift towards more farrowing than finishing in Illinois is somewhat surprising given the state is the number 2 state in the US for corn and soybean production. The lack of a significant cattle, dairy or poultry industry in Illinois relative to feed grain production suggests that Illinois grain farms rely heavily on exports from Illinois or industrial usage of the feed grains for their market opportunities.”
Profitability is the indicator of success, and Prosch says the pork producer has had a record number of months of profits, “Hogs sold from 2003 through 2006 were sold profitably. This prolonged profitable production cycle has been driven by two factors: Producer restraint in expansion of the breeding is one, and a strong export market is the other. Producers have shown great restraint in breeding herd expansion during the past 3½ years.
Summary:
High corn prices threatened to derail the pork market in the US, but they have come off their highs, and pork weights have slimmed down a bit as well, which helped pork prices. The export trade has remained strong, creating additional disappearance of pork. However, the breeding herd is also strong and growing despite high feed prices. The prudent pork producer will be able to take advantage of the weaker corn market and the strong pork futures market to lock in profitable margins.
Posted by Stu Ellis on April 19, 2007 12:25 AM to farmgate