It has been a tough run for the swine industry so far in 2013. We have seen a nice increase in the cash market: up to $90/cwt., carcass, pushing per-head revenue close to $185. Problem is we have seen breakeven prices on closeouts near $185/head – sometimes higher. Feed costs are the culprit. Average feed costs for a wean-to-finish operation are between $105-$110/head. Those of us who have been involved in the swine industry for quite some time (prior to 2007) can remember that range being the “total cost of production.” And there doesn’t appear to be any relief in sight for the remainder of 2013. Profits will be hard to come by, mainly due to these high feed prices.
Many swine producers today are using hog, corn and soybean meal futures to lock in a margin for their hogs. The number of producers doing this today compared to five years ago is quite remarkable. We have many producers who have coverage for a good part of 2013 and into 2014. The paradigm is shifting.
In the past, we would not have seen this level of engagement in margin management. More and more producers are taking an intentional, disciplined margin approach to cover feed needs and hog marketing. I believe this approach should protect producers and help more of them remain in the industry longer, even during a prolonged period of economic pain. Consequently, U.S. pork producers will have to be very cautious about any serious plans for sow herd expansion. Any significant expansion of the sow herd could be very detrimental and cause more pain.
Corn Basis Until New Crop
Even though many producers locked in margins for their hogs with futures, the explosion of the basis on corn has eroded some of these margins. In southern Minnesota, the average basis to purchase is close to $0.40 to $0.50/bu. over the board or close to $6.90/bu. We have heard the September basis is close to $1.30 to $1.40/bu. over the board, bringing it close to $6.90/bu. Rain-delayed planting in the Midwest has resulted in a bit of a runaway freight train as producers try to figure out if the basis will continue to go higher or make a correction.
All users of corn will continue to be tested this summer as they try to manage corn supplies until the new crop is in the bin. Many producers have physical ownership of corn, but very few have enough to carry them through this period. Should you try to own corn at $0.50 over the board? Yes, I think you should. Getting physical coverage on corn will be paramount. From a historical basis standpoint, this is a way out of the “typical” range, but 2013 will not be a normal year when it comes to managing margin. Unfortunately, this might be the new normal.
Will we run out of corn or feed before the new crop is harvested? No, I don’t think so, but it will take unprecedented creativity by pork producers to stretch feed supplies. Feed costs could potentially be cheaper in the Southeast this summer due to winter wheat availability, an earlier corn harvest and South American grain supplies. It will be a different story for producers who were hit by the drought last year. These are volatile times. Those who can manage through volatility will continue to grow and prosper in the future. I hope to see many of you at World Pork Expo next week!