May 16, 2022
Something is amiss. Taken at face value, the March Hogs and Pigs report would imply that we should be harvesting less than 2.4 million animals per week right now. Somebody is not reading the book properly.
So what are you to believe? The USDA or those pesky facts? As oddly as it may sound, I believe the current weekly counts are an aberration of an otherwise balanced condition between the supply of hogs and the packer's desire to fill shackle space. Consider this:
The work of Dr. Steve Meyer would indicate that the past few weeks of larger-than-expected slaughter would not fall outside of normal variation to our forecasts with a steady reduction of available numbers available hitting the data just before the first of June.
The lousy weather for humans this spring was great weather for pig growth. It is our belief that market animals were pulled ahead by favorable conditions for gain. We should see this reversed on the reported weights harvested last week during our run of 90s weather.
Wean pig prices in January – those animals should market in June – were $90. If pigs were so plentiful, why would anyone pay that high of a value? The answer, of course, is that they wouldn't.
Recent releases from reporting bureaus suggest that our production struggles continue and the impact of disease is still prevalent. We are not turning the corner, yet, on our production woes.
It is the author's belief that our fall from grace shortly after the March Hogs and Pigs report will be met with a rally of comparable proportion in the weeks ahead as buyers discover that market weight animals are not available and harvest numbers slip in a commensurate relationship. Remember, that $100 is not what it used to be. Inflation and poor government policies have decreased our consumer buying power at the fuel station or in the grocery store. Pork producers also know that the golden ring of triple-digit hogs needs to be evaluated in context as our cost of production has eroded the margin normally associated with those values.
The USDA also gave us a grain recap last week, this was our first look at the 2022/23 balance sheet. It, too, has a few items that fall in the category of "interesting." As a bit of a background, the USDA had only shifted the projected yield in the May report relative to the February forum numbers once in the past 20 years. That was in 2019 when the crop was going in a touch slower than it is this year and the prospects for weather improvement in the extended forecast was nil.
While we are very similar with our planting progress, the open window of more favorable conditions was fully anticipated at the time of the USDA report. Still, the USDA lower projected corn yields from 181 to 177 and then did the demand dance to provide a balance sheet that did not scream "ration!" I think there are several troubling items with this approach, the most egregious is not even found on the US balance sheet – it is the world stage.
World corn demand increases roughly 35 million tonnes per year, there was only one year in the past 15 (2012) where the world had negative growth in demand, that is the year we took corn to almost $8.50. My friend, Jake Moline at FCStone, is always quick to point out that — accounting for inflation — $8.50 corn of 2012 is the equivalent of $10.50 in today’s value.
You may have already guessed where I am going with this, the USDA lowered global corn demand in this report. So if our analog year for production is 2019 (167.5 yield) and our analog year for demand compression caused by a supply shortage is 2012, what does that mean for prices? Pain for the corn consumer, a new pickup (if he can find one) for the corn farmer. In my opinion, this current balance sheet somewhat paints us into a corner where we have already incorporated demand destruction as a mitigating factor to disappearance and any supply disruption has absolutely nowhere to hide.
Our summer weather forecast is not exactly Captain Fantastic. The lingering La Nina in combination with a pervasive Negative Pacific Oscillation Index offers an increased chance for hot and dry weather on the west side of the Mississippi River – similar to what we experienced last year. But wait. Last year we had record yields, why should we worry.
Two reasons to have the panic button ready in my opinion. First is the depletion of subsoil moisture across a large swath of the western belt leaves little room for margin this year and, second, the terrific planting conditions of last year provided the crop a great start prior to fading down the stretch. There is no running head start to this year's crop, it will require excellent weather from this point forward to achieve trendline yields, any hint of hot and dry will likely lead to wild market swings.
I need to nerd out just a bit to help contextualize the impact of the USDA in this report. Since 2012, the USDA has used a model by two of their own, Paul Westcott and Michael Jewison, to predict yield, the regression is attached below. Their work yielded a powerful correlation with an R-squared of .964 which means that the vast majority of deviation is accounted for via this prediction equation, that is really impressive.
What is odd is that the USDA chose to quietly forfeit the methodology of using this equation before making the yield adjustment. Time will tell whether or not this was a good idea, the thing it does tell us is that we can no longer rely on the USDA to follow their past behaviors. This, too, will add to the volatility of the market as it turns a previous "known" into another "unknown."
Here is the bottom line. Margin management has never been more important for pork producers. The recent swoon in the futures market represents more than $50 per head swing in profitability. The recent appreciation of the grain market represents more than $30 per head swing from last year's production price to the forecast for this year. These massive market moves are largely unpredictable and expecting to hit the market timing for commodities is increasingly difficult. here are several good risk mitigation tools available for producers, call us if you need any assistance.
Comments in this article are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals. Click here to contact the author.
Source: Joseph Kerns, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.
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