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August 21, 2023
The economic pain of the pork production industry took a brief hiatus in July and through the first half of August with price appreciation that was genuinely appreciated. Dr. Meyer still has 2023 as rivaling 1998 as one of the most difficult years for pork producers – not a lot of fun.
Amidst the gloom, there are a few things that are pointing toward a change in the fate of our balance sheet, they just can’t get here soon enough. To wit:
The corn balance sheet is heavy and should allow for some cost of production mitigation.
As of this writing, it is hot outside and that will dominate the psyche of many. The ProFarmer tour will, appropriately, garner the attention of the trade as your X feed (formerly known as Twitter) will light up after every stop.
A more holistic view does not have the same shock as the acute nature of pictures of individual fields, our U.S. balance sheet can handle some deviation and will still have buffer. The USDA is likely way overstating export prospects and the resulting carryout numbers are probably well above 2 billion bushels.
The biggest (only?) wildcard in this mix is China and their unpredictable nature as they balance the distain of the United States with their need for corn. This is exacerbated by the recent typhoons and flooding in China; we do not have a good feel for the net impact of their weather.
I recently had the opportunity to address a contingency of grain farmers from Brazil and they confirmed what we already expected – bean acreage is going to increase roughly 5% per year and corn production in the form of a safrinha crop (which constitutes in excess of 70% of their total corn production) will come along for the ride.
The United States lost its dominance as the world’s No. 1 exporter last year and will likely never have that mantle again. Our current policy is to shun the export market in favor of our domestic markets and we should not be surprised that our exports will wane. This adjustment will cause some discomfort for the agronomic community until the infrastructure is in place to accommodate the transition.
The bottom line is that our crop is not a disaster and our export prospects are dismal. This will weigh on corn prices over time. Take a look at the spreads on the board and you get the hint that the harvest market has a big carry into the future. This is not a bullish setup. We may finally get some input price relief. The big key to profits is on the revenue side and that is largely independent of the crop scenario; this is an upcoming bit of salve for our profit wounds.
National Oilseeds Processing Association numbers were released last week and had some interesting values.
Normally, we do not get a lot of surprises from this data as the maturity of the industry and the cartel-ish nature of the soy processing industry has a way of keeping things on an even keel. Not this time. Amidst the mundane values of crush pace and product yield came a jolt – soybean oil stocks were well below the range of estimates.
This is good news for our vested interest. The financial dynamics of soybean processing are dependent on the relationship of their revenue items in the form of soybean meal and soybean oil. It is in our vested interest for the processor to derive a larger piece of their income from soybean oil which allows soybean meal to trade as more of a residual product.
We have addressed the upcoming impact of the Renewable Diesel industry previously in this column. The impact is beginning to sneak into the trade and is evidenced in part by this recent report. I referenced the influence of spreads in corn, take a peek at spreads in soybean meal – they are at a marked inverse in anticipation of a decent U.S. crop and the prospects of more Brazilian acres and a recovery in Argentinean yields.
This second point is, perhaps, the item that will prove to be the catalyst that rolls soybean meal over into a competitively priced item domestically as Argentina resumes its previous dominance in world export markets for SBM and the United States is swimming in excess production. If I am anywhere close to right, by late spring of 2024 the livestock producer will move from an annoyance to the processor to us becoming the golden child. We represent the only viable outlet for soybean meal when/if Argentina has product to ship to the world market. That is good news for our team.
The current profitability woes in pork production are not confined to the Unites States.
European losses and the constrictions of regulation (those two things are, of course, related) are projected to result in a 10% loss of production per year for the next 10 years. On first glance that would appear to be the elimination of the entire herd, but the decrease in the denominator year over year results in a roughly 50% reduction of their marketings from today’s levels.
The EU production is about twice the size of the U.S. so this would be the equivalent of the our entire production being eliminated in the next decade. This would, ostensibly, relegate EU production to their domestic consumption and allow the United States a larger export share.
We are already seeing the phenomena play out. Take a look at the attached chart, courtesy of U.S. Meat Export Federation. EU exports (sans China in this data) are down substantially while US exports are a bright spot.
My biggest concern in this chart is what is happening in Brazil. Just as corn production grows and their physical ability to export corn is currently hampered by facility constraints, livestock production increases are a logical outlet. And they have responded accordingly. Keep an eye on Brazil becoming an increasingly burr under our saddle in the export market, they are poised to capture market share as they build out their pork production capacity.
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. Contact Joseph Kerns via email.
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