World Pork Expo 2017 is in the rearview mirror. It was marked by record crowds and, by my assessment, near-universal optimism. I find it interesting that the buoyant nature was not because of record profits (the 2014 iteration featured record profits but also the unknown of whether porcine epidemic diarrhea could be wrestled to the ground) but because things are better than feared and we are on the cusp of increased harvest capacity.
A couple of observations from the event.
• A pronounced sentiment of “taking back the house”. This is not a Republican versus Democrat battle cry, but anticipation that the new packing facilities will return the producer’s share of margin back to historical norms. Pork producers are optimistic that the increased competition for hogs will lead to more of the product value ending up in their pocket. On the surface, it is tough to argue with that mindset. Packers are willing (eager?) to sign longer term deals with monetary provisions that are much friendlier to the producer than what we have seen in the past. But my cautionary tale revolves around the complicated nature of a plant start-up. This is not like a Chevy pickup coming off the assembly line where you are relatively certain that the thing will start and run OK when you turn the key for the first time. We produce roughly a million Chevy pickups each year, it has been more than 10 years since we started a pork processing plant from a greenfield site, and expecting it to run seamlessly from the beginning is probably a long shot. If we have the additional pigs to process in August and September, and the new plants are unable to take the full barrage, it may be a rude introduction into the golden age of increased processing capacity. Delays equal risk.
• A question not answered during Expo was, “where will the meat go”? Demand has been spelled with a capital “D” so far this year but can the export pace continue to carry the water? A delegation from the United States is just back from China. If some of the production increases being reported are anywhere close to true — 20% increase in sow numbers? — then the promise of feeding 1.4 billion people more U.S. pork may be a bit fanciful. Though maybe at a compressed value? I spent the week of Expo with the Queen of the USDA and her cautionary tone should probably be heeded.
• We have a Hogs and Pigs report at the end of this month that will reorient our outlook for the pork balance table. If there is one line item to focus on with the report, it is the March-May farrowing number. In the March report, we were anticipating a 1% increase versus 2016. If this holds true, then maybe we do not overwhelm the market with production in the fourth quarter. If our production is up 2% year-over-year (1% more farrowings, 1% in productivity), then I think we can avoid significant red ink in the fourth quarter. Running at 4-5% increases could be a tipping point.
Producer profits on the forward look are favorable. I think it is prudent to lock-in margin. A combination of futures and options can offer protection.
We also had a USDA report out this past week. I would term it relatively benign for the grain market which was the anticipated outcome before the release.
U.S. corn planted and harvested acres were left unchanged. We may expect a drop of 1.0 million harvested acres in U.S. corn with the flooding issues across Missouri, Illinois and Indiana. There is a chance the USDA will lower corn yields in July to reflect the weaker good-to-excellent conditions versus last year. Old crop corn used for feed was left unchanged but should see a drop in future reports. Old crop U.S. corn exports look like they have a chance to bump up a bit, keeping the overall picture in balance. Big supplies in South America could push new crop exports lower than the current government number.
In beans, old crop crush was appropriately lowered 15 million bushels as a reflection of the sluggish crush pace; I think this will be down another 10 million bushels or so in subsequent reports. The USDA pushed Brazilian and Argentine bean production higher but seem reluctant to push the Brazilian corn number to levels indicated by the commercial crowd south of the border.
Chinese old crop corn production was estimated at 219 million metric tons with total demand at 232 million tonnes. New crop corn production was estimated at 215 mmt with total demand at 238 mmt. This continues to reflect the trend of corn demand outstripping supply. The Chinese government is expected to auction another 30 mmt to 40 mmt of state reserve corn this year. China is expected to import 89 mmt of beans in 2016-17 and 93 mmt in 2017-18. There are crushers in China that suggest bean imports for 2017-18 could be closer to 95-96 mmt. The demand story regarding China and soybeans is not going away. It is just temporarily overshadowed by big production from both sides of the equator. The proverbial treadmill continues to run faster and faster.
Speaking of Chinese bean imports, I am being told the huge amount of beans moving to China have not all been bought by the crushers. Shadow financing is back by popular demand. China is living and breathing on debt. It is getting more and more difficult to find sources to borrow from, so despite the supposed crack down on shadow financing, a blind eye is being turned to this practice again.
What if we compress corn yield and bean yields by one standard deviation? The attached tables depict that scenario relative to the current balance sheet projections. The Compliance People will not allow me to provide you an expected price associated with the “what if” balance sheets. Historically, balance sheets with this type of carryout-to-use ratio have represented higher prices than what we are trading today I would consider anything below a 1.4 billion bushel carryout to be the tipping point in corn, somewhere near 250 million bushels in soy is the line between comfortable and not enough. In my alternative scenarios, corn is well below this threshold and soybeans are right on the line.
Corn balance table with USDA June numbers and one standard deviation yield reduction
Soy balance sheet with June USDA numbers and one standard deviation yield reduction
Weather, as depicted below in the picture, is just plain hot across the better part of the production belt. We need relief that has deeper confidence than singular events two weeks in the future. I am rubbing the panic button.
Corn scares me. We have lost acres, and if yields are compressed we will be back off to the races. Beans have a little more slop in the balance sheet and should be our secondary focus. Think corn coverage.
Comments in this column are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals.