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Volatility with a capital ‘V’

A hog barn with a corn field along side
This is a favorable economic setup for the pork producer, even if the world is seemingly in an unstable state.

We have recently had some shaking in our little insulated world of animal agriculture and the parameters that shape our lives. The sleepy corn market is being nudged awake by a weather pattern that will make it difficult to get the crop in the ground in a timely manner — and may lose a few intended acres in the process. The wheat market has been more than slumbering, it has been nearly comatose for the better part of a year … until the snow hit the Plains states. Soybeans have been confused, looking at their grain brethren for strength while eyeing big production in South America as competition for export opportunities.

The beef market has roared to life with several days of limit-up trade — followed by a few limit-down — in the past couple of weeks. This has drug hog futures off of their southward trajectory and has restored paper profits to the pork sector for the balance of 2017 and into 2018. With this jerky motion in the foreground, the world stage is witnessing the Trump administration toying with our North American Free Trade Agreement trading partners, China in a pickle over its allegiance with North Korea, and a ruler in that country with a bad haircut and an itchy trigger finger messing with the nuclear weapon button. What do you make of all of this?

When we cut through the emotion and get to the data, you discover volatility — as expressed in implied volatility in our commodity markets — is trading at relatively sane levels while the volatility associated with world events has a capital “V”. This is a favorable economic setup for the pork producer, even if the world is seemingly in an unstable state.

Think of it this way: you are buying insurance for a car at an attractive rate when there are a bunch of 16 year-old kids driving in a snow storm on the same road. The macro environment is dangerous, but the premiums you are paying are, for whatever reason, discounted. What do you do? Write the insurance check and dodge the teenagers, that’s what you do. Same thing with the commodity markets. Seems to me that we are wrought with danger. From a less-than-benign crop scenario to whacky revenue gyrations to the unpredictability of Trump, this is not a safe time to do nothing and hope for the best. Margins are availed, let’s recognize the atmosphere and act accordingly.

I have spent the better part of the past two weeks traveling. First to New York for a discussion with Big Money investment bankers and then to Phoenix at the joint session with the National Pork Board and National Pork Producers Council as they gather the packers and retailers in one location. Finally, the last few days have been spent with the smartest nutritionists in our industry. All events were interesting in different ways.

First, I have good news for those of you in the pork production community — Big Money is not interested in competing with you. The push toward owning more of the supply chain does not come back to the farm. Alliances and stories are in vogue. Become a story teller — most producers would rather talk to a tractor than a human. Big Money likes aquaculture if you can keep the fish physically healthy. System Verified and Traceability are the focus areas. Capital is available if you have a great idea.

The packers and retailers meeting offers a glimpse of what may be considered the “other side” of the equation to the core production community with whom we normally associate. It dawned on me during one of the presentations when there was a question-and-answer venue that the motivation for people is pretty much the same, just the placement along the chain and the output versus the input items are different. For instance, one buyer from a major chain asked if we were within any threat of a drought causing a run-up in meat prices. Hmmmmm. Not as far as I can see. He does not do what we do every day and remembers the beef shortages (and subsequent price increase) during the dryness in Texas/Oklahoma/Dakotas in conjunction with the porcine epidemic diarrhea price move of a few years ago. He remembers the pain of high prices while we look back with a sigh of bygone days of the economic bliss we were experiencing during the same period.

Another gentleman shared privately that a part of his motivation for decision-making was based less on comparative economics, it sometimes had to do with his division receiving their quarterly performance bonus. Logical from a micro view of his own personal interests, probably not real obvious to the rest of us looking in from afar. My point is this: most of the time we are not dealing with a perfect economic model. Odd things happen at times and we must resist the temptation to explain every nuance.

Other observations
• Marketing to a Millennial is a tough gig. They want product, and fresh and with a clean label, but they also want it convenient. They do not have much idea prior to a shopping trip what they are going to purchase, but they want to be considerate to the environment and aware of health benefits prior to purchase. Pork is doing a good job of identifying this divergent group and is queued in on things like Blue Apron and social media. I was impressed with the direction and marketing.

• I was also impressed by Bill Even and what he is doing with the Pork Board. This is not your father’s Oldsmobile. He is taking a new tack with the marketing dollars and is providing a responsible leadership. He is taking that organization to the speed of business. I encourage you to pay attention to the shift, I think it is a healthy change.

• The move toward grading pork will be driven by the market and is keenly observed by the organization. Data integrity is critical. You have to be able to trace and execute at line speeds. The technology is getting better. The new plants offer a competitive advantage to the older facilities in this area. Premiums and discounts are likely coming. The retailers are clamoring for a competitive advantage relative to one another and offering an elite product line fits that need. I have every confidence in the genetic community to be an ally for success. Diet composition will play a role. This is going to be fun.

This note is being written a couple of days in front of the USDA May balance tables. This report is of interest as it will provide us our first official look the 2017-18 projections. My best guess is that the projected surplus in beans for this growing season will be big. Onerous. As in unprecedented. Look for a carryout number in the neighborhood of 600 million bushels. That is a big chunk to swallow even for a market that has screamed demand for the past several years. I had to look back 11 years to find a similar feel to the market, we may have to really shift our expectations of pricing after the aggressive price scenario (anyone remember $500 meal? Of course you do) of the past few growing seasons.

Corn is a little more tenuous. My best guess is that the carryout for next year is still in the 2.1 billion bushel area … if everything goes right. We will need weather on the east side of the Mississippi River to cooperate a bit better if we are to achieve normal yields. I am skittish on corn while I am bearish beans.

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

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