It was quite a week. While the Hogs and Pigs report of March 25 was pretty much as expected, the crop-related reports of March 31 were surprising or shocking, depending on your point of view.
USDA’s Prospective Plantings report provided a glimmer of hope for 2011 corn supplies when USDA’s estimated acres came in at 92.2 million acres, four million acres more than last year and 400,000 acres larger than the average pre-report estimate (Figure 1). Soybean acres are predicted to be slightly lower than last year at 76.6 million. While encouraging, close inspection and a few computations quickly indicated that it wasn’t nearly time to celebrate.
First was the matter of USDA’s estimated total planted acres and the question of where the added acres might come from. Total intended plantings of the four largest U.S. crops (corn, soybeans, wheat and cotton) number 239.4 million, 9.23 million more than last year (Figure 2). Add in the next four crops and you get 253.9 million, 8.8 million larger than in 2010. Lower hay acres (900,000 of them) explain only a fraction of the increase.
Where will the acres come from? Jerry Gidel of North American Risk Management wrote last week that roughly 2.15 million more acres will come from North and South Dakota this year due to prevented plantings in 2010. In addition, he estimates there will be 2.5 million acres of double-cropped soybeans in the southern Corn Belt and about 600,000 more acres planted in Texas. But those add up to only 5.25 million acres, significantly lower than USDA’s estimated eight million or so acres. So the question becomes if there is a shortfall, where will it be?
Second, assuming a normal harvest rate, 92.2 million planted acres will give us about 84.8 million harvested acres. Assuming a yield of 161 bushels/acre, those acres will provide a crop of 13.657 billion bushels. Add in USDA’s projected year-end stocks of 675 million bushels (more on that later) and you have total supply of 14.332 billion bushels, only 157 million more than this year’s total supply. That level of supply has given us cash corn prices over $6/bushel and, at times, near $7 this year. Will any usage category decline enough in the coming year to produce roughly the same prices if total supplies are more or less equal?
Corn Carryover Stocks Lower
Any positives for feed costs from the Prospective Plantings report, though, was trumped by Wednesday’s Grain Stocks report, which showed March 1 corn stocks were almost 170 million bushels lower than expected. Those March 1 stocks of 6.523 billion bushels increased higher usage (primarily feed usage) since Jan. 1, and will almost surely result in a reduction in USDA’s projected year-end stocks when it publishes its monthly World Agricultural Supply and Demand Estimates in April. Virtually any reduction in year-end stocks will mean that projected 2011-12 corn supplies will be no larger – and maybe smaller – than 2010-11 corn supplies.
Bottom Line: Rebuilding corn stocks (and, very likely, soybean stocks) will be a multi-year process that will result in multiple years of high prices.
Hog Futures Rally Continues
But there was good news for the week as well as Chicago Mercantile Exchange (CME) Group Lean Hogs (LH) futures rallied to continue providing producers reasonable profit opportunities in 2011. Figure 3 shows my cost and returns estimates based on closing corn, soybean meal and hog futures prices on Friday, April 1. Projected average costs for 2011 have risen back above $85/cwt with the increase in corn and soybean meal futures, but the $14.51/head is the best end-of-the-week estimate so far in 2011. That same estimate was over $17/head before the USDA reports were released on March 31.
And there could be more to come. May LH futures as well as every LH futures contract from July through the end of the year set life-of-contract highs last week meaning that there are no technical resistance levels above them. June LH futures closed the week at $103.575, less than $0.60 below its all-time high back in February. Those summer LH contracts historically peak in the first half of May, but I would recommend that producers be ready to price any remaining summer sales on any sign of a break in the summer contracts.
The reason is simple. To get from current cash hog prices levels to the levels now priced into summer futures would require a seasonal rally equal to that of 2008. I have heard little dispute of USDA’s estimates of hog supplies for this summer, so any such rally will have to be driven by demand. Retail pork, wholesale pork and hog demand are already much stronger than one year ago and it was Chinese imports that drove the 2008 rally. Is there any reason to think that China might do that again this year given that they have rebuilt their domestic supplies? If not China, then who might provide that kind of an “outlier” export opportunity? The strong yen and Korea’s foot-and-mouth disease problems are certainly causes for optimism, but should the optimism be equal to what happened in the summer of 2008? That is the kind of demand shock that will be required if this year’s seasonal rally matches that of 2008. It strikes me as a tall order indeed.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.