Feed Costs Loom Large

The winner for most frequently asked question at World Pork Expo last week was: “Will we run out of corn?” ¬The answer, obviously, has some serious implications to pork producers.

My answer to the question is an emphatic – NO, we will not run out of corn. But, one must be careful about what one is talking about. When I say “we,” it is in the context of the U.S. market.

I am 100% certain that “we” will not drive year-end stocks all the way to zero, but if we spread 730 million bushels (USDA’s current forecast for 2011 year-end stocks and a number that I still think may be high) evenly over the entire United States, the layer of corn is pretty thin. Of course, we all know it will not be spread evenly, so some places will have corn and some will not.

If you are in those “have not” areas, it doesn’t mean you won’t be able to buy corn, but it does mean that you will pay a premium for it, you may have to drive a good distance to get it, and, you should get your hands on corn for August and September now. I know it is expensive, but it may be more expensive later in the crop year and your search costs and headaches may grow tremendously!

The weekly average for Omaha cash corn hit an all-time high of $7.66/bu. last week. July and September futures both hit contract-life highs at $7.99/bu. and $7.59/bu., respectively.

The market is trying to make a tight supply last through this year and next. In addition, southern growing areas, most notably North Carolina and Texas, are in very bad shape due to drought and may not be able to contribute early-harvested corn to the supply at the tail end of this crop year.

While 730 million bushels and 5.4% ending stocks/use ratio is tight, USDA’s revised forecast for the 2011-12 crop is even tighter at 675 million bushels and a record-low 5.2% year-end stocks/use ratio. That is only 2.7 weeks’ worth of corn projected to be available in the fall of 2012, which is very tight, indeed (See Figures 1 and 2).

The real sobering thought, though, is that this outlook could well be optimistic for 2011-12. USDA’s reductions of 1.5 million planted acres and 1.9 million harvested acres from their May report may grow when the acreage survey is completed and the acreage report is released on June 30. Crop conditions are generally good in the western Corn Belt, but are still poor in the East. USDA left their forecast yield steady at 158.7/acre in last week’s report. Late planting certainly does not guarantee a below-trend yield, but it makes other growing season factors even more critical.

Options Limited
What does this mean for you? I’m sorry to say, it means higher costs and very likely few prospects of lowering those costs by making shrewd plays in futures or cash markets. Figure 3 shows projected costs based on June 9 post-report corn and soybean meal futures prices. Based on Iowa State’s production parameters from its Estimated Costs & Returns series, only two of the next 12 months is predicted to see breakeven costs fall below $90/cwt., carcass, for average Iowa farrow-to-finish producers. The average predicted cost for June 2011 through May 2012 is now $91.67/cwt., carcass – a record high.

Current Chicago Mercantile Exchange (CME) Lean Hogs futures prices are high enough to cover these projected cost levels in only August of this year. At current futures prices, losses of over $20/head are projected for November through January, and the average loss for the June-July period will be $10.64/head.

Those losses may be insurmountable for a good number of hog producers. While 2010 and early 2011 provided some respite from losses and some recovery of the $6 billion of equity the industry lost in 2007-2009, it seems that there is a tremendous spread in the financial positions of hog producers. In talking with a number of lenders, the people who did well with their risk and margin management programs have actually gained financial strength since 2007, while those who did not are in a precarious position and facing losses again this fall.

I expect the June breeding herd to be larger than one year ago due to expansion that was underway this spring, but we could see liquidation this fall if these losses are indeed realized. Costs must be covered and lower supplies are the only sure way to push prices up enough to cover these once-again-astronomical feed and production costs.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com