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Patience – Spring is Coming!

It has been a long, cold winter — made considerably colder and longer for hog producers by a constant flow of red ink. The losses are mounting, putting some producers at odds with lenders. Both groups are weary of losses that have persisted for virtually all of the past 20 months, draining an estimated 40 to 50% of producers’ equity over that time period.

The entire situation has made everyone quite testy, wondering why the spring rally is taking so long? There is a simple answer to the question — it’s not spring yet! I know it is difficult to be patient when doing so has such a large price tag, but patient you must be.

Figure 1 shows weekly national negotiated base prices for the entire history of the mandatory price reporting system. We are working on our eighth year of these data and they become more useful every year because it adds historical context.

The data show that not much happens until April 1. There are exceptions, of course. Prices increased $20/cwt. from January 1 to April 1 in 2004. But the rule is for sideways prices during the first quarter of the year.

The average price increase from April 1 to June 15 for the past seven years is $11.77/cwt., carcass. That average includes a $1.37/cwt. increase in 2002 and a $2.23/cwt. increase in 2005. Average the other five years and you get $15.75/cwt. Add that to last week’s observation and you get prices in the low $70s. And, remember, these are base prices. Add $2 or so to get net prices and you have pigs fetching near $150/head. When that happens, there will likely be some money left over after you pay the bills.

Cash is Still King
What may be more important is that cash is king and a cash rally will, barring a very negative March Hogs and Pigs report (which I do not expect), carry Lean Hogs futures upward, as well. Historical patterns suggest that summer contracts peak out in early May. While fall contract sometimes peak later in the year, that peak is usually not much higher than the level of the May rally. Producers need to study those histories and develop plans now to manage their hog margins for the remainder of 2009.

Corn-Use Projections
USDA’s March Crop Production report and World Agricultural Supply and Demand Estimates, released this week, contained no new news on corn supplies, but they did contain some changes in corn usage. USDA increased projected ethanol use by 100 million bushels — that after they had reduced this usage category from October through January. The new USDA number, 3.7 billion bushels, will produce almost precisely the amount of ethanol needed to meet this year’s 10.5 billion renewable fuel standard requirement. That fits with data from the Renewable Fuels Association (RFA) that says 193 ethanol plants are now operating at an output rate of 10.36 million gallons/year — 16% below their rated capacity. RFA also says there are 23 more plants being built or remodeled and that these plants will add another 2 billion gallons to capacity. These figures agree almost exactly with last year’s forecasts by Iowa State University.

USDA also decreased U.S. corn exports by 50 million bushels with the net impact being a reduction of projected year-end stocks to 1.74 billion bushels — 14.5% of projected usage. Neither of those numbers is particularly low, but the usage rate is now a solid 12 billion per year. Getting that much corn produced each year requires plenty of acres and good yields. We still can’t stand a drought — and we’ve now gone 20 years since the last widespread one in 1988.

USDA increased their prediction for the range of national weighted average farm prices from $3.65-4.15 to $3.90-4.30. The mid-point of that range, $4.10, will be only $0.10/bu. lower than last year on 1.8% increase in year-end stocks/use ratio. Those price and quantity changes suggest steady corn demand.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.