July 18, 2022
The annual pork producer pilgrimage to Wisconsin occurred last week with another great gathering at the National Pork Industry Conference in the Dells. This is the 26th year for this meeting and it continued its string of excellence – I highly encourage those that have an interest to attend next year. The program was solid with many thought-provoking speakers.
Here are some of my observations as well as market thoughts:
Dr. Meyer is ... friendly. I am not referencing his personality as he is generally pretty amicable. His market outlook has optimism. This is from the guy who is self-described as embracing the dismal science of economics that is devoid of human emotion. Facts are facts. And the current fact is that domestic demand for pork has been fantastic. Combine this with the projected animal count from the June Hogs and Pigs report and you have the recipe for holding our own in the 4th quarter at projected values that are higher than were we are currently trading the CME. You read that right: Dr. Meyer is mildly bullish.
Expansion is not going to bite us. There are some Prop 12 remodels underway that constitute the biggest construction projects on the books. There are some reproductive biosecurity considerations, but there is little outright expansion for a myriad of reasons. We have no new processing capacity underway (there is a planned site in Sioux Falls that has not broken ground). That leaves us with three big plants that could double shift (Fremont, Eagle Grove, Coldwater) with nothing additional on the horizon. We have no new thrust from the current packer lineup to offer attractive contracts, construction costs are elevated, feed prices are high, labor is tight, the cost of production is moving higher. All of this has settled into a stagnant situation where there are sufficient forward profits to maintain current production with not enough financial incentive to expand. The potential growth in the pig crop is likely to come from improvements in health, not an increase in sow numbers.
Grain volatility is not going away. The driving factors of the corn and soybean market have – so far this year – have less to do with traditional fundamentals and more to do with tertiary markets, especially crude oil. Indexing corn to energy is nothing new since the expansion of the ethanol industry beginning in about 2005. The bigger world economic factors have overwhelmed the agricultural markets with crude oil acting as the index to world macro forces. The unsettled nature of the world politics will likely keep a premium in our energy markets which will impact the corn market. Attached is a chart of corn versus crude oil. Corn, depicted in blue, has responded in a highly correlated factor to oil (green bars) before the Putin invasion and these two markets have remained indexed to one another. The recent swoon in corn values have seemingly bottomed and values have rebounded. We have shaken out fund money participation and – as of this writing – we are responding appropriately to a drier weather forecast. We are never going to completely lose the weather influence on grain, I believe the power of a larger force will become the dominating factor of trade. Corn goes where oil leads it.
Grain basis should remain erratic/elevated. I have written in this column previously about the upcoming changes in the balance sheet associated with expansion of the Renewable Diesel industry. This will require more soybean acres – ostensibly driving the mitigation of corn acres – which should, in turn, lead to less corn exports. This is important because the current CME price discovery mechanics focus on the export math and logistics. If we place less emphasis on exports it will be the job of the basis market to regulate the domestic movement of grain. We are already seeing some wild swings based on geography, regional corn yields and transportation – this one will likely be a bigger role in price discovery as we mark time.
Pork exports show promise. That may sound odd when you look at the attached chart and see that we are down right at 20% for the year. Recall that the year-over-year comparison has the big China exports in 2021 that were prevalent in the first half of the year, the balance of the year will be against a lower denominator of volume. Additionally, there has been interest in fresh exports of muscle cuts to China as their market has rebounded. Hmmmm. Whether Canada ships the product or it comes from the United States, the bounce in Chinese trade interest is a welcome contributor to our export window.
The long play may hinge on whether Brazil has access to fertilizer from areas that are currently a bit on the hostile side. Note that the U.S. crop is largely self-sufficient on fertilizer with the exception of potash that originates from our northern neighbors. Brazil, on the other hand, is very dependent on the importation of fertilizer for its crop needs, a good chunk of which comes from areas of the world marked with turbulence. Brazil is currently negotiating with Russia for an energy deal, a pending fertilizer agreement is probably not out of the question between those two countries. Brazilian President Bolsonaro is fighting for his political life as his economy teeters on the brink and an oil deal with Russia is seen as a stabilizing factor for their economy. Brazil has remained very non-committal in taking sides given the world consternation, they claim to have positive relationships with the United States, China and Russia all at the same time. It is probably worthwhile to follow this bouncing ball.
Comments in this article are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals. Click here to contact the author.
Source: Joseph Kerns, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.
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