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USDA Adjusts Corn Usage Forecast

USDA made some significant changes in its forecasted “usage” numbers for corn in this week’s monthly World Agricultural Supply and Demand Estimates. The adjustments reflect the significant changes that have occurred in oil and ethanol prices over the past two months as the world economy has slowed.

If there is one lesson from this, it is that the old admonition popularized by Milton Friedman that “there is no such thing as a free lunch” applies to all things – even those that are “can’t miss” opportunities on the wave of the future! Ethanol comes to mind.

Table 1 shows the changes in the USDA numbers, including:

  • A reduction in projected corn usage for ethanol from 4 billion bushels to 3.7 billion bushels. Don’t expect any further reductions as we move forward, since this is about the minimum given the 2009 renewable fuel standard (RFS) requirement of 10.5 billion gallons of ethanol. The 3.7 billion is, in fact, a bit low for next year’s requirement, but is easily justified by the mismatch between the crop year USDA is using and the calendar year to which the RFS applies. The projected 2008-09 usage is still 22% larger than this past year.

  • A reduction of projected exports by 100 million bushels to 1.8 billion. A major driver of this reduction is undoubtedly the slow progress of exports thus far this crop year and the increase in the value of the U.S. dollar. In addition, USDA expects stiff competition from feed wheat from the European Union (EU) and former Soviet Union (FSU) countries. South American corn exports are expected to fall and China is forecast to export only 20 million bushels this year.

  • A significant (31%) increase in projected 2009 carryout – to 1.431 billion bushels. That number is beyond the range of any of the pre-report estimates and pushed the forecast year-end stocks-to-usage ratio from 9% to 12.1%, nearly as large as this year’s 12.7%. This increase in stocks led Robert Wisner at Iowa State University to conclude that supplies would be “fully adequate to accommodate demand through late summer.” It also led USDA to reduce its forecasted season-average farm price range by about 40¢/bushel. The midpoint is now $4.

  • Some rearranging of soybean usage but no change to projected 2009 year-end carryout stocks, which remain equal to this year’s 205 million bushels. USDA did lower its forecast prices for beans, oil and meal with the mid-point on meal now at $270/ton, down from $285/ton last month. That price is still higher than all of the Chicago Mercantile Exchange (CME) Group soybean meal futures contracts for the coming crop year as of Friday at noon.
So, no change in soybean usage or stocks and a significant reduction in corn usage and concurrent increase in corn carryout. Soybeans should be neutral to up and corn down, right? Wrong, at least partially! Soybeans have indeed rallied with March up about $0.30/bu. March soybean meal is higher by nearly $9/ton. March corn futures, instead of falling on the lower usage numbers, are $0.30/bu. higher than Wednesday’s close as of Friday noon.

Have Grain Markets Bottomed Out?
It still appears to me that the grain markets are trying to make a bottom. The markets’ reaction to the USDA numbers is in line with that and there is still one significant supply risk remaining – 11% of the corn acres are still unharvested. Wisner estimates that would account for 1.32 billion bushels. The longer this delay lasts, the higher the percentage of corn will be lost in the field and the lower USDA’s January estimate will be, suggesting higher prices in the months to come.

The opposing point of view will argue that cash corn is higher than it should be at present because cash corn sellers are holding their crop expecting higher prices and trying to avoid taxes on 2008 income. No doubt, that is true. Price movements in early January will be the telling sign on how big this factor really is.

Brace Yourself
Livestock producers should get ready to be painted as the “bad guys” next year when meat prices rise. Retail beef and pork prices are already record high and, while both may decline some this winter, they will very likely set new records in 2009. Chicken prices are heading up as well as the broiler industry copes with huge losses. The World Agricultural Supply and Demand Estimates (WASDE) indicates that output levels for each of the four major protein sources will fall next year from this year’s levels – the first time that has happened since 1973.

Corn and ethanol groups have correctly claimed this past year that they should not be blamed for higher food prices. Neither corn nor soybeans directly account for much of the actual food we eat. Bread prices were driven by two short world wheat crops and dairy prices were generally driven by export demand.

But higher corn (and closely related higher soybean prices) in 2007-2008 will indeed be the key drivers of higher meat prices in 2009 and beyond. I fully expect to hear this from many ethanol apologists: “It’s not our fault that meat prices are higher – see how much lower corn prices are this year!”

I hope no one buys that line because it is not true and the biggest reason we are seeing any respite from higher grain prices is, of course, lower oil and gasoline prices. But feed costs are still about twice their historic levels and meat and poultry producers will have to keep output levels lower to realize profitable prices.

For the record again: I have no problem with making corn into ethanol, but I don’t think we should subsidize or require it, especially if corn supplies are tight and prices are high. A “counter-cyclical” ethanol subsidy designed to put a floor under corn prices, but not add to them when corn is scarce, seems to me to be a good idea. Let’s get to work on it.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]

Feed Additives Don't Resolve Mycotoxin Contamination

Two related feed additives failed to resolve the impact of mycotoxin contamination in a nursery pig trial.

Feeding diets containing about 2 ppm Deoxynivalenol (DON), a mycotoxin, depressed feed intake by almost 10% when consumed by nursery pigs for three weeks.

Moreover, feed additives, regardless of their mode of action, did not reverse the detrimental effects of the mycotoxin.

DON is a mycotoxin produced by fusarium molds found in corn and wheat. Pigs consuming DON-contaminated feed will initially reduce the amount of feed consumed as well as growth rate. Signs such as vomiting are evident if the contamination is severe. This can have serious consequences resulting in an economic loss of 8-10 ($CAN)/hog (under average market conditions).

Several feed additives are reported to reduce the effect of the mycotoxin by either binding the mycotoxin in the gut and preventing absorption, chemically transforming the toxin to decrease its toxicity or enhancing immune system function.

To test the additives, five nurseries with 24 pens/nursery and four pigs/pen weighing 20 lb. were fed 0.6 lb. of Provision 1, then Provision 2 (FeedRite, Winnipeg, Canada) until Day 14, and treatment diets containing DON from Day 15-35, postweaning.

Pigs were weighed seven and 14 days postweaning, and at the start and end of treatment diets at 35 days of age when they exited the nursery.

Treatment diets were formulated to meet or exceed nutrient requirements for pigs of this age. Samples of corn shown to contain DON were used for 35% of the corn in nursery diets to provide an average of 2 ppm DON in the nursery diets.

Diet samples showed control diets were negative for DON, compared to up to 2.61 ppm DON in late nursery diets.

Overall, average daily gain and average daily feed intake of control pigs were superior to pigs consuming a diet containing DON, regardless of the feed additive used.

Researchers: A.D. Beaulieu, J.F. Patience and D. Gillis, all of the Prairie Swine Center at Saskatchewan, Canada. Contact PSC's Ken Engele by phone (306) 373-9922, fax (306) 955-2510 or e-mail [email protected].

TOPIGS Canada Buys Maple Leaf Farms’ Genetics Firm

TOPIGS Canada Inc. announced it has completed the acquisition of the complete swine genetics business of Maple Leaf Agri-Farms (MLAF).

“The swine genetics of Maple Leaf Agri-Farms combined with the existing activities of TOPIGS in Canada form a perfect basis for the future developments of our business in Canada,” says Martin Bijl, CEO of Pigture Group. TOPIGS is part of Pigture Group, which is headquartered in Vught, Netherlands. “With this purchase we expand our market share and acquire market knowledge that makes it possible for continued future growth.”

The terms of the sale call for TOPIGS Canada to acquire Maple Leaf Agri-Farms’ genetics business, including the assets of Lean Team International, a marketing arm of the company, along with a nucleus farm located in Manitoba, Canada. The two companies have also agreed that TOPIGS Canada will supply genetics to Maple Leaf Agri Farms’ hog production operations.

“TOPIGS has a strong reputation as a world leader in swine genetics and we are pleased that the company recognized the value in our genetics and our people,” states Glen Gratton, vice president, MLAF Genetics. “Maple Leaf is looking forward to drawing on TOPIGS global expertise and building a strong working relationship as our genetics supplier for our hog production operations in Manitoba.”

TOPIGS is a global player in pig genetics and with its subsidiaries, agents and distributors is active in more than 30 countries. TOPIGS annually supplies more than one million gilts and over six million doses of semen, and exports worldwide from its high-health SPF nucleus farms in Saskatchewan, Canada.

Maple Leaf Agri-Farms is an independent operating company of Maple Leaf Foods, a leading food processing company based in Toronto, Canada.

Manure-Based Cow Power Program Keeps Growing

The Central Vermont Cow Power (CVCP) program has been called the nation’s first manure-based, farm-to-consumer energy program. The state’s fifth dairy farm has just joined the CVPS Cow Power herd through cooperation with Vermont Electric Cooperative. A number of Vermont groups and businesses have enrolled in the energy program since it began in 2004.

CVCP customers, such as the U.S. Forest Service headquarters in Rutland, VT, sign up to receive all, half or a quarter of their electrical energy through Cow Power and agree to pay a premium of $.04/kilowatt hour. The fee goes to participating farm producers, helps purchase renewable energy credits when enough farm energy isn’t available, or is put in the Central Vermont Public Service (CVPS) Renewable Development Fund. That fund also provides grants to farm owners to develop on-farm energy generation. Farm producers are also paid 95% of the market price for all of the energy sold to CVPS.

Neighborhood Farms in Newport, VT, is the most recent farm to join the Cow Power program. The farm was started in 1957 by Maurice and Lois Maxwell, who now share ownership with their four sons: Stewart, Bradley, Anthony and Jeffery. Grandson Matthew also works on the farm in a management position. There are 850 milking cows with an average of 750 milking at all times.

“We’re excited to be online and generating a new income stream,” explains Matthew Maxwell. “If not for CVPS Cow Power, we wouldn’t be doing this. The program provides solid financial benefits while helping us make tremendous improvements to our manure management. CVPS Cow Power and the customers who enroll help make projects such as ours a reality.” Matthew, Bradley, Stewart, Jeffery and Anthony recently created a partnership called Neighborhood Energy LLC. The farm partnership will produce energy with an anaerobic digester and generator installed at the farm site. Construction of the digester began in March.

The Cow Power process is simple. Manure and other agricultural waste are held in a sealed concrete tank at 101 degrees F (which, incidentally, is the same temperature as a cow’s stomach). Bacteria digest the volatile components, creating methane and killing pathogens and weed seeds. The methane fuels an engine/generator.

Neighborhood Farms is in the Vermont Electric Cooperative’s (VEC) service territory. VEC worked with the Maxwells and CVPS to make the project a reality. VEC will purchase the farm’s electrical output and CVPS Cow Power agreed to purchase the credits and all associated renewable attributes for $.04 per kilowatt hour.

The Neighborhood Farms project is expected to produce about 1,750,000 kilowatt-hours annually. The other four farms are located in Addison, Berkshire, Sheldon and St. Albans, VT. All of the farms have well over 500 cows, and produce or are expected to produce between 1.2 and 3.5 million kilowatt hours of electricity per year. CVPS is hoping to be able to supply 4 to 5% of the state’s energy needs with Cow Power within 10 years.

Visit the Cow Power web site and learn more about the Cow Power energy process.

Webinar Addresses Feed Buying, Pricing Considerations for ‘09

The University of Minnesota is offering a webinar from 1-2 p.m. Dec. 9 to address feed buying and pricing considerations for 2009.

Feed ingredient prices have fluctuated considerably this past year. Small fluctuations in feed prices, especially for corn and soybean meal, can greatly affect overall cost of production.

The webinar will cover the 2009 outlook for feed prices, and strategies for producers to consider for procuring feed ingredients, presented by Mark Schultz of Northstar Commodity.

Interested individuals can access the free program live via the Internet by connecting to the Web site a few minutes before the 1 p.m. start time. An archived copy of the program will also be made available on the Web site a few days after the program airs.

PorkCast online seminars are provided by the University of Minnesota Extension and the Minnesota Pork Board. They are designed to provide management-level information on current issues affecting the pork industry.
Past programs can be downloaded and viewed on the PorkCast Web site.

Questions regarding PorkCast programs or connections can be directed to Mark Whitney, University of Minnesota Extension educator, at [email protected] or (507) 389-5541.

Chicken Integrator Struggles to Survive

Pilgrim’s Pride’s Monday filing for protection from creditors under Chapter 11 of the bankruptcy code came as no real surprise. The company had lost huge sums of money each of the past two years as it struggled beneath the load of debt it took on when it bought Goldkist in 2006. Add in high-priced feed and breast meat prices near their lowest ever and the situation finally became untenable. Pilgrim’s stock had reached penny status several weeks ago, and two extensions of debt on facilities did not provide enough time for the company to make any substantial progress.

This in no way means Pilgrim’s will disappear or that its chickens, which represent 24% of the U.S. market, will disappear. The company will sell some assets, close some operations, downsize others, etc. as it devises a plan to continue in a smaller, leaner form. Its equity holders have lost virtually all of their investment, and now the creditors will line up to list what is owed, and get a place at the table for new financing arrangements. But the company will go on.

The cutbacks, however, will be important. It is not clear how much of the recent reductions in egg sets and chick placements have occurred at Pilgrim’s operations. Industry sources tell me they comprised a good portion of the reductions but not near all of them. Other chicken companies have reduced sets and placements, too, and those cuts are beginning to show up in higher chicken prices (see Figure 1). The problem remains leg quarters, which were down 19% last week, and are still over 40% lower than one year ago. These price reductions are caused primarily by a slowdown in exports.

Chicken Downturn Will Boost Pork Prices
Any reduction in chicken output will be supportive of pork and hog prices – but you couldn’t have guessed it by looking at Lean Hogs futures the past two days. As of Tuesday, I was ready to declare that a major reversal had occurred in Lean Hogs futures, since prices moved above the 50-day average late last week and then the 10-day average crossed the 50-day average. See the April Lean Hogs chart in Figure 2. The charts for the rest of 2009 looked much like the April chart.

The sell-off of Wednesday and Thursday has to call this “reversal” into serious question, though, and futures prices dropped back below what I expect in cash markets next year. I still do not think it is time to sell hogs for next year as November and December are hardly ever advisable times for forward pricing. But I would feel better about that if the market would indicate that it is indeed turning.

Plotting Profits in 2009
USDA’s December hog inventory survey went out on Monday amidst much more encouraging futures price relationships for U.S. hog producers. My computations using Tuesday’s future prices showed that producers with production parameters similar to those used by Iowa State University in its Estimated Costs and Returns series could have locked in profits averaging $13/head for 2009, assuming historical Iowa basis relationships held for hogs, corn and soybean meal. That figure has fallen a bit since Tuesday, due to the drop in Lean Hogs futures, but concurrent reductions in both corn and soybean meal have offset part of the hog revenue decline.

Sow Slaughter
Regardless of the precise number, the fact that it is positive and reasonably large suggests the incentives to reduce sow numbers may be gone. And weekly sow slaughter (Figure 3) reflects that conclusion. The slaughter of U.S. sows had run far above year-ago levels for much of this year. In fact, slaughter of U.S. sows had been below year-earlier levels for only three weeks in 2008 prior to Oct. 25. Three of the past four weeks have seen a year-over-year shortfall of the slaughter of U.S. sows.

Slaughter of Canadian sows in U.S. plants had been lower than one year ago for all of the summer months, due primarily to Canada’s sow buyout program. The number of Canadian sows in U.S. plants has moved closer to year-ago levels since the program has ended.

It is unlikely that the U.S. herd can go from -2.6%, year-over-year, on Sept. 1 to anything positive by Dec. 1. But a number closer to zero is clearly a possibility, especially given the profit prospects for next year.

The Canadian herd is another question. Going from -8.6%, year-over-year, on Oct. 1 to any number near zero, will take awhile. While economic conditions have improved north of the border (see the hog price percentage changes in the data table!), there has still been some substantial sow liquidation this fall as Canadian producers deal with the uncertainty of the mandatory country-of-origin labeling’s impact on their customers and their operations.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]

Have We Seen the Hog Market’s Low Point?

Let’s hope so for two reasons. First, last week’s prices are still not as low as the prices we saw in January! And second, the pigs we are selling now ate some very expensive corn early in their lives. Some computations using weekly corn, soybean meal and hog prices and a pro-forma production budget show that hog finishers are losing $40-70/head on November sales, depending on their pig-pricing method and feed-buying practices.

Last week’s average negotiated net price fell to $51.35/cwt., carcass ($38.51/cwt., live), the lowest level since late March (see Figure 1) and well below the cost of production. The negotiated net price represents the total price received by producers on hogs where the price is actually determined by some degree of seller-buyer interaction. Therefore, it is about the best thing we have for a producer-received spot price. It comes from the Prior-Day Slaughter report (lm_hg201).

The average total net price last week reached $56.77/cwt., carcass ($42.58/cwt., live), also the lowest level since March. This price includes all pricing methods – negotiated, hog/pork price formulas, other market formulas and other purchase arrangements. The big driver of the $5.42/cwt., carcass difference in these two measures is the price of “other market formula” pigs. The average price of those pigs was $68.94/cwt., carcass last week, over $18/cwt. more than the negotiated hogs and the result of producers’ pricing decisions last summer when the Chicago Mercantile Exchange (CME) Group Lean Hogs futures for December delivery were well above $70/cwt. That, in fact, was the case as recently as Aug. 20.

This price differential – and its implications for producers’ bottom lines – is one reason we have seen only limited sow liquidation in the United States. Many producers took advantage of these prices and have yet to lose much money. Others rode the cash markets and, as last week’s negotiated price level shows, have paid dearly for that decision.

Does that mean you should jump on the bandwagon now and hedge your hogs for 2009? Absolutely not! The current “bandwagon” is not nearly as attractive as the one these producers boarded last summer. The fall months are historically a bad time of year to price hogs on futures markets, since seasonally-low cash markets tend to pull down the entire lean hogs futures complex.

What this does mean, though, is that you should know how to forward price your hogs and be vigilant about watching for opportunities to lock in profits on some portion of your 2009 production. My computations for 2009 cash prices are actually yielding numbers higher than the current CME Group contract prices. Some analysts are quite bullish for 2009. I don’t share that sentiment, but I do think better opportunities lie ahead.

Now, back to the original question: Is the low in? As can be seen from the lines representing five-year averages in Figures 1 and 2, the weeks of Christmas and New Year’s are usually the worst. Holiday meat orders are over and packer hours are usually cut back. That’s not a good recipe for holiday cheer when it comes to hog prices. I really hope last week was the low and this week’s slight rally in cutout values gives us some hope that it was. Still, I think we’ll see more weakness before year’s end. Not much, but some, so be prepared for a few more weeks of very low spot prices.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]