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Pork Continues Export Advance

U.S. pork exports continued their march forward in May, setting another monthly record, while beef exports reached their highest level since December 2003.

“The shortage in the global meat supply, combined with record pork production in the United States and the continued weak dollar, are putting U.S. beef and pork in a very advantageous position in many export markets,” reports Erin Daley, manager of research and analysis for the U.S. Meat Export Federation (USMEF).

China/Hong Kong has emerged as a major market for U.S. pork since the fourth quarter of 2007, since that country’s pork production has declined.

“It’s not so much that consumption is up,” says Daley. “Rather, production is down, and U.S. pork remains undervalued. Russia is the exception, however, where pork production is up, but not enough to keep pace with rising consumption.”

In May, pork (including variety meat) exports set a new record of 432.4 million pounds worth nearly $452 million. Export volume was up 95% over May 2007, and 12% above the April 2008 record.

This puts January-May 2008 pork exports (including variety meats) at 1.8 billion pounds worth $1.86 billion, up 60% and 51%, respectively, from the same period last year.

China/Hong Kong was the top market for U.S. pork exports in May, with exports totaling 121.9 million pounds valued at $99.4 million pounds, and up from just 23.6 million pounds worth $15.7 million in May last year.

Exports to Japan reached 88.2 million pounds again in May. For January-May, exports totaled 407.7 million pounds valued at $592 million, up 19% and 22% respectively, and still the largest market for U.S. pork in terms of value.

In other key U.S. pork export news:

  • Mexico rebounded in May to 64 million pounds. That puts the January-May total at 292.6 million pounds valued at $213 million, up 16% and 18% respectively, but 15% below the record levels of 2006.
  • Russia’s purchase of U.S. pork exports in May reached 39.5 million pounds valued at $158.9 million, up 137% and 142%, respectively, over May of last year.
  • The ASEAN (Association of Southeast Asian Nations) also set a new record in May at 16.1 million pounds in sales mainly to the Philippines and Vietnam.

For complete export details, go to The U.S. Meat Export Federation.

More pork production news

Corn Prices Finally Pushed Lower

Good growing conditions and what some feel is an ambitious yield estimate from Informa Economics pushed corn futures prices lower last week, providing some much-needed good news for pork producers. See Figure 1.

Informa’s estimated national corn yield of 152 bu./acre, released on Monday, was a big driver in the price decline that saw new-crop December corn futures fall 73¢/bu. or almost 10% through Thursday. Warm, sunny days and rains in much of the Midwest also helped, even though USDA’s Monday estimate of crop conditions improved only slightly, with 62% of acres rated good or excellent, 1% more than last week. That improvement finally puts this year’s ratings above those of 2002 – the year with the record-worst, season-long average percentages in the good-excellent crop categories.

Soybean Concerns
The sell-off extended to soybean and soybean meal futures early in the week, but both of those markets rallied to recapture much of the lost ground by Thursday. A major factor at play in soybeans is the value of the U.S. dollar relative to the Brazilian real. The dollar price of soybeans must get high enough to offer Brazilian producers enough reals to make them plant more soybeans this fall. Dr. Robert Wisner of Iowa State University thinks that this target price is in the $15-$16/bu. range, so don’t be surprised to see soybeans stay in that range – and cause meal to remain in the $425-$450/ton range.

Corn Plantings
USDA’s monthly Crop Production and World Agricultural Supply and Demand Estimates, released Friday morning, showed the estimated national corn yield at 148.4 bu./acre, 0.5 bu. lower than USDA’s June forecast. USDA increased the carryout for the 2007-08 (i.e. current) crop year by decreasing ethanol usage (due to delays in plant openings) and feed and residual (due to higher-than-expected corn stocks in the June 30 crop inventory report).

The 155-million-bushel increase in ’07-’08 corn carryout stocks falls straight to the carryout for the ’08-’09 crop year, increasing it from June’s estimate of 673 million bushels to 833 million bushels or 6.7% of total projected usage. That is 1.6% higher than USDA’s June estimated season-ending stocks-to-use ratio, yet USDA increased its estimated season average farm price by 20¢ to $5.50-$6.50/bu. of corn. Should that price increase hold, it would mark another positive shift of the corn demand curve, since June’s 5.1% and $5.80 (mid-point of June’s $5.30 to $5.60 range) was almost precisely on the demand relationship that USDA has apparently used since last summer. The new price range is still far below futures price levels, however, suggesting that the trade is still expecting stronger corn demand than is USDA.

The net impact of the week’s price changes was a small decline in projected hog feed costs (see Figure 2).

High Hog Slaughter Continues
Federally inspected hog slaughter continues to trend toward year-ago levels. That’s the good news. The bad news is that 24 out of 27 weekly slaughter totals this year has set new records for the respective weeks (see Figure 3). Further, USDA’s June Hogs and Pigs Report says that the remainder of 2008 will see more of the same. My projections using the June data say that every week’s slaughter for the remainder of this year will be record large.

One question these high summertime slaughter runs raise is whether we will have a packing capacity crunch this fall. Forecasted slaughter runs will be at or beyond 2.5 million head in December (see Figure 4). Packer capacity as of last August was 428,335 head/day, meaning that packers would have to operate in excess of 5.8 days/week to handle the large fall runs. My packer contacts say capacity will not be an issue – but I’m afraid operating at those high rates will mean wide packer margins and, consequently, lower hog prices than would otherwise occur.

Keep Marketings Current
The key for fall slaughter will be to reach the fall with marketings as current as possible to keep weights from climbing if capacity becomes an issue. Producers got current, I believe, this past spring when slaughter surged and weights went below year-ago levels. They need to remain very current through the summer and into the fall if we are to keep capacity from becoming a significant issue.




Click to view graphs.

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

Profitability Challenge Topic Of July 17 Minnesota Meeting

Understanding the Pork Industry Profitability Challenge – Lenders Education, is the subject of a July 17 meeting at the Minnesota Soybean Office in Mankato, MN.

The meeting is co-sponsored by the National Pork Board (NPB), Minnesota Pork Board and the National Pork Producers Council. Register by calling the NPB at (800) 456-7675, faxing (515) 223-2646 or e-mailing Sharlotte Peterson at [email protected] The program runs 9 a.m. to 3 p.m.

Mike Laughery, National Pork Board, will outline a short- and long-term view of what lies ahead for the pork industry.

Brian Buhr, University of Minnesota, will address “Something’s Got to Give,” looking at how grain and soybean meal prices have risen into uncharted territory – and hog futures are following.

John Green, National Pork Board, “The Glass is Half Full,” will explain how the demand for pork domestically and abroad is strong and growing, and what this can mean for U.S. pork producers in 2009 and beyond.

Following lunch, Tony Clark of the Chicago Mercantile Exchange Group will focus on Risk Management. He will discuss how producers can use futures and options for risk management to lock in production price levels and input costs by hedging.

Exit Responsibilities is the topic of Wayne Anderson, Minnesota Pollution Control Agency, who will detail rules that apply to vacated livestock facilities. He will share some real examples of exit challenges and discuss the accountability of the producer and lender when a livestock facility is vacated.

Perry Aasness of the Farm Service Agency (FSA) will present information on the FSA Loan Program.

Producers Face Some Tough Losses Before Profits Return

Extraordinary losses for pork producers in 2008 may be offset by extraordinary profits in the last half of 2009 and 2010, says Purdue University Extension Marketing Specialist Chris Hurt.

“This will be especially true if Conservation Reserve Program (CRP) land is relapsed in 2009, if ethanol receives less support, if 2009 weather is favorable, and if crude oil prices don’t keep moving higher,” he suggests. “There are still plenty of uncertainties, and most won’t feel relieved about ‘better times’ until they arrive.”

In reviewing the pork market, Hurt says he believes the product is dramatically undervalued.

“Pork is cheap in the United States, but it is ‘dirt cheap’ for many of our foreign buyers since the strength of their currencies effectively lowers the price even more,” he says. “Pork is at bargain basement prices when you realize that U.S. producers are producing and selling hogs at huge losses.

“In essence, U.S. producers are providing huge subsidies to U.S. and foreign consumers. Why wouldn’t the world’s pork buyers be banging at our door for these bargains? Why would foreign pork producers want to try to compete with U.S. producers?”

Hurt believes all indications point to U.S. pork prices exploding to the upside similar to what other commodities have done. The question is, when will that happen?

To understand the situation, look at cheap domestic pork. Retail pork prices in 2008 have averaged $2.85/lb., compared with $2.87 for 2007. Hurt says pork producers have contributed to the lower pork prices with about $1.4 billion in losses in the first half of 2008 alone.

“The cheap U.S. dollar relative to currencies of other countries with which we trade pork should stimulate exports and reduce pork imports and that is exactly what is happening,” he reports. “For the first four months of 2008, pork exports have expanded by 52% and imports have dropped by 12%.”

Trade accounts for a large portion of the record pork production in the United States, Hurt adds.

For the first four months of 2008, commercial production was up 11%, yet when trade was considered, the amount of pork available to U.S. consumers was only up 6%.

“That is to say that additional trade has accounted for about 5% of all the added pork production in early 2008,” Hurt says. “More importantly, the export parade is just getting rolling as pork exports reached a record 22% of U.S. production in April. This was up from a mere 14% for all of last year.”

Many countries are now upping their purchases of U.S. pork products.

“U.S. pork is going almost everywhere as the world has discovered one of the last food bargains on the globe,” Hurt points out. “About one-half of the higher exports this year compared to the same period last year are headed to China and Hong Kong.

“Exports to most other major buyers are up as well, with Japan up 14%, Russia up 58% and Canada up 27%. It is becoming clear that the world will continue to buy up the huge U.S. production until pork prices move sharply higher. Maybe U.S. consumers can’t eat all of the U.S.-produced pork at profitable prices to producers, but the world can,” Hurt says.

The flooding that has contributed to corn prices moving up to $7/bu. and the bleakness of the latest hog outlook report have convinced more producers to slaughter sows. The USDA Hogs and Pigs Report showed the breeding herd down about 1% with farrowing intentions to drop by 2% this summer and decline by 4% this fall.

“Both of those declines will likely be larger since the USDA survey was taken before the June flooding,” he says. “Another 2% drop would put the summer farrowings down 4% and fall down 6% – some serious declines.

“Slaughter supplies will be up by about 10% in July, and then the percentages will begin to drop, with 6% higher supplies in August and 4% more in the fall. Winter slaughter supplies could finally be down by 3%, and spring 2009 supplies could be down as much as 5%,” Hurt projects.

Given U.S. slaughter projections, he expects prices will improve very late this fall and winter and become much higher by next spring and summer.

“Trade will likely continue to accelerate, and this will encourage even stronger prices than the supply reductions expected for late this year and 2009,” Hurt comments.

Cattle prices have started to make gains, up nearly $10/cwt in the last three weeks, and he expects hog prices should soon follow.

“If U.S. consumers don’t want to buy up the last of the cheap pork, the world is anxious for the opportunity,” he says.

“The issue for individual pork producers is whether they can hang on long enough for hog prices to catch up with costs. Expectations now are for live hog prices to trade in the lower-to-mid-$50s for this summer and fall, then to move into the low $60s by winter and on to the higher $60s and mid-$70s by next spring and summer. Given prices of corn and soybean meal on July 7, costs of production for farrow-to-finish producers are estimated to be in the low $60s.”

Illinois Pork Holds Visioning Session

The Illinois Pork Producers Association (IPPA) is providing pork producers and pork industry representatives an opportunity to provide input and direction on IPPA programs at the IPPA Visioning Session on July 15.

The session, open to all pork producers, will be held at the Northfield Inn & Suites in Springfield, IL.

The program kicks off at 1 p.m. with Steve Meyer, president of Paragon Economics, providing an outlook for pork and grain markets and discussing risk management strategies that producers can use to get through this tough financial period.

Other updates include the IPPA image/education campaign, Operation Impact, as well as the new national effort, Responsible Pork Initiative. Producers will learn about what is being done to help educate consumers about pork production and proactively work in industry issues, such as animal welfare, and how producers can become involved.

The Visioning Session starts at 4 p.m. with the Pork Act Election, which is the election of pork producer delegate candidates for the 2009 National Pork Act annual meeting. A meal will be served at 5 p.m. and the program concludes at 7:30 p.m.

“IPPA is truly a grassroots organization. The Visioning Session will allow producers a chance to discuss suggested changes to IPPA programs and services and provide direction on the development of the 2009 IPPA budget,” says Phil Borgic, IPPA president.

“We realize that the high feed prices are drastically impacting pork producers,” Borgic adds. “Dr. Meyer’s presentation should lend some insight on where we are headed and what producers can do to survive. I hope producers will make plans to attend this important meeting to help prioritize the IPPA’s programs and resources to best meet the needs of Illinois pork producers and address the many issues facing the pork industry.”

The meeting is free of charge to pork producers and industry representatives, but advance registration is required. Contact the IPPA office at (217) 529-3100 or visit www.ilpork.com.

The Maschhoffs Acquire Iowa Pork Operation

In a move that company officials say fits their business plan, The Maschhoffs have announced that Maschhoff Northwest LLC has purchased the swine production assets of Blackjack Pork LLC of Ames, IA.

Blackjack Pork consists of 20,000 sows in a farrow-to-finish operation owned by a group of investors. The transaction includes the associated nursery and finisher pigs, as well as the related contract production facilities in Illinois, Iowa and Oklahoma. The transaction is effective immediately.

Ken Maschhoff, president and CEO of The Maschhoffs, stated: “This is a very strategic fit for us, with the majority of the assets in areas in which we already operate. This purchase brings together key facilities, employees and Production Partners (contract growers) that complement our existing network.”

The acquisition brings the official company herd inventory to just over 130,000 sows.

The Maschhoffs is a family-owned pork production company headquartered in Carlyle, IL, with our 100 years of experience in pork production.

Smithfield Sells 5% of Stock To Chinese Company

The nation’s largest pork production and processing firm is selling nearly a 5% stake in its business to a Chinese company.

Smithfield Foods Inc. announced it is divesting 4.95% of its stock, or seven million shares, to COFCO Ltd., China’s largest agricultural trading and processing company.

The transaction provides the Virginia-based firm with funds to pay down debt and cash to carry it over until the expected sale of its beef operations to JBS, analysts said. That sale is expected to close in the third quarter of this year.

The investment by the Chinese company strengthens ties with Smithfield, says Jonathon P. Feeney, food analyst for Wachovia Equity Research. Smithfield has been shipping ractopamine-free pork to China since last fall.

The value of the deal is expected to be determined in the near future, including price of the shares and the terms of an offering of $350-$400 million in senior contingent bonds.

Investors were unfazed by the stock sale as the company’s stock fell to its lowest level in about five years, to just over $17 after the deal was announced. It closed most recently at $17.30/share.

“I am very pleased that COFCO has agreed to make this equity investment in Smithfield. We have been working closely together, and this investment represents a significant step in cementing our relationship for the long term,” says C. Larry Pope, Smithfield’s president and CEO, in a statement posted on the company’s Web site.

Tracking the Corn Crop

Before we contemplate business, let us first contemplate freedom as we prepare to celebrate the most important day in our nation’s history. Fifty-six visionaries signed the Declaration of Independence 212 years ago today, their names appearing just below this closing line:

“And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.”
How many of us would demonstrate such courage and devotion today?

If you haven’t read the Declaration since your school days, take a few minutes on Friday to read it again. You can find it at and a bevy of related information at www.ushistory.org/Declaration/.

Now to business
USDA’s Crop Acreage report, released on Monday, was a pleasant surprise for corn users as the feds estimate that there were 87.33 million acres planted to corn this spring. That was at the top of the range of analysts’ pre-report estimates and 1.67 million acres higher than the average of those pre-report estimates.

Those planted acres could a) exceed expectations, and b) exceed the March 1 planting intentions of 86 million acres by this amount. In a year with a tough planting season, this is a strong testament to the power of economic incentives. Those incentives, of course, grew dramatically after March 1 as corn prices rose relative to soybeans. Though the price ratio changed and there is a very strong history for corn acres to grow, many did not think conditions would allow it this year. Again: It’s amazing how much ground you can cover in a short time with 24-row planters and GPS systems.

We are going to need all of those acres! USDA estimates that 78.94 million acres will be harvested. That is 90.4% of the total, 2% lower than last year and the long-term trend, but only 0.5% lower than the average for 2002-2006. Floods have no doubt hurt the prospects for harvested acres, but the economic incentives to harvest corn are still very strong so we could see this percentage increase if growing conditions are good.

What does this mean for the corn crop and prices? The futures market was decidedly bearish early in the week, losing $0.35 on new crop December corn futures through Tuesday. December corn futures have rebounded the past two days, though, and as of this writing, stand just $0.05 lower than last Friday’s close.

Monday afternoon’s Crop Progress report showed 59% of this crop rated good or excellent. While 2% higher than last week’s number, that figure is still lower than the worst year on record – 2002 (See Figure 1). It appears that the euphoria over more acres has been swamped again by the realization that the needs for corn may outweigh the supply.

Figure 2 shows USDA’s June yield and usage figures and the acreages from last week’s report. This may not be what USDA actually forecasts in the July 11 World Agricultural Supply and Demand estimates, but it should be close. I do not expect USDA to change its yield estimate much if at all before the August reports when they will have objective measurements of plant populations, ear counts, ear length, kernels, etc.

Uncomfortable Forecasts
The biggest problem with recent (and I fear future) USDA forecasts is the usage estimates. Note in Figure 2 that USDA is forecasting ethanol usage to increase 33%, while feed and residual declines by 16.3% and exports fall by 18.4%. I’m not comfortable with any of those numbers and here’s why:
  • With oil at $140/barrel and gasoline above $4/gal., ethanol prices should be high enough to allow ethanol plants to operate at anything below $8/bu. or so for corn. Iowa State University’s Center for Agricultural and Rural Development (CARD) estimates that the 144 plants currently operating will use 3.225 billion bushels of corn per year and that the 66 plants currently expanding or under construction will use another 1.94 billion bushels per year. If anything over 40% of the new capacity is up and running by the end of 2008, it is very likely that USDA’s 4 billion bushels for ’08-’09 usage is too low.

  • The feed and residual estimate of 5.15 billion bushels is 16.3% below last year. The DDGS from additional 1 billion bushels of corn put through distilleries will provide the equivalent of about 280 million bushels of corn, but that would still leave total feeding 11.7% lower than last year. None of the species are either able or likely to cut back that much in one year’s time – unless they are forced to do so because a) they cannot get feed for the critters, or b) feed is so high priced that it makes young animals worthless and causes them to be destroyed.

  • An 18.4% reduction of exports is probably the most likely of these numbers to be correct but even that is questionable. China is on the verge of moving from corn exporter to corn importer. The dollar remains weak, which means U.S. grain is a great buy for foreign users. Yes, wheat output is up and the wheat:corn price ratio is low enough that wheat feeding will happen in some places, but will enough feed wheat be available to supplant these exports?
How does that situation get rectified? To get usage numbers this low, I think prices have to be higher than what USDA projected in June. The futures market appears to agree with that judgment as ’08-’09 futures contracts are all near or above $8/bu., a price that will drive more radical reductions of usage over the coming year.




Click to view graphs.

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