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More Slippage in Crop Estimates Expected

Tuesday’s Crop Production and World Agricultural Supply and Demand Estimates from USDA are expected to show yet-smaller U.S. corn and yet-larger U.S. soybean crops, according to pre-report estimates from Dow Jones.

Tuesday’s Crop Production and World Agricultural Supply and Demand Estimates from USDA are expected to show yet-smaller U.S. corn and yet-larger U.S. soybean crops, according to pre-report estimates from Dow Jones. Analysts expect USDA to again reduce its corn yield estimate, this time to 154.4 bu./acre compared to 155.8 bu./acre last month. That would put the 2010 crop at 12.545 billion bushels, down 119 million bushels from last month’s estimate and 565 million bushels lower than last year’s crop – an average yield over 10 bu./acre shy of the 2009 crop.

This reduction is most likely already priced into the futures markets, so it would take a significant deviation to move markets sharply at this time. The final estimate of the 2010 crop won’t be available until January.

There are many things that could happen next spring and summer that could impact corn prices for the remainder of the 2011 crop year and, given the low levels of projected carryout stocks next September, well into the 2011-2012 crop year.

The livestock and poultry industries still need a relief mechanism for the Renewable Fuels Standard that would allow corn to move from mandated ethanol usage (or production, if the ethanol program gets changed) to livestock feed when we get a severe drought. This crop is the third-largest on record and, still, it could set the stage for huge challenges in 2012, if the weather is much less than perfect next summer.

We are now 22 growing seasons removed from our last major drought (1988). According to Elwyn Taylor at Iowa State University, the longest gap between severe droughts in Iowa history has been 23 years.

The simple fact is that ethanol plants can be idled much more quickly than can livestock and poultry production. And even the ethanol guys should like this idea. They do not want to be forced to make ethanol out of $7 or $8 corn, unless oil and gasoline prices are much higher than they are today.

As opposed to corn, analysts expect USDA’s soybean yield and crop estimates to rise to 44.6 bu./acre and 3.426 billion bushels, respectively. Those are up from 44.4 bu./acre and 3.408 billion bushels in the October report.

That’s the good news. The bad news (for feed buyers, at least) is that soybean futures are still near $13/bu. and they are setting contract-life highs for all contracts except Nov ’10, July ’11 and Nov ’11, which were already trading during the last big rally back in 2008. Ditto for soybean meal with contract life highs in the $350/ton vicinity, except for Dec ’10 and July ’11. Robust export demand and the need to compete with corn and wheat for acres in 2011 are supporting the soybean complex.

Higher Feed Costs to Come
Hog feed prices are now at their highest level since July 2008 (Figure 1). Last week’s Feed Cost Index (the cost of the corn and soybean meal to make a 16% crude protein diet) was $221.85/ton. Friday’s futures imply that feed will be $25-$30/ton higher in 2011 than was indicated at the end of September – before this round of higher feed prices began in earnest with USDA’s October reports.

My projected breakeven costs for hog producers in 2011 now stands at $78.47/cwt., carcass weight, nearly $10 higher than average costs for this year. The highest of those costs, according to this model, will occur next summer when pigs that have never eaten any “reasonably” priced corn go to market.

Cash hogs were lower for the week but showed some strength late – buoyed by a rise in cutout values. The weekly average cutout was $2.73 (3.7%) higher for the week, driven by a rally in ham prices. That strength should hold for another few weeks before Christmas ham needs are met. After the first week of December, however, there are usually few pork cuts to carry the value side of the pork and hog markets.

The good thing, of course, is that hog slaughter normally peaks about that time, removing the seasonal supply pressure on prices. There has been no sign of a reduction in slaughter yet, as last week’s 2.338 million head was the second-largest of the year and higher than both last week and last year’s totals. Weights grew by another pound last week.

Lean Hogs (LH) futures gained ground last week with contracts from July forward reaching new contract-life highs. Figure 2 shows projected costs and prices for 2011. The annual average loss of -$0.47 is actually a bit better than one week earlier due to the rise in LH futures.

The -$0.47 is not negative enough to drive liquidation and certainly is not positive enough to push expansion except for those units that were operating at less than capacity earlier this year. My thought is that traders have now completely removed any expansion of the sow herd from their expectations, though I doubt that any are expecting any reduction of numbers either. I expect breeding herd numbers to move sideways for the next few quarters until future grain prices and contracting rules are known.

Click to view graphs.

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

TAGS: Marketing