In this issue I look at some of these trends and take a look at the difference between the prices of for pigs sold via formula prices versus regular cash sales. Another ongoing shift is the reliance upon formula pricing of feeder pigs. In 2004 USDA started recording the prices and quantities of feeder pigs sold via a formula price versus straight cash price sAales. Today about half of all feeder pigs are priced on a formula basis. There are many different formulae for feeder pig prices, but all of them translate some information about the status of the market (hog futures prices, feed prices, etcetera – it can be different for every formula) into a price paid for those feeder pigs.

The difference between formula priced feeder pigs and those sold without a formula can be stark. For example, since 2005, the average 10-pound feeder pig sold via formula price in the U.S. has cost $34.71 while all other 10-pound feeder pigs have average a price of $42.15 – that’s 21% more (more than $7 per pig more) for non-formula pigs. Two-thirds of the formula prices for these pigs are in the range of $33-35 over this time period, while, for the non-formula pigs, prices range from $37-47 two-thirds of the time. Only about one week in five will the formula price be higher than the cash price – usually during the summer price slump. Clearly, over the past 2 years, there has been a big cost advantage for those finishers who have purchased early wean pigs under formula prices.

There is also a difference between formula and cash prices for 40-pound feeder pigs, though it is not nearly as large. Since January of 2005, formula-priced 40-pounders have averaged about $55.50 while negotiated prices averaged just over $59 – only about 7% more. As well as being higher on average, negotiated prices featured much greater fluctuations over this time period. Two-thirds of the time, formula prices were between $54 and $57 while negotiated prices ranged from $53 to $65.

Some further analysis of the data also shows that formula prices are much less sensitive to changes in other relevant prices, like those of lean hog futures prices and feed prices. Take the 40-pound feeder pig prices as an example. Some data analysis suggests that, if hog futures prices rose by $1, formula feeder pig prices would increase by about $0.30 but negotiated cash prices for 40-pound feeder pigs would increase by twice that much. Similarly, if the corn futures price jumps by $0.10, formula prices increase by $0.50 while negotiated prices jump by $1.20. Similar contrasts arise in the 10-pound feeders, with negotiated feeder pig prices being much more sensitive to price swings for feed and lean hogs.

The different sensitivity between formula and cash feeder pig prices has been quite obvious over the past few months as feed prices have spiraled upwards. Oddly, however, higher feed prices have not driven down the price for feeder pigs. In fact, if you were just looking at formulapriced feeder pigs, you couldn’t tell that the cost of feed has increased by 80% since last summer because prices are so closely tracking last year’s prices. For 10-pound formula pigs, the price has been greater than or equal to the previous year’s price nearly every week since last Labor Day – in fact, an average of $0.60 more across these weeks.

Prices for feeder pigs in the cash market have reflected the increase costs of finishing we have observed since Labor Day, as 10-pound cash pigs have cost about $5.50 more since Labor Day compared to the previous year. However, even these markets have rallied in February with prices in late February surpassing previous year’s feeder prices for both 10-pounders and 40- pounders in cash markets. Such a rally in cash feeder pig prices reflects the extreme tightness of supply for feeder pigs in the United States and the extreme optimism of finishers (and their financiers).

Think of it – the average 40-pound feeder pig purchased in the U.S. in late February cost $70. Add to this a $45 feed bill to take that animal to 260 pounds for market, and you already have $115 sunk. With lean futures prices trading around $75/cwt for summer contracts, that translates (after about a $2 basis) to about $144 in gross receipts for that hog. This leaves about $29 left over to cover everything else. So, if you are quite efficient, you may just break even. Recalculate this for the finisher who was buying that 40-pound feeder pig via a formula price – formula priced feeders sold for $55 rather than $70. This is a huge safety cushion for these finishers.

It will be interesting to see how long this paradoxical strength in feeder pig prices will persist. On one hand, U.S. sow slaughter has surged during the first two months of 2007, which will continue to make available feeder pig supplies quite tight across North America, particularly given that there has been only modest expansion in sow numbers in the US and Canada over the past year. My models of finisher profitability suggest that, if feeder pig prices are similar to those observed over the past 12 months (~$55 for 40-pound pigs), most finishing floors will average a $4/cwt loss over the next 12 months. However, if feeder pig prices soften by about $10 per pig, the average finisher will break even over the next 12 months.

Distillers Grain Notes

The price of corn and soybean meal relative to dried distillers grain (DDG) has increased dramatically since the beginning of the year, though it is still slightly lower than all-time highs observed in the fall of 2006 and the summer of 2005.

Specifically, I have been tracking the cost savings from substituting 31.8 bushels of corn plus 190 pounds of soybean meal with 1 ton of dried distillers grain (all priced in central Illinois). I chose these numbers as it is one feed ration substitution I have seen mentioned in the proliferating literature about how to use dried distillers grains into livestock rations. The cost savings from this substitution was calculated at $19.63 for the third week in February, which is among the highest 10% of values in my data (which goes back to 1999). This ‘cost savings’ I calculate does not account for differences in transportation costs that might arise if one actually switched from corn and beanmeal to dried distillers grains, nor does it account for any differences in spoilage that might arise. Nonetheless, it is indicative that ethanol byproducts continue to look more attractive, particularly as soybean meal prices have appeared to join corn’s upward march in prices.

These transportation costs can very well eat into the possible savings associated with making this switch, however. For example, in Ohio, where DDG must be brought in from Indiana or Illinois (at least until Ohio’s ethanol plants start full operations) while corn and bean meal are available locally, the additional costs of rail or truck transportation appear to negate the possible savings associated with a switch to DDG. Several Ohio producers suggest that the additional transportation costs associated with DDG make incorporating it into rations a break-even proposition at best. Nonetheless, these are figures that producers will need to monitor as ethanol plants proliferate over the next few years and as corn and bean prices stabilize at higher levels. Furthermore, as ethanol production continues its escalating pattern, it will be wise for producers to investigate how DDG may fit into their rations and feeding regimen.

March 2007