Corn Production Estimate Lowered; Feeding Costs/Uncertainty Rise

Mandatory reporting for dairy products in cold storage has improved the compliance to the entire Cold Storage Survey. As a result, additional data for some commodities have been collected that were not previously reported on the survey. In order to maintain the month-tomonth and year-to-year comparisons, estimates have been adjusted to exclude the newly acquired data in the summary tables.

The September estimates have been revised accordingly for selected commodities. NASS will provide data for these commodities in a new table found on the table on the contents page of the Cold Storage report . This table will be updated monthly until the end of the calendar year. All commodities for 2006 can be further revised in the annual Cold Storage report issued in February 2007. Further information will appear in the Cold Storage report to be released on November 21, 2006.

Feed Grain/Forage Conditions

November 1 U.S. corn production for 2006 was forecast at 10.7 billion bushels, down 160 million bushels from last month. Consequently, the 2006/07 marketing year average farm price of corn was raised 40 cents on both ends of the range to $2.80 to $3.20 per bushel. The red-meat/poultry sector will have to adjust to new, higher corn prices.

Hogs/Pork

The fourth quarter is typically the period of the year when pork production achieves its annual high, driving hog prices to their annual lows. Fourth-quarter 2006 opened with a very large slaughter, but hog prices moved only slightly lower in response. The October estimate of federally inspected hog slaughter was almost 6 percent above a year ago, while live-equivalent prices of 51- 52 percent lean hogs were $47.57 per hundredweight (cwt), just 0.7 percent below October 2005.

Corn Production Estimate Lowered

November 1 U.S. corn production for 2006 was forecast at 10.7 billion bushels, down 160 million bushels from last month. The national average yield was lowered 2.3 bushels per acre this month largely reflecting declines in Illinois, Indiana, Iowa, and Nebraska. Feed and residual use was lowered 50 million bushels reflecting sharply higher cash prices and the reduced crop. Exports also were lowered 50 million bushels as higher prices are expected to slow the pace of sales and shipments later in the year as supplies tighten. Ending stocks are projected to be down 60 million bushels to 935 million, less than half the ending stock levels of the past two years.

The 2006/07 marketing year average farm price of corn was raised 40 cents on both ends of the range to $2.80 to $3.20 per bushel. Despite the strength of current cash prices, farm prices are expected to lag current cash levels as a result of farmers’ forward-pricing their corn during this past spring and summer at lower than current prices. Grain sorghum production was also lowered and the average price raised 60 cents a bushel to $2.80 to $3.20 a bushel. Soybean production is forecast at a record 3.2 billion bushels, up 15 million bushels from last month. Soybean meal prices are projected at $165 to $190 per short ton, up from $147.50 to $177.50 last month.

Feeding Costs/Uncertainty Rise

Grain harvest typically marks the seasonal price low. However, this year, despite the third largest crop on record, corn prices have been rising counter-seasonally. Corn prices in Central Illinois averaged $2.07 a bushel in August, but have risen continuously to $2.82 in October. A new variable has been added to feed grain supply/demand analysis—ethanol. Strong growth in the ethanol industry is expected to continue to pull in larger quantities of corn as additional plants and plant expansion come on line. Corn use in fuel ethanol is projected at 2,150 billion bushels, up from 1,603 billion last year and 1,323 billion in 2004/05.

Production and price aberrations were historically short-term phenomen due to production shortfalls. Typically feeder cattle sell at a premium to fed cattle due to lower priced cost of gain, but when feed costs, including forages, rise and/or grazing conditions are poor, stocker/feeder cattle prices are pressured downward. In the spring of 1996 fed cattle prices averaged $60.66 per cwt, while yearling feeder cattle averaged $56.87 per cwt, 600-650 weight feeders averaged $58.81 per cwt, and 500-550 weight stocker/feeder cattle averaged $59.86 per cwt. At present, October stocker/feeder cattle were still selling at a strong premium to fed cattle.

However, with poor forage conditions this fall and sharply rising corn prices, largely due to expanding ethanol grain demand, feeder cattle are going to be under increasing pressure, at least until spring and a new grazing season begins. Fortunately for stocker/feeder cattle producers, distillers’ grain, a byproduct from ethanol production, can be incorporated into cattle rations at much lower prices than the prevailing cash corn price. Wet distillers’ grains are priced very favorably and can comprise 20 to 40 percent of fed cattle rations. Higher levels can perhaps be utilized as feeding regimes are altered to this rapidly expanding feed source. Unfortunately for the pork and poultry sectors, with present feeding technology, distillers’ grains are limited to about 10 percent or less of the feeding rations.

Hogs/Pork: Fourth Quarter Begins on a Positive Note

The fourth quarter is typically the period of the year when pork production achieves its annual high, driving hog prices to their annual lows. Fourth-quarter 2006 opened with a very large slaughter, but hog prices moved only slightly lower in response. October estimated federally inspected hog slaughter was more than 6 percent above a year ago, while live-equivalent prices of 51-52 percent lean hogs were $47.57 per cwt, just 0.7 percent below October 2005. A significantly larger slaughter, accompanied by a small dropoff in prices, indicates strong demand for live hogs, which in turn derives from strong demand for pork products. USDA added $2 to its fourth-quarter hog price forecast, with prices now expected to range between $45 and $47 per cwt. Fourth-quarter pork production is expected to be about 5.7 million pounds, or almost 3 percent above the same period last year.

Third Quarter Retail Prices Strong, Despite Competition From Other Meats

The average American consumed 0.4 pound less pork in the third quarter than last year at the same time, but paid slightly more than 1 percent more per pound at retail. Per capita pork consumption was 11.9 pounds in the third quarter, compared with 12.3 pounds a year ago. Third-quarter retail prices were $2.86 per pound, or 3 cents higher than third quarter a year ago. Slightly higher retail prices reflect, in part, a small increase in the farm-to-retail spread, compared with the same period in 2005. Higher retail pork prices come at the same time that beef prices are stable, at about $3.93 per pound, and retail young-chicken composite prices are below a year ago. Given larger anticipated fourth-quarter pork supplies, October-December retail prices are expected to drop off a bit, to the low $2.80s.

Third Quarter Pork Exports Increase

The U.S. pork industry exported almost 220 million pounds of pork in September, over 7 percent more than in September 2005. Exports for the quarter were more than 653 million pounds, almost 4 percent greater than in the same period a year ago. On a cumulative, 9-month basis, U.S. exporters have shipped almost 12 percent more pork to foreign markets than in the first 9 months of 2005. Of the three countries that typically account for the lion’s share of U.S. pork exports--Japan, Mexico, and Canada--Mexico and Canada have registered yearover- year increases.

In 2005, Mexico and Canada accounted for 31 percent of U.S. pork exports, and that share has increased slightly this year to 32 percent. Japan, on the other hand, continues as the largest foreign destination for U.S. pork. But cumulative, year-over-year export quantities are almost 8 percent lower than in January-September 2005. So far this year, Japan accounts for a significantly lower share of U.S. exports. Last year Japan’s 9-month average share was 41 percent. This year, Japan has accounted for 33 percent--still the largest of any foreign customer, but much smaller than a year ago.

Through September of this year, U.S. export volumes and average export shares of such countries/regions as Russia, South Korea, Hong Kong, Taiwan, Central and South America, the Caribbean, and Europe have increased.

Imports Lower So Far in 2006

U.S. importers bought more than 74 million pounds of foreign pork in September, about 14 percent less than in September 2005. For the January-September period, U.S. imports of 735 million pounds were 1.5 percent below a year ago. Most U.S. pork imports originate from Canada and Denmark. So far this year 79 percent of imports have originated from Canada and about 11 percent from Denmark. Thirdquarter imports from Denmark are off by more than 21 percent. Imports from Canada are down more than 6 percent.

Exchange rates are the variables most likely responsible for driving imports lower. The low-valued dollar, relative to the Canadian and Danish currencies, make imported pork products more expensive than they would be otherwise, causing importers to reduce import quantities.

Canadian Pork Sector: Big Problems Up North

Data published by the Government of Canada corroborate the conventional wisdom that says the Canadian swine and pork industry, as it is structured and functions today, was largely built on a $0.65 Canadian dollar. The figures below show that strong inventory growth occurred during the 2000-2002 period, when the value of the Canadian dollar averaged $0.65.

The Canadian dollar is currently trading closer to $0.90. For the pork side of the industry, a more expensive Canadian dollar means that many pork importers can buy more pork when the products are valued in (low-valued) U.S. dollars, than when the same products are valued in (high-valued) Canadian dollars. The highvalued Canadian dollar thus creates an incentive for pork importers to buy U.S.

pork products rather than Canadian pork. In fact, to date U.S. pork exports are almost 12 percent higher than a year ago, whereas Canadian pork exports have increased only 1 percent. Because the financial health of the Canadian pork industry is so dependent on exports--more than 50 percent of Canadian pork production is typically exported each year--the relatively high value of the Canadian dollar creates serious problems for the pork industry in Canada.

The loss of the Canadian pork industry’s competitiveness in international markets due to a high-valued currency may be a factor contributing to the problems that Canada’s largest packers--Maple Leaf Foods and Olymel--are currently experiencing. Maple Leaf Foods recently announced a plan to close all but one of its packing plants by 2009, while Olymel signaled its intention to remedy the problems it is experiencing in Quebec's pork industry.

Hog Statistics Reflect Industry Problems

Quarterly statistics published by Statistics Canada in October depict an industry that is beginning to contract. The Hog Statistics report shows accelerating reductions in quarterly breeding stock inventories in each quarter of this year (see figure).

Year-over-year percent changes in quarterly total swine inventories have been negative and accelerating since the first quarter of this year (see figure). The dependence of the Canadian pork industry on foreign markets makes it likely that the Canadian dollar exchange rate is at least one of the variables squeezing profitability, particularly for meat, leading to a reduction in animal and breeding numbers.

High Canadian Dollar Harms Swine Exports Relatively Less Than Meat Exports

U.S. packers and swine finishers imported 2.2 million head of slaughter hogs and animals for finishing in the third quarter. Slaughter hogs comprised 29 percent of July-September imports; 69 percent were animals for finishing. Last year at the same time, slaughter hogs were 34 percent of third-quarter imports and animals for finishing were 65 percent. Total-third quarter imports were slightly more than 2 percent greater, compared with the same period last year.

State of entry import data, published by USDA’s Agricultural Marketing Service, show that the greatest proportion of Canadian swine enter the United States through North Dakota, and Michigan. These States are contiguous with Manitoba and Ontario, provinces that account for 21 percent and 25 percent of the Canadian hog inventory, respectively. A significant percentage of operations in Manitoba, in particular, specialize in the production and export of animals for finishing. Canadian statistics indicate that Manitoba and Ontario are responsible for the majority of live international exports.

The State of entry numbers indicate that imports through both North Dakota and Michigan increased strongly in the first three quarters of 2006 (see table). Quarterly imports of finishing animals through North Dakota increased at strong uniform rates. Slaughter hog imports through North Dakota however, appeared to increase and decrease with more variability, suggesting that Canadian producers shipping slaughter hogs through that state treat U.S. packers as residual buyers.

Ontario swine operations are more evenly distributed between those specialized in producing and exporting animals for finishing and slaughter hog production. In the first three quarters of 2006, animals for finishing imports through Michigan increased more than 19 percent, with most of the increase in the first quarter. The threat of a Canadian countervail on imported U.S. corn earlier this year likely accounts for the large first-quarter year-over-year increases in imports through Michigan. Year-over-year quarterly increases were smaller in succeeding periods, with a year-over-year decline in the number of animals for finishing in the third quarter.

The data detailing swine imports through North Dakota, together with Manitoba breeding herd inventory changes, suggest that the swine export side of the Canadian swine and pork industry is not being squeezed as hard by the unfavorable U.S.- Canadian exchange rate, as the meat export side of the industry (see table). Breeding herd inventory changes indicate that this year Manitoba breeding herd numbers actually increased, relative to 2005. Ontario breeding herd numbers declined in each quarter.

This is not to say that finishing animal exporters are not being pressured by the high-valued Canadian dollar. The more expensive Canadian dollar, means that a Canadian producer of animals for finishing who sells a pig for $32 in the United States receives about 36 $CN after exchanging currencies at a rate of $0.90, rather than the 49 $CN received when Canadian dollars cost $0.65. So the 41-percent appreciation of the Canadian dollar (between September 2002 and September 2006) in all likelihood puts export-dependent Canadian animals for finishing businesses under financial stress. But breeding herd inventory statistics indicate that Manitoba’s operations, unlike Ontario’s, are not contracting.

The contrast between Manitoba and Ontario, in terms of breeding herd changes, may simply be another indicator of the longstanding challenges faced by the Canadian slaughter industry. Until Maple Leaf Foods announced its intention to close all of its slaughter plants except its newest plant in Brandon, Manitoba, the industry struggled to maintain international competitiveness with a set of small, aging, single-shift slaughter plants. The animals for finishing side of the industry obviously circumvents the high-cost, noncompetitive slaughter component of the industry altogether, allowing it to compete on its strengths--among them, high productivity relative to U.S. operations--rather than on its weaknesses, even under some fairly adverse exchange rate conditions.

Further Information

For more information view the full Livestock, Dairy and Poultry Outlook - November 2006 (pdf)

November 2006