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Pork Commentary: Feed Prices Continue to Climb

by 5m Editor
16 January 2008, at 12:40pm

US - Last Friday, the USDA released World Agriculture Supply and Demand Estimates. They came up with a smaller corn crop in 2007 and greater projected feed usage. In the end, less corn carry-out of 300 million bushels, says Jim Long.

On the soybean front, the USDA dropped soybean carry-out by 10 million bushels. Ending stocks at 175 bushels in the third lowest on record. The combined news in the corn and soybean markets pushed futures too.

Is there any good news in this price scenario? We think so. Every acre of arable land that can sustain a crop for grain or oilseed in the Northern Hemisphere will be planted this coming crop year. Tremendous profit opportunities are going to get this done. There will be no holding back. North America, China, Russia, Ukraine and Europe are going to discover what maximum production will be. Its no wonder Monsanto’s shares have a five fold increase (seed, crop protection). John Deere’s shares aren’t far behind.

On the flipside, we believe that high feed prices will start to limit usage. In the coming weeks, expect a cutback in hog and cattle weights (use less feed). We expect chick placement will stop increasing. Exports of feed grains will decrease. Corn per bushel in Mexico, last Friday was $6.50 a bushel, a reflection of imported grains cost for many parts of the world.

Hopefully (wishful thinking), at some point, the US government will realize the insanity of its corn ethanol subsidy program. The threat of food inflation throughout the world is real. The social, political and economic instability it can cause domestically and internationally is mind-boggling. The US economy with 25% of the world’s GDP has prospered, with the lowest food costs in the world.

Around 10 per cent of US disposable income has been spent on food. This has left the other 90 per cent to buy two cars, big houses, three televisions, holidays, cottages, etc. A large percentage of the population has benefited from the disposable dollars not dedicated to food. We have been in countries where 75 per cent of disposable income is spent on food. There are few cars, few television, holidays, etc. in these countries.

If Americans spend 20 per cent on food because of food inflation, standard of living will decrease. There will be larger effect on the working poor. In countries that are at 75 cent of disposable income on food and food prices double, what gives? Less food, malnutrition and political strife. Not a more stable world. Hungry people are not happy people.

Generally, grain farmers will not like this synopsis. There are enjoying good times. We understand. But will it be sustainable? Land rents and prices will increase. Equipment costs will be up, seed, etc. In our opinion, the worldwide food price shock is a greater risk for western standards of living than the energy issue.

5m Editor