What we characterized as a “small decline in projected hog feed costs” last week is developing into a potential buying opportunity for pork producers. The price declines of the past week for both corn and, to a lesser degree, soybean meal futures, may develop into one of the best chances we will see to lower feed costs for the coming year.

Figure 1

Figure 1 shows my feed cost index calculations updated to include Thursday’s close for corn and soybean meal futures. I have argued recently that producers must be prepared to take advantage of what once would have been seen as small declines in feed costs and prospective feed costs. We saw one of those times in mid-March (the pink and red lines in Figure 1) when the collapse of Bear Stearns forced some fund managers to liquidate commodities positions to raise cash.

The feed cost index’s decline in the past two weeks has been larger than the March reduction, so I think producers should be sharpening their pencils and marshalling the necessary resources (i.e. credit line, margin money, etc.) to make a move.

Figure 2

Note that I did not say “Go!” Figure 2 shows the daily chart for December corn futures – and it looks much the same as every other chart all the way through September 2009. All of them broke through the 50-day average this past week. All of them broke through a major support line off spike lows in March and May this past week. All of them have a chart gap within 10¢ below Thursday’s close. All of them have another resistance-support objective in the neighborhood of $6.00.

That is a lot of usage of the word “all” even for grain contracts that, quite understandably, are usually similar within a crop year.

Figure 3

None of these charts say that the decline is over, and my windshield survey of the Iowa, Illinois and Missouri corn crops this week say there is still downside potential. Iowa’s crop has no doubt done some catching up and, while still 7-10 days behind by most estimates, is looking much better. Western and central Illinois corn crops look very good. Northern Missouri is very spotty with some excellent-looking corn and some that may not make good silage. Still, the major corn areas seem to be improving, and there could be some more downside in this market. Be ready.

One side note – Don’t wait too long. The corn market has bottomed out in early September each of the past two years. Those of us who were waiting for “harvest” lows got fooled. It looks like it is the southern Corn Belt harvest that sets the timing these days.

Adjust to New Pig Values

Have you adjusted your management and decision-making to the new realities of the value of pigs? The changes we have seen in feed costs, sunk costs, financial risk, etc. should be driving some changes in our attitudes to a host of management decisions.

Consider the following total cost figures for market hogs from Iowa State University’s (ISU) Estimated Costs and Returns series and my forecasts based on the ISU parameters:

• May ’06: $101.67
• May ’08: $154.91
• May ’09: $186.40

May 2008 costs are 53% higher than one year earlier and May 2009 costs will be 20% higher than current costs.

Those numbers mean that all of the valuation losses that can beset pigs will be much more painful. Death loss, morbidity, dead on arrival at plants, non-ambulatory pigs, carcass condemnations – all of them will be far more painful now and will be even more so in months to come.

Figure 4

Further, since these figures represent cost numbers and not foregone market value, they are money that you have already spent and, perhaps, borrowed so they can represent even more interest costs.

Have you done a critical evaluation of your “loss-preventing” strategies in light of these higher costs? I know you have plenty on your management plate, but this is one area that should probably be added somewhere near the top of your list. The consequences are going to get larger.