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Pork Commentary: Grain Prices Collapsing

by 5m Editor
22 July 2008, at 11:12am

CANADA - This weeks North American Pork Commentary from Jim Long.

Markets made some major moves last week. Corn dropped 80¢ a bushel on September futures, while soybeans dropped $1.45 a bushel. In the last two weeks, the decline in corn and soy meal has lowered cost of production for a market hog about $20.00 per head. Big time change in the right direction.

Other Observations

US Acreage Estimates (Million acres)
2006 2008
Corn 78,377 87,327
Soybeans 75,522 74,533
Wheat 57,344 64,457
Total 211,243 225,317
  • Total US planted acres in corn, soybeans and wheat are about 14 million acres more than two years ago. It’s a testament to what high prices can do for supply. If prices stay above $4.00 bushel for corn expect more acres in 2009 as conservation land and set asides will be released by the politicians. America cannot produce its own oil but it sure can ramp up food production to keep a lid on the average American’s cost of living.
  • Last week, the European Union released their grain production estimates for this crop year. Low and behold; more grain. Up 15%, 295.9 million tonnes total and almost 45 million more tonnes than last year. European Union corn production is projected up 22%. The 15% increase is being accomplished with yields up 10% and area planted up 5% (plus 5 million acres).
  • China released their projected summer grain production last week. Up 3.04 million tonnes to 120.41 million tonnes.
  • More crop in EU, Ukraine, Russia, USA, Canada, Mexico and China – trend line is more.
  • Global meat production is declining pounded by high feed prices – less cattle on feed, chicken production cutbacks, swine production cutbacks. More grain, less grain demand. US corn exports are not meeting expectations. More supply – lower demand. The corn ethanol insanity is losing its support of environmentalists and many politicians. Take away the ethanol tariff protection and their subsidies; put them on a level playing field with livestock producers. They cannot compete.
  • A couple of months ago, the US was using 9.7 million barrels of oil a day. Now 9.3 a day. Any wonder the price of oil declined last week? You think $145 barrel oil is only altering US consumption patterns? Not likely. Everywhere in the world is cutting back.
  • Latest polls indicate that 75% of Americans support off-shore drilling. Hit people in the pocketbook and affect their lifestyle and see attitudes adjust. Paying people to not plant land we suspect would poll similar numbers. Consequence – we expect more acres planted in US in 2009.
  • If we hear one more time pork demand in China is being triggered by the Olympics, we are going to scream. There are about 1.1 billion people in China. Maybe there will be 500,000 to one million visitors for the Olympics. One million would be less than one tenth of 1% of China’s population. These visitors do not eat pork in their home countries? It’s irrelevant. It’s an urban myth similar to the fallacy on bacon and tomato sandwiches. All data we see shows US belly disappearance (bacon) hardly alters seasonally. The reason US belly prices go up in the summer is there are less bellies due to smaller slaughter. It’s not tomatoes. It’s less hogs (bellies).
  • Further convoluted logic – we read the economists’ calculation that US pork exports have increased market hog prices by $30 to $40 per head. We also read from the same economists that Canadian hogs are hurting US prices. Question: What would US pork exports be if not for Canadian feeder pigs and hog imports 10 million head. If the Canadian pigs were not available for US slaughter obviously US exports would be less. Taking a step further, would then US hog prices be lower? Abracadabra – Canadian pig imports increase US exports, increasing US prices and profitability. Convoluted probably, but no more than the simplistic linear logic of economists – pig imports bad – pork exports all good. Its not than simple.
  • Probably never been better to be a sausage maker. Sows 15-20¢ lb. Market hogs 50-55¢ lb liveweight. Not sure if the spread between sows and market hogs have ever been greater (35¢ lb). Pork retail prices are reported to be higher the last year. Sow price is half. Got to believe sausage makers are buying inputs for half and selling the same price as last year. The spread in price is because sow availability is so high. Sow slaughter is running over 10,000 a week higher than last year. Sausage is mostly sold fresh, not frozen. Shelf life is 6 weeks. We can slaughter more sows but there are limits on how much sausage can be sold fresh. We have reports of barns being rented to hold sows for later slaughter. Ongoing liquidation is major. We are taking 10,000 plus sows out of production a week. Every week’s liquidation equals 150,000 – 180,000 less market hogs next year.
  • Spain has about 3 million sows. It’s the third largest sow herd in the world. Currently prices are 1.27 Euros per kilo liveweight (89¢ US lb). Sounds good, doesn’t it? Unfortunately for Spain’s producers, we understand the cost of production is over $1.10 US lb. Reason – high feed prices. The other currency adjustment – the Euro used to be .9 to the US dollar, now 1.6 to the US dollar. All costs adjusted, it’s a nightmare. They are losing over $40.00 per head. Feeder pigs in Spain are 20 Euros 20kg ($30 US). Cost of production 43 Euros 20 kg ($69 US). Loss. Liquidation will be continuing.
  • The $20 per head we earlier talked about in feed price savings over the last 2 weeks can be seen in the DTN feeder pig calculation. Two weeks ago, it calculated you could pay $5.00 for a 45 lb pig, last Friday $25.39. The market always follows this arithmetic. Good news for small pig producers. We expect further improvements and we believe finishers believe the same. It appears many finishers are quickly trying to buy ahead at today’s prices. A real sign that market movers see prices’ upside. These finishers know that $5 early weans mean $60 early weans by December.

Summary

Liquidation of the sow herd is at a major rate. Feed prices have declined. When we look at total global grain production and what we believe is decreased demand from the poultry and livestock industries throughout the world, we see further price decline. We certainly believe we have seen the high for grains, barring some weather catastrophe. US May exports for beef, chicken and pork were all at record levels. Supply and a cheap US dollar are hammering US meats into many markets. The US is the bully boy of the global meat trade. It’s leading to further price increases as chicken, beef and pork supply declines.

5m Editor