Friday will be another of those big report days for USDA with monthly Cattle on Feed, Cold Storage, Chickens and Eggs and Livestock Slaughter reports being released. The first three will be released at 3:00 p.m. Eastern time. Livestock Slaughter will be released at 8:30 a.m. We will provide key numbers and implications in Friday’s Daily Livestock report.

DowJones reported that the average projection for frozen pork belly stocks on July 31 is 61.3 million pounds. Analysts’ pre-report estimates ranged from 56.0 to 64.885 million pounds. The 61.3 million pounds would be 93% larger than last year and 19% smaller than last month.

We’re convinced that no period in history has seen economic signals shift so quickly and so dramatically for U.S. and Canadian livestock producers. As evidence, just consider the graph of hog production costs and prices below.

First, a note about the computations behind these graphs. There are no hard and fast data about “U.S. costs of production.“ There is no centralized financial records system and even the collections of data in consultants’ and other financial advisors’ hands are not always comparable. Record systems differ. The treatment of depreciation and depreciated assets differs, etc. etc. So, we must use estimates of costs of production.

Steve Meyer uses the estimated costs and returns series published monthly by Dr. John Lawrence and his colleagues at Iowa State University. The series dates back to 1973 and has been a good predictor of output changes. When these estimates said producers were profitable, output increased 12-18 months hence. When they said producers were losing money, production fell 12-18 months later. The estimates and documentation can be found at http://www.econ.iastate.edu/faculty/lawrence/.

The forecasted cost figures in the charts are based on a simple regression model using Omaha corn, Decatur soybean meal, historic basis levels for central Iowa and a time trend variable. Since pigs eat corn and soybean meal for about 5 months, costs were regressed on corn and soybean meal prices for the month of sale and the immediate 5 preceding months. Of those lags, only the prices for the month of sale and 5 months earlier were significant, so the model was re-estimated using only those two prices and the time variable As you can see, the predicted costs are quite close to the actual values as the model has an R-square of .966.

As of Thursday, this model predicts hog production costs in the neighborhood of $87/cwt carcass in 2009. Thursday’s CME Group Lean Hogs futures prices would provide profits in just 3 months through the end of 2009. Just 10 days ago (see Figure 1), the picture was very different. Forecasted costs were below $80/cwt carcass and hog prices were high enough to result in profits for most of 2009. Of course, just 6 weeks prior to that (see Figure 2), costs were predicted to be above $95/cwt carcass and, while not shown in this graph, only June LH at $97.95 on July 1 offered a profit. What will the signals be in the next few weeks?