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Pork Commentary: Road Trip to Russia

by 5m Editor
8 September 2010, at 9:30am

RUSSIA - This week, Jim Long writes from Russia.

Since the end of June, September corn futures have gone from $3.33 a bushel to last Friday’s close of $4.49 a bushel. That is about $1.20 difference. Using the old calculation it takes 10 bushels of corn to produce a market hog. This creates a $12.00 per head increase in swine cost of production or about a 4 cent to 5 cent per pound increase in live weight cost of production. September wheat has gone from $4.64 a bushel at the end of June to a close of $7.08 last Friday. The high price of wheat will pull corn to countries where wheat is used in livestock feeds increasing corn demand. These new price realities are not conducive to swine profitability.

As we wrote, the last couple of weeks we saw firsthand the devastation by drought to the crops in Russia and Ukraine. Now this past week Prime Minister Putin of Russia announced a moratorium on exports of wheat until next year’s harvest. Importers of Russian wheat now have to find other sources. Russia was the number 3 exporter last year. The big question: will these prices be a speculative bubble? In 2008 the grain bubble caught ethanol maker Vera – Sun, chicken producer Pilgrim Pride and others. Vera – Sun and Pilgrim Pride went bankrupt partially due to the fact they locked in large amounts of corn supply at the high of the bubble market. Formally the smartest people in the room were no longer that smart. It is now Game On 2010!

It sure makes you wonder where the US government’s logic is on corn ethanol subsidies and tariff protection. China has banned ethanol production from grain. China can’t see the logic of burning food for fuel.

Other Observations

  • Lean hog futures continue to show strength. Last Friday June 2011 closed at 84.175 – a new life of contract high. Other months continue to show strong prices with every month for the next year averaging near 80 cents lean.

  • If there was ever worry about the strength and viability of the US Packing Industry the current spread between US pork cut – outs of 91.31 and lean hog prices under 80 cents per pound will certainly allay those fears. It appears packer after packer is announcing large or record profits in there pork divisions. We need a dynamic and profitable pork packing industry to have the capital for reinvestment, modernization, fund, retail space, and export. The margin spread today we don’t expect will continue. Triumph will in all likelihood build a second plant. We expect packers like us, farmers can’t stand too much of a good thing and one will break ranks to try to gain market shares pushing farm to packer spread tighter.

  • There are still many empty sow barns in the USA and Canada. We are aware of none being repopulated. This reflects the ongoing fear and lack of capital that underlies our industry. It’s also one of the reasons we expect lean hog futures to fairly capture the profitability scenario over the next twelve months. With US hog slaughter continuing to run around 5 per cent lower year over year. There is little chance considering the biological timetable of swine production that hog numbers appreciably expand in the next twelve months.

  • When we look at the USDA National Daily Direct Hog Prior Day Report we see loads of hogs bringing over 90 cents lean per pound. We also see packer owned hogs average 53.45 per cent lean while the all average total is 54.75 per cent lean.

  • Cash early weans averaged $42.75 while cash 40 pound feeder pigs averaged $55.89 last week on the USDA report. These prices are historically strong. If feed prices stay where they are now we expect to see small pig prices start to move higher seasonally. In sixty days early weans become pigs that will be marketed in the spring.

Summary

A year ago 53 – 54 per cent hogs were averaging 50.92 cents per pound. Last week’s prices 82.88 cents per pound. That is a $60 per head better. We needed it. As we go forward we expect hog prices will stay strong. When we look at global swine markets Canada – USA are the lowest prices currently. This will continue to pull pork out of Canada – USA holding and enhancing prices. We consider the global swine market price an important consideration to follow each and every week. To this end we are initiating the weekly Genesus Global Market Report. It will be on various websites, including Genesus, and e – mailed with weekly country commentaries from Genesus offices around the world. We are in a global interconnected industry. We have to pay attention.