Margins in the US deteriorated precipitously since the middle of May due to both lower hog prices and higher feed costs. In particular, corn has advanced sharply over the past two weeks as weather conditions across the Eastern Corn Belt remains unfavourable for planting with excessive rain. Many producers in Ohio will now have to decide on whether to execute preventive planting provisions in their insurance contracts instead of risking uncertain yields with high fixed costs. Meal has likewise moved higher as a falling domestic crush rate is beginning to tighten cash supplies.

Hogs meanwhile have fallen under heavy pressure as a combination of increased slaughter numbers and heavier weights has raised pork production at a time when domestic demand appears to be waning. The grilling season has been slow to start due to excessively wet weather in the US Midwest and Northeast, while high pork prices have compromised consumer interest even though export demand remains strong.

Margins are now negative in both Q4 and Q1, while just above break-even in nearby Q3. While positive, Q2 2012 margins are below the 20th percentile, indicating very weak profitability for producers through the middle of next year. Strategies should incorporate more flexibility now given the weaker margin projections.

Q3 2011 has experienced a high of $13.38 with a recent low of ($2.06) and the month of May ending with $0.16. The five-year percentile fell from 73.4 per cent in April to 36. per cent for the end of May.

Q4 2011 has experienced a high of $6.39 with a recent low of ($3.61) and the month of May ending with ($1.66). The five-year percentile is 60.1 per cent.

Q1 2012 has experienced a high of $5.80 with a low of ($2.57) and the month of May ending with ($0.90). The five-year percentile is 50.0 per cent.

Q2 2012 has experienced a high of $15.61 with a low of ($1.76) and the month of May ending with $0.76. The five-year percentile is 18.3 per cent.

The Hog Margin calculation assumes that 73lbs of soybean meal and 4.87 bushels of corn are required to produce 100 lean hog lbs. Additional assumed costs include $40 per cwt for other feed and non-feed expenses.

Thank you to Commodity & Ingredient Hedging, LLC (CIH) for the margin data. Please visit the CIH web site to subscribe to the CIH Margin Watch report.