CME: When Will Hog Operations Respond to Feed Costs?

by 5m Editor
31 July 2012, at 9:00am

US - Monday’s weekly Crop Progress report from USDA was more of the same — deteriorating corn and soybean conditions that are now rivaling the worst on record, write Steve Meyer and Len Steiner.

As of Sunday, only 24 per cent of the nation’s corn acres were in good or excellent condition. That compares with 62 per cent last year and 26 per cent last week. This week’s figure is also the second lowest on record — second only to 1988. On the other end of the spectrum, 48 per cent of corn acres were rated in poor or very poor condition. That compares to only 14 per cent last year and 45 per cent last week. Corn maturity patterns continue to run well ahead of “normal“ pace, pushed along by early planting and an abundance of heat units this summer. As of Sunday, 94 per cent of the corn had silked. That compares to only 78 per cent at this time last year and a 5-year average of 77 per cent for this date. Perhaps more telling is that 13 per cent of the corn crop (vs. 3 per cent last year and 3 per cent for the 5-year average) is already in the dent stage. At that point there may be some kernel filling that will add to test weights (ie. the weight of a bushel of corn or the density of the kernels) but even that impact will be small. Dented corn is pretty much done and all indications are that we will continue to run ahead of the normal pace on this measure as well.

The news was no better (and no less expected, we might add) for soybeans where 37 per cent of the crop was rated in poor or very poor condition, up 2 per cent from last week and far beyond the 12 per cent that was in these categories last year. Only 29 per cent of soybean acres were rated as good or excellent last week, far below last year’s 60 per cent. Soybeans, too, are much farther along in their maturity, primarily due to being planted so early this year. 88 per cent of the crop (vs. 72 per cent last year and a 5-year average of 75 per cent) is blooming. Those same comparisons for setting pods are 55 per cent this year vs. 29 per cent last year vs. 25 per cent over the past 5 years. Of additional concern in most areas will be the degree of pod filling. Beans per pod is a major yield determinant.

How quickly will hog operations respond to higher feed costs? Good question and one for which we have very little immediate data. Corn, soybean meal and lean hogs futures on Monday indicated that farrow-to-finish hog operations were facing losses of $6.54 per head for all of 2012 (and $14.40/head for the rest of this year!) and $11.12 per head for 2013. As can be seen in the top chart, when losses occur, the breeding herd usually declines from December of the previous year in the very year in question. We don’t have much track record from which to predict a magnitude for the potential declines but larger losses only drove 3 per cent cutbacks in 2008 and 2009. Pork producers’ financial conditions are not nearly as good now as they were at the end of 2007, so we would expect a quicker response but smaller losses may leave the sow herd decline in the 2 per cent range more akin to 1994 and 2002. Whatever the potential magnitude, the data say it hasn’t gotten rolling YET. Sow prices have plunged the past three weeks, indicating ample offerings. Sow purchases (from the mandatory price reporting data) have been 15, 22 and 12 per cent higher than last year the past three weeks. But notice that these data have been higher than last year for most of 2012 — especially relative to sow slaughter, which finally went above the year-ago level (by 2.8 per cent) just two weeks ago. We expect the past two weeks to show a marked increase in FI sow slaughter — one that will likely continue into the fall.

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