Canada – Peering into the New Year & Looking for Perspective

As they say what a difference a year makes. Hog producers have gone from zero to hero in the course of the last twelve months and now it appears to be the dirt farmer’s "turn in the barrel".

The perspective if you’re a cash crop farmer in Ontario/Canada

Some excerpts from a recent column of Southwest Ontario’s Philip Shaw

"Under the Agridome"

"For many years, I farmed and sold grain when prices were below or close to the cost of production. That's the way it was post-1981 when I started farming. So, with the ethanol boom changing the game five years ago, I moved into delusional territory. I was not used to demand-driven markets; $7 corn was delusional. I've said it many times. It wasn't our father's market anymore!

Those days seem to be gone now, as a bearish tone has taken over grain markets. So "Maybe this is your father's market again, with onerous supplies and with the unending hope of finding some glints of sunlight. Hopefully I'm wrong."

The perspective if you give some consideration to inflation

Some excerpts from a recent column of DTN Contributing Analyst Southwest Elaine Kub "Kub’s Den"

$4? $3? Corn is Already Cheaper than you Think

"The last time the front-month corn futures contract was below the $4 anchor was August 2010, but obviously the market has spent the majority of its history with a lower nominal price tag. In the 30 years between 1973 and 2003, the price tag of corn rarely strayed below $2 or above $4. So if it's still above $4, still valued in the top range of historical experience, should it really feel like our benchmark feed grain has become "cheap?"

Yes. It's already cheaper than you think. Comparing today's prices to 2010's prices is probably valid because inflation has been so minimal since then, but if we look further back, the purchasing power of the dollar itself has changed so much that any asset's price tag from 50 years ago is measuring that asset's value in wildly different units than what the 2013 U.S. dollar represents today. Between

November 2010 and November 2013, the Consumer Price Index (CPI), which is the government's official measure of how the cost of living inflates from one time period to the next, has only changed 6 per cent. But between the time JFK was shot and today, the CPI has changed by 657 per cent. So to give our minds some anchors that are more rational than just the first digit of the price tag, let's compare inflation-adjusted prices through the past several decades.

In the corn market, for instance:

• The corn being harvested in November 1963 when Kennedy was killed would have been sold at the elevator for around $1.16 per bushel, and that was right in line with the five-year average price expectation. Adjusted for inflation, that value would have felt like selling corn for $8.76 today.
  
  
• To put it another way, receiving $4.20 for corn today would feel like receiving only $0.56 per bushel in 1963. In like-for-like dollars, corn is valued at half as much today as it was 50 years ago.
  
  
• The "high" harvest price tag in 2012 of $7.48 was actually cheaper, in inflation-adjusted 2013 dollars, than any of the harvest prices between 1971 and 1980. The present price near $4.20 is cheaper than what farmers received during most harvest timeframes prior to 1993.

For the hog market:

• In 1973, the price was $43 per hundredweight for lean hogs. That would be equivalent to $218 today.
  
  
• To put it another way, today's price would feel like selling $17 hogs into a $43 market. In like-for-like dollars, the present hog price is only 40 per cent of what it was 40 years ago.

Using corn as the benchmark again, growing an average 67.9 bushels per acre in 1963 and selling it for $1.16 per bushel would have netted a farmer more than $78 per acre, equivalent to almost $600 per acre in 2013 inflation-adjusted dollars. That level of revenue is pretty close to where it is today.

The perspective if you look at corn like a hog farmer

Some excerpts from a recent column By Chris Hurt, Purdue University economist

"Hogs provide nearly $7 per bushel corn value"

Grain farmers are looking for new corn uses now that ethanol is not big enough. Low corn prices are encouraging end users to seek ways to add value to corn, which is now below costs for most corn growers. What about hogs? For the 2013/14 corn marketing year, hogs are offering an estimated $6.85 per bushel if the profits from hog production are assigned to the value of corn.
While selling corn at $6.85 per bushel is appealing to cash grain farmers, it is importa

nt for them to recognize that the high feed prices resulting from the 2012 drought caused large losses. In the current profitable period, it will take until June of 2014 to recover the losses After many years of often high and very volatile feed prices, the future appears brighter for all of the animal species with feed prices moderating over coming years. With moderation should also come less volatility. The pork industry is well positioned to take advantage of several years of favorable consumer expansion driven by improving domestic consumption and foreign demand.

So as always, lots of different perspectives. So what’s a hog producer to do? Seems to me the ones that have evolved a business model and stuck with it have succeeded as well as any. Here in Canada for many that model includes land, the first truly integrated model of land to corn to hogs to manure to back around although for good stretch under siege has proven highly sustainable as some of the above perspectives attest to. The other key to success has been ensuring that you’re always better than average.

For the last number of years many producers have been hunkered down on survival mode, reluctant "to touch the levers" of their operation. While perhaps understandable this is not also without a cost. Keeping yourself always apprised of the latest technology and best practices to maintain your better than average edge always remains a key ingredient to success. Make sure you are! Wishing you and yours a Most Happy & Prosperous of New Year.