Pork Commentary

Jim Long President – CEO Genesus Inc.

November 18, 2013

Early Weaned Pigs Reach $82

The lack of pigs, lower feed costs and strong lean hog futures have pushed some cash early wean pigs to $82 last week according to the USDA. The average early wean last week was $73.69. Those are really high prices from any historical perspective. We expect it’s not only lower feed costs pushing the market. It appears the PED virus has reached Central Iowa and into Illinois; areas it hadn’t been before. Major outbreaks are occurring in large production groups with many pigs dying. This in itself is creating demand for early weans. Nurseries – Finishers contracted are a fixed cost. If no pigs go into the barns payments are still made. Buying small pigs to fill these barns makes sense for many of the large producers. Even at a loss. Remember Cattle feedlots lose money almost all the time but for many reasons, cattle still go on feed (feedlots have lost money for 30 months!) We have been in the business a long time, all things are not rational. Pigs will go into barns with no chance of making money; they will now and will for some times in the future. In the meantime we expect in three months early wean pigs will be at real high prices – $70 plus average.

PED Virus

PED virus appears to be spreading, several large production systems have gotten it in the last few weeks. It’s far from under control. We expect PED will cut hog production through next summer by 2% overall, this will ensure a profitability of $30 per head through next summer. We still believe that there has been no significant sow herd expansion. The survivors in our business (all of us) have bills to pay and equity holes to fill.

Smithfield

The Chinese buyers of Smithfield had great timing on their purchase. Feed costs have dropped $25-$30 per head since their offer was made; times 15 million hogs Smithfield produces – that’s close to $500 million a year in lower costs. Couple that with the strong hog prices, it’s not hard to see a $750 million plus change in Smithfield’s operating position. That goes a long way to helping make the payments and look smart to the stock market.

Corn Ethanol

The US Government, EPA announced last week plans to reduce the corn based ethanol mandate from 14.4 billion gallons to roughly 13.0 billion gallons for 2014. The EPA reduction will cut in all likelihood 170 million bushels of corn out of ethanol production and put US ending stocks above the 2 billion bushel mark for the first time since 2004-2005! It appears the good times might be taking a lull for grow producers and it will likely quickly stop crop land value appreciation (indeed probably go lower). Cash Corn is about $4.10 a bushel currently, the USDA estimates the cost of production of corn is at $4.05 a bushel. Not much margin to go buy a new tractor iron or farmland in 5¢ a bushel. We expect land rents have peaked and will trend lower. Farmers like planting and just like hog finishers can’t stand an empty barn. Expect lots of crops still planted in USA next year. Some other parts of the world where credit is hard to get and they have little equity, lower grain prices will cut next year’s planting. The bloom has come off Corn Ethanol. The only reason Corn Ethanol survives is the EPA mandate. Otherwise with the US becoming self –sufficient in energy with Oil and Natural Gas production rising rapidly from fracking; it would be over. If the EPA ever allowed national gas to be substituted in the Ethanol mandate, it would be the death knell for Corn Ethanol. We feel bad for the shareholders of Ethanol plants, soon they will be as valuable as a house in downtown Detroit.

Summary

High early wean prices reflect lower feed prices and empty finishing spaces looking for pigs. PED is and will be a market price mover. The drop in the Ethanol Mandate will make more corn available for feed. We expect the hog producers will make $30 per head though next summer.

Print Newsletter 🖨