Pork Commentary by Jim Long, October 12, 2010

Corn Price Shock

It was the Canadian Thanksgiving this past weekend.  There were lots to be thankful for, but one item that as hog producers we did not feel thankful for was the USDA Corn Crop estimate that was released last Friday. The USDA forecasted US corn production at 12.664 billion bushels, down 3.8% from 13.16 billion production forecast last month.  The average expert guess was 12.95 billion bushels prior to the report.  Corn a bushel by Monday afternoon had gone up to $5.60 a bushel with talk of $7.00 a bushel being put out there by the corn bulls. The USDA is now projecting the ending US corn inventory at 902 million bushels.  The USDA is now forecasting for this market year an average cash price of around $5.00 bushel – up 60 cents from last month’s forecast.
  • The corn price move over the lasts couple months higher has increased swine cost of production approximately $15.00 per head which is a real margin implosion.
  • It will be interesting if higher feed prices put downward pressure on slaughter weights.  In our opinion, this might lower weights slightly but when packer grids continue to encourage heavier weights there will be little buyer encouragement.
  • We expect these higher feed prices will be a major factor in curtailing much thought of sow herd expansion.  Bankers already reluctant to lend money to swine production will see this jump in feed prices as a great reason to keep the brakes on funding swine projects.
  • When grain producers see $5.00 corn it makes them less interested in feeding hogs.  This will take the edge off small pig demand unless lean hog futures push over $90 which is not inconceivable when June lean hogs Monday were $86.50 per pound.  With $5.00 corn breakevens are approaching 80 cents lean per pound.
  • The corn ethanol subsidization by the US government continues to be a testament to government policy gone astray.  A policy of burning our food to fuel our cars is continuing to disrupt the global food network with little environmental benefit.  It will be interesting how $5.00 corn works in corn ethanol production.  Last time there was a corn price spike some corn ethanol producers went broke and failed to pay their farmers for their corn.
  • In the coming weeks the Southern Hemisphere crops will be planted.  Strong grain prices will certainly encourage plantings.  You wonder at what point the USDA will stop funding land not to be planted.  It’s a rich society that subsidizes corn ethanol at the same time it pays for millions of acres of land not to be planted.  In the coming weeks we expect wild gyrations in grain prices as Chicago traders get their Christmas early.
Other Observations
  • The hog prices in Brazil continue to rocket higher.  Last week in Mina Geras 3.40 R per kg.   Sao Paulo 3.20 – 3.30 kg per R.  These prices work out to be around $2.00 US per kilogram or about 90 cents US per pound.
These prices are fantastic for Brazilian producers as they like North American producers lost significant money during the last downturn.  Just as importantly high prices in Brazil means there is a strong domestic demand and less for export.  Brazil is one of the world’s largest exporters of pork.  High prices there is extremely price supportive for North American pork prices in the global market.  We expect to see strong US – Canada pork exports over the coming three months. Summary Grain prices have jumped.  We expect grain price volatility in the coming weeks.  There will be no swine herd expansion in the next few months as grain prices will discourage any bullishness.  High swine prices in Brazil are going to be positive for North American Pork Exports in the coming months.  With June lean hog’s at 86.50 we expect 90 cents plus in the future.
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This post was written by Genesus