The USDA data confirms that since September 2006 (last 6 months) the breeding herd has been static. We do not think it is a coincidence that September was, when higher feed costs, despite good crops, was becoming a fact of life, eroding swine profit margins.

The USDA data confirms that since September 2006 (last 6 months) the breeding herd has been static. We do not think it is a coincidence that September was, when higher feed costs, despite good crops, was becoming a fact of life, eroding swine profit margins.

We continue to expect no growth in the breeding herd going forward. Any new construction will be negated by exiting with a net sum zero. High feed prices, higher construction costs and hog prices that are currently not astounding will hold breeding herd expansion in check. We expect the combined US-Canada breeding herd to decline.

In some ways confusing numbers, how do we have 4% more hogs over 180 lbs this year compared to last (similar to slaughter numbers since March 1st) and the inventory shows less than 1% year over year under 180 lbs. Doesn’t really make sense and we do not know how to explain it. We will soon get to reality. The March 1st 180 lb plus inventory should be marketed by mid-April. If the report is correct, weekly hog marketings should quickly decline to be similar year over year. We do not believe 4% year over year production is possible with a breeding herd that is 1% greater. We expect US marketings will be quite similar year over year through the spring and summer. Lean hog prices are going to see a rapid cash rally into the mid 70’s and we expect some 80’s.

A little over 400,000 more pigs in the pig crop compared to a year ago accomplished by 1% more sows having slightly bigger litters. The 2% increase in the pig crop certainly doesn’t show a cut-back in production during the Dec-Feb time period. The slow down appears to be reflected in March-Aug farrowing intentions which are even with a year ago.

Summary

The breeding herd has not grown the last six months. The market inventory, only 1% higher than a year ago, will deliver good profit margins through the spring and summer. We believe the report is bullish, as there are no surprises that are negative. The consequences of the report reinforce the bullish prices in the 70’s that lean hog futures project over the next few months. Underlying price strength continues to be delivered by growing markets such as pork exports (+22% January) and population growth.

USDA Report Prospective Plantings

Nothing has impacted livestock (swine) production more in the last several months than the rapid price increase in grain (corn). On Friday morning the USDA released a survey of prospective planting intentions. Corn acreage came in at 90.45 million acres – 15% more than 2006. An increase that exceeded the average guesser’s by 2.5 million acres. The reaction to the report was fast with corn dropping the allowable limit 20¢ bushel on the nearby futures.

Cannot say we are surprised. Several months ago we expressed the belief that a 12 billion bushel US crop was in the cards. Give farmers profits and they will rapidly figure how to produce more. The proof is in the pudding of this USDA report.

What are planting intentions in the rest of the world? Mexico is expecting to plant nearly 5 million more acres of corn. Russian visitors that we recently hosted (one with 140,000 acres) said that their country was planting more. Everyone? Everywhere? How much more in the world?

We are not sure how this translates into an end price, but greater production usually leads to low prices. Ethanol in the US is a factor for US consumption, but countries like Mexico and Russia are not into Ethanol (they have oil). What the US high prices are, in fact, doing is increasing grain production throughout the world. In the end, foreign buyers will become less reliant on US grain for importation. The US is, in effect, taking itself out of the world market for grains. This could be regretted.

Conclusion

There is going to be record grain production in the US in 2007, this despite millions of acres still being paid to stay out of production (conservation program). The US potential for grain production has not been reached. Some will speculate about weather scares affecting plantings and yields. The odds are small that any significant weather disturbances will prevent the corn crop from exceeding a record 12 billion plus bushels.

Corn prices could stay high over $3.00 a bushel but the US planting intentions make it hard for us to believe that $4.00 plus corn will be seen in the US Midwest in the coming months.

2007 world grain production will exceed the most wild predictions. Nobody can produce more than farmers with unrestricted markets and profit potential. We expect the increase in world grain production will far exceed US increased ethanol usage. Supply and demand could lead to prices significantly lower than grain futures last Thursday.