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Pork Commentary: USDA Crop Protection Good News

by 5m Editor
28 February 2012, at 11:59am

US - The USDA last week released a 2012/2013 crop year projection for a record 14.27 billion bushels of corn. The USDA is predicting farmers will receive $5.00 per bushel in the 2012/2013 crop year, writes Jim Long.

The USDA is aggressive in projecting 94 million corn acres to be planted and a yield of 164 bushels per acre. The 14.27 billion bushels projected is 1.2 billion bushels more than the previous record in 2009.

Demand for corn will be 13.47 billion bushels with feed usage and exports up while corn for ethanol is expected to decline.

Our observations from travelling in other countries are that corn – wheat, etc... plantings and yields will push higher as historically high grain – oilseed prices stimulate production.

If the USDA is correct at $5.00 a bushel 2012/2013 it’s about $1.00 a bushel lower than in 2011. A $1.00 per bushel decline will drop the cost of production $10.00 per hog. That is definitely increasing hog margin potential.

We have been at this game long enough to know that crop projections in February are far from crop in the bin. Weather is the most obvious wildcard between now and November. We believe the USDA is correct on the aggressive nature of planting intentions. High grain prices and strong capital position of farmers will lead farmers to plant not only more acres but have the financial wherewithal to push for higher yields. The old saying "surest cure for high prices is high prices" is coming into play.

Corn Ethanol

The USDA is projecting less corn for ethanol in the coming crop year. It is interesting that reports show a loss of 25 cents per gallon for corn ethanol currently. The major subsidies that back stopped ethanol ended January 1st. What does all of it mean? We don’t know but it appears the Golden Age of the Corn Ethanol industry is over, doubt if new corn ethanol plants will be built, while some small ones might not survive without getting free money from US taxpayers.

Hog Markets

Summer lean hog futures reached over $1.00 a pound last week. These are record highs for this market year. The market is bullish. US feeder pig prices continue to be strong with 40 pound feeders reaching $95.00 (average $85.46).

The latest USA – Canada combined swine industry inventory was released last week.

United States – Canada
1,000 head
2007 2008 2009 2010 2011
Kept for breeding 7745 7457 7182 7090 7115
Market 74242 71872 69540 69730 70836
Pig Crop 37644 36521 35455 35619 36437

Production of swine is increasing with the breeding herd holding steady from a year ago but productivity gains are increasing total production. In 2007 there were 74.242 million market hogs in inventory, this year there is 70.836 million or over 3 million fewer hogs.

From 2007 to 2012 the USA – Canada people population has increased a combined 14 million people. Assuming 45 pounds of pork per capita consumption and cowboy math of 4 people consume on average the equivalent of one market hog per year. Our back of envelope calculation tells us the 14 million increase of people since 2007 requires 3.5 million hogs per year to meet their pork needs. That is an increase of demand for sure!

As we go forward maintenance and/or increase of pork consumption while the people population grows continually increases the need for more pork production.

The world population works in much the same manner. With an estimated 7 billion people currently the world’s growth is at 1.14 per cent per year or about 80 million more people a year. Many will eat pork especially if they have money. More people – more customers. The global demand for food and pork is growing.

Europe

One of North America’s biggest competitors in the world pork export markets is Europe. The end of year inventories from several European countries is now coming in. The results are striking, high feed prices leading to significant financial losses has lead to major liquidation.

By Country - % year over year decline
SOWS TOTAL PIGS
CZECH REPUBLIC -19% -19.4%
DENMARK -3.79% 0.4%
GERMANY -1.8% 1.9%
SPAIN -0.2% -0.3%
FRANCE -2.5% 0.2%
ITALY -8.0% 0.3%
NETHERLANDS -0.7% -0.8%
POLAND -15.3% -11.6%
SLOVAKIA -4.7% -15.6%


Europe Total (not all countries reporting)
TOTAL SOWS -4.7%
TOTAL PIGS -2.4%

The end result looks like the European swine inventory will be lower by about 3 million head, when the dust settles and all countries report. This will be supportive for European hog prices and for North American producers the lower volume of European pork production means less pork on global markets. The scenario is price supportive.