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Pork Commentary: Drought Pushes Corn to Record Highs

24 July 2012, at 8:39am

CANADA - The cost of producing swine continues to ramp up. The drought that has hit most of the United States continues to spread and the consequences can be seen in December corn futures.

On June 15 December corn closed at $5.06 a bushel. Last Friday December corn closed at $7.95 a bushel. This is a change that leads to an increase of $30.00 to produce a market hog.

The only thing we know about what the future is that it is totally fluid. So many dynamics are at play it is almost impossible to comprehend all scenarios for the swine industry.

Some Observations

There is fear of the future. We are in the Swine Genetics business. We know firsthand customers that have decided to quit breeding in the last four weeks. We expect this is happening in all areas. Most who are quitting right now are producers that produce early weans and/or feeder pigs.

The record high temperatures will increase seasonal breeding problems relative to a cooler summer. We expect an increase in sow mortality also due to the heat. Result: Less Pigs.

The hog industry will be margin challenged with losses over $30 per head for farrow to finish operations when we look at this fall’s potential market prices and costs.

All competing meat and poultry sectors are being cost challenged. Chicken prices are the same as a year ago but now with higher feed costs ditto for turkeys and eggs. We expect higher feed prices will cut production in all poultry sectors – sooner rather than later.

The cattle business is loosing money. Drought on pasture land, higher feed costs for feed lots. We quote DTN “According to the DTN feeding model, live steers and heifers sold this week at $113 lost more than $300 per head. That represents the nastiest bloodbath since before 1996 (ie the models earliest data). Our guess is that cattle feeders haven’t lost so much money this quickly since the massive herd liquidation of the mid 70’s“.

Ugly! Ugly! Ugly! $300 per head loss? We know that there will be cattle hedged on market prices and feed costs but if the whole industry was unhedged some simple arithmetic 654,000 cattle marketed last week x $300 per head = $196 million loss for the week!

We have been told there has been quick increase of light pigs or poor doers being sent to cull buyers. Expensive feed = producers dumping poor doers?

Corn produced ethanol. As the corn crop gets smaller by the day it becomes even more insane that the U.S. government policy mandates the burning of around 6 billion bushels of corn to produce ethanol. Let the market decide corn’s usage not government mandates. The distortion of supply and demand has been a detriment to livestock, poultry, producers, and food consumers. Oil can be used for energy, natural gas for energy, coal for energy, wind for energy, and solar panels for energy. Only corn can produce energy or food. There is no global energy crisis but America is facing a food cost crisis. Corn ethanol mandates should be removed. Economic, Social, National Security, and moral arguments are strong that the misconceived push to corn ethanol must be readjusted sooner rather than later.

The Canadian Grain Corp looks good. Feed could be cheaper in Canada than the U.S.A. in the coming months. Last week it was $13 per head cheaper for feed in Western Canada to produce a hog than the U.S. Midwest. Surplus grain and the cost of transportation will probably keep Canada’s feed cost lower.

Observation: Last Friday Eastern Corn Belt hog price averaged $86.10; Iowa – Southern Minnesota $95.30. A difference of $17 per head. Why the spread? How good is our industries price discovery? Are we trading too few real cash hogs to establish markets?

Summary

Corn and feed prices are devastating. All meat and poultry sectors are in financial trouble. We expect cuts in all meat protein sectors. The wizard ag economists who were predicting last week more hog production in 2013 compared to 2012 are in la la land. There will be a big cut. We are not optimistic when we say the huge devastating financial losses coming in the next few months will lead to the highest U.S. hog prices in history by the summer of 2013.