CME: Quantum Changes in Feed Costs

by 5m Editor
1 August 2012, at 8:01am

US - To put yesterday’s discussion of potential sow herd liquidation in context, consider the charts below.

The first chart shows historic prices and costs for Iowa farrow-to-finish operations per Iowa State University’s longrunning costs and returns estimates. Cost predictions for the remainder of 2012 and 2013 are based on a regression of those historical costs on corn and soybean meal prices and futures prices for those two items as of Tuesday morning at 7:00 a.m. The Future-Implied Ia- Mn hog price is based on Lean Hogs futures at the same time. The model assumes cash purchases of all feed ingredients and cash sales of hogs—no hedging or other risk management activities are included.

It is obvious that 2012 has turned sour big time. Back in February, this model was showing profits of nearly $19/head for 2012. Producers felt good about the future. The sow herd was growing slowly with gains of just under 1 per cent, year-on-year, in December 2011 and March 2012. The June herd was 1 per cent larger than last year.

The model now shows losses of nearly $8/head for the year and indicates monthly losses of $23, $33, $39 and $34/head for September through December. Profits in 2013, based on current futures prices, are even worse with the average being a loss of $12.23/head.

But the biggest reason that the industry may move quickly from slow expansion to liquidation is its precarious financial position. The lower chart shows the accumulated profits of an average Iowa farrow-to-finish operation on a per head basis since January 1991. Dr John Lawrence, former extension livestock economist and now assistant dean at Iowa State, first used this back in the crisis of 1998. The measure simply adds the profit earned by selling one pig per month over the entire time period. Think of it as the balance of a savings account into which the return to one pig is placed each month.

As can be seen, the quantum changes in feed costs of 2008 and 2009 drained nearly 80 per cent of the profits that had been accumulated as of September 2007. Further the “good“ years of 2010 and 2011 did not even allow the recovery of half of the ‘08-’09 losses (a level represented by the red line). And current corn, soybean meal and hog futures prices indicate that this measure will set successive new lows in October, November and December of next year. While this cost crisis is not the permanent shift of 2008 and will likely last, at least at this severe level, until next year’s crop is harvested, we expect a quick reaction due to this lack of financial resources. How large the reaction will be remains to be seen.

Further Reading

Go to our previous news item on this story by clicking here.