American Hog News USDA

[mikey]

Market Preview: Pork Exports Have Ups & Downs
US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.



US pork exports for May were, as expected, significantly lower than one year ago, with shipments to virtually all major US markets falling relative to last year. Total US pork exports were 231.2 million pounds, product weight. That is 34 per cent lower than last year, but remember, May of 2008 is the all-time record US export month at 350.4 million pounds, product weight.

Shipments grew on a year-on-year basis for only two major US markets: Australia (+22.1 per cent vs. 2008) and, surprisingly, Russia (+8.2 per cent from last May). The Russian figure is a surprise given the country’s ban on meat imports from several states in the wake of the H1N1 influenza virus outbreak. Those restrictions, however, always allowed shipments from some states with pork packing plants and Russian buyers apparently took advantage of those opportunities.

The largest year-on-year reduction was, as expected, in shipments to China. We shipped 95 per cent less pork to China this year than we did last year in May. A bit of a surprise was the drop in shipments to Hong Kong (down 71 per cent from last year) given that Hong Kong never officially stopped imports from the United States. Many observers, including me, had guessed that trade with Hong Kong had grown in order to satisfy buyers in China. But that was not the case – at least in May.

The other mild surprise was that exports to Mexico were down only 5.7 per cent from last year. But May 2008 was the first month of a recovery of shipments to Mexico and the year-on-year comparisons may get worse this summer unless business with Mexico picks up sharply. I have heard anecdotal reports of a rebound, but I don’t think “sharp increase” would be appropriate – yet.

Even shipments to Japan were lower, year-on-year, in May, falling by 15.7 per cent. The good thing, as always, is that Japanese buyers continue to buy high-value products. The value of May exports to Japan fell by “only” 6.4 per cent. Japan’s gate price mechanism, whereby the average value of a container of pork product must exceed the gate price to avoid a tariff, is a major driver of this high-value slant for Japan’s purchases.

Year-to-date, US exports are now 14 per cent lower than in 2008 (see Figure 1) and that number could worsen in the next three months as we compare this year’s performance to huge months last year.


Variety Meats Sales Encouraging
Year-to-date export value, a more important driver of hog demand than volume alone, is now 7.8 per cent lower than last year and a primary reason for soft hog demand and lower butcher hog prices.

Pork variety meat exports continue to be a bright spot with year-to-date quantities up 43.5 per cent and year-to-date value up 40.6 per cent. The primary driver of that growth has been Mexico where variety meat shipments thus far in 2008 are up 95 per cent in volume and 84 per cent in value. In fact, variety meat exports to Mexico in May were 68 per cent higher than last year and the value of those shipments was 49 per cent higher than last year.

This, plus the smaller-than-expected drop in muscle meats shipments to Mexico, tells me that the main driver of lower exports was the Mexican economy and, quite possibly, the impact that the H1N1 influenza virus outbreak had on the economy during May. Take most of a week out of any country’s economy and you very likely have a significant impact on consumers’ incomes and expenditures. This reduction in pork exports and increase in variety meat exports could well be simply a symptom of less money to spend.


Feed Costs Ease
Finally, last week’s World Agricultural Supply and Demand Estimates provided some more respite from high feed costs. USDA is now forecasting a 12.3 billion bushel corn crop and 1.55 billion bushels in storage at the end of the 2009-2010 crop year. It is also forecasting a 3.26 billion bushel soybean crop with 250 million in 2009-2010 year-end stocks – much higher than previously predicted levels for this fall.

Those estimates, plus the acreage estimates of June 30, have pushed new crop corn $0.60/bu. lower and new crop soybean meal $20/ton lower. The impacts on forecast feed prices (Figure 3) and breakeven hog production costs (Figure 4) have been dramatic. While losses of $2.13/cwt. for the next 12 months are no cause for celebration, they beat the early June estimates by a mile – and may be critical for some producers who are willing to lock in at least some of the profits being offered.

[mikey]

CME: Pork Packer Margins Dismal All Year
US - Anyone wondering about the reasons behind Smithfield Foods and Tyson Fresh Meats idling pork plants on Monday need only look at the graph below, says CME's Daily Livestock Report for 14 July.

Pork packer margins have been dismal all year but have hit their lowest level in our data set which goes back to 1992. The $5.31/head for the week of July 4 is the worst ever and plenty good reason for a lack of enthusiasm for operating plants. Smithfield’s Sioux City, Iowa and Sioux Falls, SD plants were reportedly dark on Monday. Those reports came from dealers and producers who supply the plants as the company does not comment on operations. Tyson Fresh Meats’ Columbus Junction, IA plant was also dark on Monday and that was confirmed by the company. Monday’s slaughter was estimated at only 360,000 head, compared to 423,000 on year ago.

It should be pointed out that temporary shutdowns of pork slaughter plants are not terribly unusual at this time of year. Packer margins are usually near their lowest level of the year in the summer months when hog supplies tighten and hog prices rise. Taking a day off usually allows some much needed maintenance work to be done and saves the company some bucks. We wouldn’t be surprised to see some more of this in the next few weeks if margins stay this poor.

The packer margin graph represents gross, not net, packer margins. It is simply the value of the carcass less the value of the live animal plus the value of the carcass by-products such as fat and organ meats (often referred to as "variety meats"). Packers must still pay all non-livestock costs from this margin and those are estimated to be anywhere from $16 to $22 per head, depending primarily on whether the plant runs single or double shifts.

What is so concerning about these margins is that they have occurred with very low hog prices. And the lesson there is that cutout values have been positively awful — especially for this time of year. In fact, the cutout value for the week of July 4 ($54.65/cwt carcass) was the lowest so far this year. While last week’s May export data was not as bad as some had feared, the H1N1 influenza export demand problems (whether market-driven as in Mexico or politics-driven as in China and Russia) have still put 3% or so of U.S. production back on the U.S. market. Add another 1.8% or so for higher-than-expected slaughter and 1% (and perhaps more) for higher slaughter weights, and you have a huge supply surge that can only be moved at lower prices. So, at a time when cutout values are usually making annual highs, they are making annual (at least so far) lows this year.


But there has been a positive development. Figure 1 below indicates that barrow and gilt slaughter weights have finally declined, falling 2 pounds to 197 pounds the week of June 26. That puts weekly weights within 3 pounds of last year instead of 4 and 5 pounds higher as they have been for much of the summer. Producers have been trying to get weights down and are apparently making some headway but backing up 50-60 thousand head for one day will work against the reduction in the short run. Lower feed price will slow the trend in the longer term.

[mikey]

CME: Pork Cutout Values Increase 11 Per Cent
US - Weekly average pork cutout values rose over $6/cwt or 11 per cent this week (see Figure 1) to provide some of the first good news that the meat and poultry business has seen in a while, according to CME's Daily Livestock Report for 17 July.

The increase was driven by a second VERY short week of FI hog slaughter. Last week’s short run was not much of a surprise since it shared the holiday impact with the week of 3 July. But this week’s run of only 1.954 million head was the smallest non-holiday weekly total since the week of 14 July 2007 when FI slaughter was 1.951 million head. The temporary closings of one Tyson plant and, reportedly, two John Morrell (Smithfield) plants last Monday was a contributor to this shortfall, of course. We had expected slaughter to fall relative to year-ago levels following the Fourth of July holiday but nothing like last week’s 8.7 per cent year-on-year decline. Pork packers have thus far taken this opportunity to get healed up a bit from the margin beating they have been suffering. Cash hog prices (based on the daily national afternoon purchased swine report — HG 203) began creeping up by about $0.50/cwt per day on Wednesday but made no large moves.

After dropping sharply before the holiday, hog weights have increased again the past two weeks (see Figure 2), suggesting that we may have backed up a few pigs with lower weekly slaughter runs. Last week’s average weight of 200 pounds were the heaviest on record for this week, breaking the record set in 2007 by 2 pounds. Barrow and gilt weights from USDA’s mandatory price reporting (MPR) system (report HG- 201) show the exact same pattern as the weight of all hogs in Figure 2. The average weight of MPR hogs (which includes only barrows and gilts from packers subject to mandatory reporting) last week was 199 lbs., 3 lbs. heavier than last year and 1 lb. higher than the previous record for MPR pigs, also set in 2007.


We have heard nothing of plant closures this week. Of course, the rise in cutout values reduces one of the incentives for shutdowns. It will be interesting to see how aggressively packers bid for hogs given this increase in cutout values. Historically, they have not been able to stand prosperity for long but this year’s profit pain may slow their "pig chasing" a bit.

The other quite interesting number in this week’s table is the quote for Omaha corn — $3.02 per bushel. And we found another source for an Omaha corn price that says $2.98 per bushel. We are not sure why the quotes are different but we know this: It is the first time since October 2007 that Omaha corn prices have flirted with the idea of beginning with a "2". Some extensive driving over the past few weeks (Iowa, Missouri, Kansas and Ohio) leaves us impressed with the condition of both the corn and soybean crops — but they are no doubt late. Both crops need heat units and central Iowa saw some near-record low temperatures Thursday night. Late development and cool weather mean that the date of the first frost will be very important.

All of this is good news/bad news for the pork industry. Good since it means lower losses but potentially bad since it also reduces the incentives to make the herd reductions needed to get back to profitability.

[mikey]

Canadian Pork ‘Bail Out’ Would Hurt US Producers
US - An emergency government subsidy program for the Canadian pork industry proposed by the Canadian Pork Council would have a "lethal impact" on US pork producers, according to the National Pork Producers Council.



The CPC has asked the Canadian government to pump $800 million into the country’s pork industry. The key component of the program is a loan to pork producers – to be repaid over 10-15 years – of $30 for each market hog. A second component would provide $500 for each sow culled plus the market value of the animal.

The proposal would artificially prop up Canadian pork production and, according to Iowa State University economist Dermot Hayes, US live hog prices would be approximately 7 per cent lower than otherwise would have been the case.

"Such a subsidy program would have a lethal impact on US pork producers," said NPPC President Don Butler. "NPPC is extremely concerned about such a program, which will shift financial pain to US producers, who already have lost an average of more than $21 per hog since October 2007."

Mr Butler pointed out that while the program is described as a "loan," it is unlikely that commercial banks would make unsecured, subordinate loans to Canadian pork producers at a time when they are losing money. "The program is really a cash bailout," he said.

"NPPC is keeping all options open to address this issue," said Mr Butler.


 

[mikey]

Weekly Outlook: Focus on Yield Potential
US - Prices of corn and soybeans declined sharply during the last half of June into early July. December 2009 corn futures declined from the $4.70 area to under $3.30 while November 2009 soybean futures dropped from $11.00 to about $8.80.



The sharp decline in prices reflected a number of factors. Improving weather conditions reduced concerns about the potential yield impact of late planting in the eastern corn belt. For corn, the larger than expected planted acreage estimate was especially negative. Weakness in financial and energy markets also contributed to weakness in corn and soybean prices. These factors outweighed prospects for larger exports this year and next and the potential for extremely small year ending stocks of soybeans. Prices traded in a relatively narrow range for the past two weeks, with strength in the financial and energy markets, along with weakness in the US dollar providing some support.

For the next several weeks, yield and production prospects will likely determine if a low in corn and soybean prices has been established. Weather conditions have been viewed as generally favorable for both corn and soybeans. Extreme heat has remained south and west of major production areas, with the Midwest experiencing generally below normal temperature in July. Moisture concerns are minimal. Overall crop condition ratings are relatively high as of 12 July, the USDA reported 71 per cent of the corn crop and 66 per cent of the soybean crop in either good or excellent condition. The highest ratings are generally in the western corn belt. A year ago, 64 per cent of the corn crop and 59 per cent of the soybean crop was rated in good or excellent condition. There is an extremely high correlation between the per cent of the crop rated good or excellent at the end of the season and the US average trend adjusted yield. For corn, for example, the crop condition model based on observations from 1986 through 2008 would project a 2009 US average yield of 163.2 bushels per acre IF 71 per cent of the crop is rated good or excellent at the end of the season. Each 1 per cent change in the proportion of the crop rated good or excellent would alter the yield forecast by about 0.66 bushels per acre. Our crop weather model forecasts a US average yield of 161.9 bushels if growing conditions through August are favorable. The yield expectations based on current crop ratings or the assumption of favorable weather for the rest of the season are well above the long term trend calculation for 2009 of 154.9 bushels per acre.

For soybeans, favorable weather through August would point to a US average yield of 44.7 bushels per acre, well above the long term trend calculation of 42.2 bushels per acre. For both corn and soybeans, yield projections based on the crop weather model assume that frost/freeze dates are not earlier than normal.

Based on current acreage estimates, yields at levels projected by either current crop condition ratings or by a crop; weather model assuming favorable weather for the remainder of the season, point to prospects of large supplies and further price weakness into harvest. Using USDA’s most recent projections of 2009-10 marketing year consumption, a US average corn yield of 162 bushels, for example, would result in year ending stocks of 2.236 billion bushels. Use might well exceed current projections due to lower prices under this yield scenario, but stocks could exceed 2 billion bushels. For soybeans, a US average yield of 44.1 bushels and use at the level current projected would result in year ending stock of 410 million bushels.

The USDA will release the first corn and soybean yield estimates of the year on 12 August. Due to the lateness of the crop, objective yield estimates for the eastern corn belt states included in that portion of the survey, will be based heavily on plant populations, suggesting more uncertainty about yield estimate than would normally be the case. Estimates of planted and harvested acreage of corn and soybeans will be updated in October as acreage certification information from the Farm Service Agency becomes available.

Corn and soybean markets have prices in relatively large crops, but considerable production and price uncertainty remains. The November soybean futures are now about $.50 above the spring price guarantee for crop revenue insurance products offering an opportunity for some additional pricing of the 2009 crop. In contrast, December corn futures remain well below the crop revenue insurance price guarantees.

[mikey]

CME: Temporary Reductions in Slaughter
US - According to CME's Daily Livestock Report for 21 July, hog futures lost ground on Tuesday on concerns that the surge in cutout values may be rather fleeting, reflecting the short term impact of big slaughter cutbacks rather than a demand driven summer rally.



The pork cutout has surged higher in recent days as slaughter cutbacks have allowed packers to clean up inventories. The pork cutout value on Tuesday was quoted at $66.70 per cwt, some $1.2 per cwt higher than Monday’s levels and $12.9 per cwt or +24 per cent higher than at the beginning of July. Lean hog prices (IA/MN wt. avg.), on the other hand, were quoted on Tuesday afternoon at $58.30 per cwt, $1 higher than the previous day but only slightly higher than where they were on 1 July.

The fact that hog values have failed to get much traction despite the surge in cutout values has some market participants worrying that the recent pork rally may not be sustainable going into August. The bullish argument would suggest that current reductions in slaughter are due to tighter hog supplies. If that is the case, as pork cutout values move higher, packers have to raise their bids for live hogs in order to secure enough product to meet demand and so forth.

The more bearish argument would suggest that the reductions in slaughter were temporary, reflecting decisions by packers to reduce output in the face of big losses. In that case, hogs that would have been processed last week are still available this week, albeit with more pounds on them. In that case, packers bids stay flat and may even decline should a backlog of hogs and/or pork develop. Slaughter was again light on Monday at 356,000 head, in part due to production issues at one slaughter facility but also because of slower slaughter overall.

Tuesday slaughter was 416,000 head, slightly ahead of last year’s pace. Going forward, it will be important to see whether producers remain current. One positive development in the last few weeks has been the decline in hog carcass weights. Weights were somewhat out of control following the flu outbreak and the backlog that developed. More recently, lean hog carcass weights have declined but one should be careful not to make too much of this. Seasonally weights go down in the summer as heat takes its toll on animals.

What is important to note is not just the fact that weights decline but also the rate of the decline compared to normal. Last week USDA reported hog carcass weights of around 200 pounds, which we think is too high given that weights were 199 pounds for the week ending 4 July. We should see weights decline another three pounds between mid July and early August. The concern is that by less than what the seasonal suggests, adding more pounds to a summer market that already seems to have more protein than it can handle.

[mikey]

Meat, Poultry are Major Sources of PBDE Exposure
US - Red meats and poultry have been found to be major sources of exposure to polybrominated flame retardants, known as PBDEs, in the US. The conclusion follows research just published in Environmental Health Perspective by Fraser and co-workers.



People who eat meat and poultry have significantly higher levels of common flame retardants compared to vegetarians, according to a summary of Fraser and co-authors' paper in Environmental Health News. The findings indicate that food may be a more important source of the contaminants, known as PBDEs, than previously thought. PBDEs are omnipresent in the environment This is the first large-scale study to examine the contribution of red meat and poultry to dietary PBDE body burden in the US.

Methods used in the study
Data collected as part of 2003-2004 National Health and Nutrition Examination Survey (NHANES) were examined for a correlation between food eaten and blood levels of PBDEs. A randomised sample of 2,337 participants that were 12 years or older supplied dietary information via a 24-hour food recall list and a food frequency questionnaire. Food was assigned to one of the following groups: poultry, red meat, dairy, egg, seafood and non-animal products.

The blood levels of ten PBDEs (BDE-17, 28, 47, 66, 85, 99, 100, 153, 154 and 183) were measured. Only five with the highest measured levels (BDE-28, 47, 99, 100 and 153 – all components of pentaBDE) and their sum were compared to the participants' diets.

Results were adjusted statistically for age, sex, race or ethnicity, income, body mass index (BMI), and socioeconomic and demographic variations.

Main findings
Serum levels of five different PBDEs were associated with eating poultry. People who more poultry had higher levels of the PBDEs. Poultry fat was the greatest contributor to the body burden of PBDEs.

Red meat intake was associated with two of the measured PBDE levels. Seafood and dairy were not associated with any changes in the PBDE levels in serum.

Vegetarians had 23-27 per cent less PBDEs circulating in their serum as compared to meat-eaters.

The highest levels of PBDEs were found in males, the youngest age group examined (12-19 years old), the poor and the underweight (subjects with lowest BMI).

Implications
The major source of human exposure to PBDEs has been assumed to be via contaminated dust at work or in the home. Some recent findings have pointed toward other possible sources, including diet.

This study indicates that food is a more important route than previously thought.

A number of scientific studies have suggested that PBDE levels in food supplies are rising. These studies, however, have been limited by small sample sizes and by small geographic scope.

The greatest strength of this study is the large sample number that the researchers used for their analysis. Based on their comprehensive research, poultry and red meat are major sources of dietary PBDE exposure in the US. Identifying which foods are most contaminated is a major step in limiting public exposure.

Since this study lacks information about the household exposure of the subjects to PBDEs, scientists refrain from commenting on the relative contribution of dietary exposure to overall body burden of flame retardants. The authors conclude that comprehensive studies that include dietary, household, and geographic data will be needed to determine the contribution of each factor more accurately.

PBFEs and human health
Polybrominated flame retardants, known as PBDEs, are suffused into consumer products to suppress fires, save lives and lower the economic burden of fire accidents. Electronics, plastics, textiles, car interiors and many other products now contain the chemical fire suppressors.

The long-lived chemicals are not fixed into materials, so they slowly leak out of the products and into the environment. More chemicals are released as the products age.

In North America, meat, poultry, dairy and fish are known to be contaminated with PBDEs. The food comes into contact with PBDEs during processing and through packaging materials.

Most human exposure is thought to be through food and dust, but which contributes the most to human exposure is not known.

In the last few decades, as PBDE use increases, levels of PBDEs in human tissue have increased significantly. Americans and Canadians have 10 to 20 times higher levels of PBDEs than people in Japan or Europe. The highest levels have been detected in US children between the ages of two and five years.

The first scientific evidence about the toxicity of several types of PBDEs surfaced in mid 1980s. European regulations began to limit PBDE use in the 1990s and took tightened restrictions further in 2004; by 2008 several US states had taken action against at least one of the PBDEs. Two types of PBDEs are no longer manufactured in the US because of health concerns. Exposure continues, however, both because products that contain them are still in use and because the chemicals themselves are highly persistent. Consumer goods that have entered the waste stream, for example, in landfills, continue to release PBDEs. Sewage sludge can be heavily contaminated

PBDEs accumulate in the liver, kidney and thyroid gland and are known endocrine disruptors. Chronic exposure and elevated levels lead to disruption of estrogen and thyroid systems. Animal and epidemiological studies link PBDE exposure to several types of reproductive and nervous system impairments.

The health effects associated with exposure to PBDEs are a major public health concern. Children may be especially vulnerable to their toxic effects because of their developing nervous systems.

Reference
Fraser A.J., T.F. Webster and M.D. McClean. 2009. Diet contributes significantly to the body burden of PBDEs in the general US population. Environmental Health Perspective doi: 10.1289/ehp.0900817.

Other resources
Birnbaum, L. and D.F. Staskal. 2004. Brominated Flame Retardants: Cause for Concern? Environmental Health Perspectives 112:9-17.
National Health and Nutrition Examination Survey. Centers for Disease Control and Prevention.
Polybrominated diphenylethers (PBDEs). US Environmental Protection Agency
Reducing your exposure to PBDEs in your home. Environmental Working Group.
Schecter A., T.R. Harris, N. Shah, A. Musumba and O. Päpke. 2008. Brominated flame retardants in US food. Molecular Nutrition and Food Research 52:266-72.

[mikey]

Market Preview: No Gain Without Some Pain
US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.



I had the honor once again to speak to the annual National Pork Industry Conference at the Lake of the Ozarks in Missouri last week. The event was, given the economic conditions of the pork industry, surprisingly well attended. The mood was somber, but not what I would call depressed, even though everyone was obviously growing weary of the continuing economic challenges.

I began my talk with the old joke about the guy who walks into the doctor and says, "Doc, it hurts when I do this," and then moves his arm up and down. The doctor, of course, responds with an emphatic "Then stop doing that!"

The metaphor for the pork industry is obvious: If the economic outcomes of our businesses are to change, we have to not do what we’ve been doing.

Factors Impacting Pork Prices
Now some of what we have been doing is really not our fault. The H1N1 Flu Outbreak Virus forced "us" to sell a lot more pork on the US market. Without that extra supply, things would have been different this summer.

Another "problem" of what we have been doing is the paradoxical impact of improving efficiency. Becoming more productive is what the American farmer is all about, right? But the surge in productivity – especially litter size – in the past two years has completely confounded any output rationalization efforts that we have seen. It appears that the sow reductions to date have simply been the removal of the “circovirus compensating” sows that were in place to keep pig flows reasonable in the face of large death and morbidity losses.

An aside on this topic: I have mentioned several times that we heard several anecdotal reports of a surge in sow productivity after the introduction of circovirus vaccines. That surge appears in the data as we compared the production from vaccinated sows in 2008 to that of unvaccinated sows in 2007.

That impact should have been over when we began comparing 2009 data to that from the vaccinated sows in 2008, right? But it has not ended, and one well-known veterinarian explained to me that a reason is the impact that circovirus suppression is having on the immune systems of vaccinated animals. We have not only eliminated circovirus, but we have enabled the animals to fight other pathogens more effectively, thus raising their health level another notch and providing this added surge of productivity.

I doubt that that impact can continue forever, but it certainly is not waning yet and provides a huge challenge: If we are to reduce output to drive prices up, we must reduce the sow herd by a larger per centage than productivity growth. And we haven’t done that yet.

My "it hurts when I do this" schtick reminds me of another famous (at least in Oklahoma) comedy routine by Archie Campbell on the old Hee-Haw television show. Archie would weave stories that had some good happening, to which Roy Clark or some other accomplice would say, "That’s good" and Archie would respond "No, that’s bad!" He would then describe some awful happening to which Roy would say. "Oh, that’s bad!" Archie, of course, would reply with "No, that’s good!" And on and on they would go. It was great fun.

Lower Feed Prices Are Good – and Bad
I feel that way – without the fun part – about the recent drop in corn and soybean meal prices and the surge we have seen in cutout values over the past two weeks. While the latter has yet to translate into higher hog prices – and that may take awhile given the fact that the cutout and hog prices have been upside down for much of this year (see Figures 1 and 2) – the profit picture improved markedly from mid-June to last week, and then declined sharply as Lean Hog futures fell to contract life lows for most contracts on Monday morning.

 


Figures 3 and 4 show my forecasts through July 2010 as of 21 June and then again today. Note that the projected losses through year’s end and through July 2010 are both smaller now than they were in June. But they are over $3/cwt larger than they were just one week ago.

 


So – the drop in feed prices is good because it means producers are losing less. That’s good. No, that’s bad – because we still need to reduce the sow herd enough to offset productivity gains and reduce supplies and that will not happen with less economic pain. So – the drop in Lean Hog futures this past week is bad because it hurts producers’ profits prospects and adds to their financial stress. No, that’s good – since it increases incentives to reduce the sow herd and will lead to higher long-term profit levels.

I could go on, but you get the drift. Economics is all about incentives and the incentives for output changes are shifting weekly and, in some instances, daily. I still believe we need to produce less to bring some semblance of consistent profits that are large enough to compensate producers for the risks they take. Unfortunately, it will take economic pain to get that done.

 

[mikey]

US Livestock Industry Under Stress
US - At a time when many crop producers continue to show profits, even with sharply higher input costs, the entire livestock industry is under extreme financial stress, according to the Iowa Pork Industry Centre



Livestock producers have been hit hard with a combination of declining market prices, higher feed costs and operating expenses, declining export markets and unforeseen events. The negative profit margins and financial stress are especially prevalent in the swine and dairy industries – two very important segments of Minnesota’s economy. The continued negative profit margins and potential future reductions in the livestock industry should be a concern to crop producers, local communities and the state of Minnesota.

The growth of the biofuels industry in recent years has driven much of the discussion on future usage of US corn and soybean production. The total amount of the US corn supply used for ethanol production has increased by nearly one-third in the past two years, from just over 3 billion bushels/year in 2007-2008, to an estimated 4.1 billion bushels for 2009-2010. However, feed usage for livestock production is estimated to utilize approximately 5.2 billion bushels of corn in 2009-2010, or about 41 per cent of the total US corn usage. As recently as 2007-2008, livestock feed usage accounted for nearly 50 per cent of the total US corn usage. In addition, the other byproduct from increased Midwest ethanol production is increased volumes of dried distillers grains (DDGs), the vast majority of which are used for cattle and hog feed.

The interaction with the livestock industry is very similar for soybeans. Nearly 60 per cent of the soybeans produced in the US are processed into soybean meal and soybean oil at plants such as ADM in Mankato and CHS in Fairmont and Mankato. Over 90 per cent of the soybean meal produced is utilized as livestock feed.

Swine Industry’s Negative Profits
The recent worldwide concern over the H1N1 virus (so-called "swine flu") has had a major impact on the pork industry, and lead significant financial losses for producers. This followed highly negative profit margins in 2008, due to rapid increases in feed costs and production expenses and a struggling US and worldwide economy. Let’s review some of the numbers and facts leading to the current negative financial situation in the swine industry:

In May, it was estimated that swine producers were receiving an average of $110-115 gross value for every market hog produced, while the average cost of production was approximately $140 per hog, resulting in a loss of $25-30/hog.


Iowa State University (ISU) calculates the actual estimated breakeven price for sow operations and hog finishing operations on a monthly basis, based on changes in hog market prices, feed costs and operating expenses. Sow operations have shown losses in the past 15 straight months, with losses of $15-31/head for each 50-lb. feeder pig produced in the six-month period from September 2008 through February 2009. The hog finishing segment of the industry has not fared much better, showing losses in 17 of the past 19 months. Losses from finishing feeder pigs have averaged approximately $20/head from January to April 2009, after losses of over $40/head late in 2008.


The feed cost for finishing a market hog rose from just over $50/head in July 2007, to nearly $80/head by July 2008. Current feed costs are near $65/head.


To some extent, the swine industry is a victim of its own success in recent years. Pork producers with sow operations have steadily improved genetics, herd health and production practices, which has lead to producing more pigs per sow per year. While this is good for the financial bottom-line of the individual producer, it adds to the available supply of pork and thus puts pressure on hog prices. The pork production per sow has increased by over 11 per cent in the past four years. So, even though the total number of sows in the US has declined by 3.6 per cent since 2007, the total supply of pork has continued increase.


The May lean futures price for hogs at the Chicago Mercantile Exchange (CME) dropped about $10/cwt in one week following the H1N1 outbreak, dropping from a closing price of $69/cwt on April 24 to near $59/cwt on May 1. The CME May futures price actually fell to a low of $55.50 on May 4, a loss of nearly 20 per cent of market value in just over 10 days. CME hog futures have rebounded somewhat, and were near $60/cwt in mid-June. Following the H1N1 virus outbreak, US pork exports dropped by 15-20 per cent.
Bottom Line
The swine industry is a key segment of Minnesota’s economy, and creates thousands of jobs in rural communities throughout the state. Minnesota ranks third in the nation in hog production, with approximately 4,400 swine operations that produce over 11 million hogs annually, which is just under 10 per cent of the US total. Over 40 per cent of Minnesota’s hog production originates from south-central Minnesota, with Martin, Blue Earth, Nicollet, Waseca and Brown counties all in the top hog-producing counties in the state. For the future demand for corn and soybeans, and for the future economic stability of rural communities in the region, it is very important for livestock production to return to profitable levels and greater financial viability. Unfortunately, in order to stabilize the livestock industry, it will require overall production of meat and milk to shrink, which will require some producers to exit the livestock business.

[mikey]

CME: Steady Retreat in Hog Prices
US - CME lean hog futures took another step lower on Tuesday as the market was clearly worried about the impact of higher hog slaughter rates on pork prices, according to CME's Daily Livestock Report for 28 July.



Hog slaughter on Monday was 418,000 head and on Tuesday it was 422,000 head. At this pace, we could see hog slaughter for the week at around 2.1 million head, likely above the 2.093 million head slaughtered in the comparable week a year ago. And once we add to the larger hog numbers the heavier hog weights, likely +3 pounds over year ago, we could see pork production for this week up about 13 million pounds or 2 per cent compared to a year ago. The cutout rally of the last two weeks saw pork production down about 7 per cent from year ago levels. As we pointed out last week, there was some hope that the rally in the pork cutout would help boost hog values. But in order for the rally to be sustained, it needs to be driven either by a meaningful reduction in supplies or a notable demand boost. It does not appear that any of these factors were behind the recent up move.

There was no real reduction in supplies, packers simply reduced kills for a few days, only delaying when hogs would come to market and in the process causing them to put on a few more pounds and boosting supplies down the road. As for demand, it appears that there has been no perceptible shift, maybe exports are somewhat better than they were in late April and May but still way off from year ago levels. USDA pegged the pork cutout on Tuesday at $62.04, $2.11 lower than the Monday close and $4.66 lower than the week before.

The steady retreat in hog prices has generated much talk as to where the industry needs to be with regard to the size of the breeding herd and pork supplies down the road. Back in June there was talk about a sow herd retirement program, similar to what dairy producers are doing, but that initiative fizzled quickly. Then there was the announcement by Tyson that it would remove some 20,000 sows, which also seemed to buoy markets. Despite all the talk, the monthly sow slaughter data paint a somewhat less bullish picture.

Sow slaughter in June remained below year ago levels and in the first six months of 2009 US producers have slaughtered some 224,000 fewer sows than they did in the first half of 2008. And based on weekly slaughter data for July, we will likely see July sow slaughter also lower than year ago levels. So while there is much talk about liquidation and tighter supplies down the road, it will be difficult to accomplish that goal if production units do not decline and productivity gains continue.

[mikey]

Weekly Roberts Report
US - Agricultural US Commodity Market Report by Mike Roberts, Commodity Marketing Agent, Virginia Tech.



The trip was a good one. I was able to meet with several producers, processors, and agriculture ministry officials. The downturn in the global economy has European decision makers wanting to know more about how our risk management system works and to implement it in some form or fashion. The European Union farm support program has become very expensive.

One thing was very clear. Although our risk management system has its warts, the market is free to work.

A visit to Omaha Beach in Normandy made very clear that we must never take our freedom for granted.

LEAN HOGS on the CME finished mixed on Monday. AUG’09LH futures closed up $0.125/cwt at $59.175/cwt. The DEC’09LH contract slid $0.325/cwt to $54.050/cwt. Futures found support in short covering. USDA on Friday put the pork cutout price at $65.00/cwt; up $0.15/cwt. The cutout was down $1.70/cwt from last Tuesday’s high. The latest CME Lean Hog Index was posted at $60.09 cents/lb; up $0.54/lb. Packers are expected to pick up buying Tuesday or Wednesday on profitable margins through this week. However, a consistent bearish tone of daily hog kills above 400,000 head has returned to the market. According to HedgersEdge.com, the average pork plant margin rose $18.60/head from a negative $10.40/head to a positive $8.20/head. This was based on the average buy of $43.13/cwt vs. the average breakeven price of $46.23/cwt. It would be a good idea to sell hogs when ready and price up to four week’s feed needs.

CORN futures on the Chicago Board of Trade (CBOT) were up on Monday. The SEPT’09 contract closed at $3.222/bu; up 6.0 /bu. DEC’09 corn futures finished at $3.336/bu; up 6.4 /bu. Steady to stronger corn exports were supportive as good crop growing weather and retreating demand on a shrinking US cow herd limited gains. USDA placed US corn-inspected-for-export at 52.234 mi bu vs. expectations for 31-34 mi bu. Late Monday USDA rated the US corn crop in good-to-excellent condition at 70 per cent; 1 per cent lower than this time last week but 4 per cent better than a year ago. Cash corn bids were steady amid slow farmer sales. USDA is expected to issue an updated crop plantings report in early August. This should give a clearer picture of US corn crop acres planted and therefore supply expectations. Funds bought 5,000 contracts while large speculators increased net bear positions in CBOT corn by 15,700 lots. The December 2009 contract posted a Relative Strength Index of 32.26 indicating that this market will attract increased speculator interest. Hopefully all of the old crop corn is gone and up to 70 per cent of the 2010 crop is sold on previous advice. Old crop corn is fast losing its premium to new crop corn.

SOYBEAN futures on the Chicago Board of Trade (CBOT) were down on Monday with the exception of the August ’09 contract which was up 2.0 /bu. The SEPT’09 contract closed off 6.5 /bu at $9.450/bu.

The NOV’09 contract closed at $9.064/bu; off 8.4 /bu. Tight old crop stocks and short-covering supported the nearby August contract. Exports were disappointing with USDA reporting soybeans-inspected-for-export at 8.145 mi bu vs. expectations for 11-14 mi bu. Over half of these were bought by China. Processors and suppliers south of the equator are filling most global needs at this time. Late Monday USDA put soybeans in good-to-excellent condition at 67 per cent; unchanged from last week. Cash soybean bids were steady to weaker as old crop sales finish up. Funds sold just over 1,000 lots while large speculators decreased net bull positions in CBOT soybeans by 4,800 contracts. If you have any old crop soybeans at all they should be sold now. Old-crop beans are swiftly losing their premium basis value and will soon be valued near new crop levels. Up 70-80 per cent of the new crop should have been priced on previous advice.

WHEAT futures in Chicago (CBOT) were up on Monday. SEPT’09 wheat futures finished up 4.25¢/bu at $4.904/bu; 38.0¢/bu lower than last report. The JULY’10 wheat contract closed at $5.192/bu; up 5.25¢/bu. Good weather conditions for the US crop hindered price advances. Short covering was price supportive but gains were limited by large global stocks.

USDA put wheat-inspected-for-export at 10.683 mi bu vs. expectations for 14-17 mi bu. Good weather in the US and parts of Europe are allowing the harvest to fill up the supply line. Funds bought 2,000 contracts while large speculators cut net short positions by 2,700 lots. Under pressure from traders and regulators to fix its problem with convergence in the market, the CME Group is reportedly looking at more changes in storage charges as well as a new cash settlement index. Meanwhile, the CME is waiting to see if previous changes made to the soft red winter wheat contract; additional delivery locations; and increased storage charges that began the first of June can improve hedging performance. Reports from wheat harvest in the center-west of France indicate acceptable yields and very good milling quality wheat. Consider pricing up to 20 per cent of the 2010 crop at this time.


 

[mikey]

CME: Pork Index Strong on Consumer Level
US - An observant reader asked about the difference between the calf crop numbers we discussed in the July 24 edition and the numbers in the chart labeled US Calf Crop in that issue, says CME's Daily Livestock Report for 30 July.



His confusion was understandable since the numbers in the chart were actually the number of cattle on US farms on July that weighed 500-lbs o less. The actual calf crop chart appears as Figure 1. It looks quite similar to the 500-lb. and under inventory but the numbers on the Y axis are different. USDA predicts that we will see 1.2 million fewer calves born this year than just two years ago. That is an important comparison because the animals in this year’s slaughter were, pretty much, part of that 2007 calf crop. We think that speaks volumes about slaughter levels in 2011.


Demand indexes for January-June, released this week by the University of Missouri, continue to appear just as we expected them to appear in this recession—even though the pork demand index is substantially higher than even the optimistic among us had likely thought possible. The numbers from Professor Glenn Grimes appear at left along with the historical data for these indexes. Remember that these indexes are strictly descriptive. They indicate the apparent movement of the various demand curves in P-Q space but offer no information as to why those movements may have occurred. That interpretation is up to us market observers and analysts. Some critical issues with this month’s indexes:

The consumer-level pork index is surprisingly strong and the reason is that USDA’s June retail price data show NO DECLINE from May even though domestic pork disappearance was 14.5 per cent higher than last year and 4.8 per cent higher than in 2007. June 2009 domestic disappearance was the second highest ever for June. Readers should note that a big reason for the 14.5 per cent year-on-year increase was VERY low domestic disappearance last year when exports were near record high. And an extra slaughter day this year helped as well since disappearance is simply the residual after we deduct all of the measured uses from total supply which is the sum of production, imports and beginning stocks. We find the disappearance numbers quite believable but we don’t for a minute believe the retail price was constant given the widespread featuring of pork in June to keep large supplies moving.


The lower chicken demand index is caused by prices that have not improved as much as sharp reductions in US output and disappearance would have suggested. We believe it is likely that his situation will eventually be rectified but it will almost certainly require enough economic recovery to get people back into the habit of eating out. While some indicators suggest that the recession may be easing, unemployment and payrolls will almost certainly lag that recovery so a bounce for chicken demand may be slow in coming.


Ditto the chicken situation for beef with one exception: retail beef prices in June fell by 0.5 per cent from last year. Total domestic beef disappearance in June was 2.6 per cent lower than in 2008.

[mikey]

Weekly Review: Pork Demand Up at Consumer Level
US - Weekly review of the US hog industry, written by Glenn Grimes and Ron Plain.

 
Ron Plain
Packers pushed hog slaughter under Federal Inspection well above 400 thousand per day; as a result, pork product prices were pushed lower. Pork prices Thursday afternoon at $59.09 per cwt of carcass were down $5.76 per cwt from a week earlier.

Demand for pork at the consumer level for January-June was up 4.2 per cent from the same months in 2008. Demand for beef at the consumer level was down 0.9 per cent, broiler demand at the consumer level was down 4.4 per cent and turkey demand was up 5 per cent for these six months compared to a year earlier.

Demand for live hogs for January-June was down 4.2 per cent from the same months in 2008. Demand for live fed cattle for January-June was down 6.9 per cent compared to the same months in 2008.

The weaker live hog demand than pork consumer demand was due to reduced exports and wider marketing margins at the processor-retailer level.

Sow slaughter continues to run low. For the four-week period ending 18 July, sow slaughter was down 9.2 per cent from a year earlier after adjusting for sow herd size. We still see no signs that the breeding herd is being reduced very much. Gilt slaughter for the four-week period ending 25 July was below a year earlier.

Even though profitability in the hog industry is quite negative, hog producers find it difficult to cut back in number with the large investment in the herd per sow.

It now looks like it will require bankruptcy by a substantial number of producers to get the sow herd reduced enough to get back in a profitable situation for the average cost producer.

Slaughter weights of barrows and gilts in Iowa-Minnesota for the week ending July 25 were up 0.1 pound per head from a week earlier and up a whopping seven pounds above a year earlier.

The cooler-than-normal July weather and packers cutting the bill to try to get product prices up are contributing to these heavier weights.

The average carcass weight for barrows and gilts for the week ending 18 July at 196 pounds was up 4 pounds from 12 months earlier. There are no questions about hog marketings being backed up some in the summer of 2009.

Prices for wholesale cuts of pork Thursday afternoon showed loins down $8.99 per cwt at $74.61 per cwt, Boston butts at $53.66 per cwt were down $6.35 per cwt, hams at $44.22 per cwt were down $8.30 per cwt and bellies at $84.11 per cwt were up $0.75 per cwt from seven days earlier.

National feeder pig prices last week were $2-4 per head higher than a week earlier.

Pigs weighing 10 pounds averaged $28.24 per head, 40-pound-basis pigs were at an average of $29.05 per head. Pigs weighing 10 pounds sold on formula averaged $34.07 per head, 40-pound-basis pigs formula priced were $50.20 per head. Negotiated or cash priced 10-pound-basis pigs sold for $17.46 per head and 40-pound-basis pigs on spot market sold for $27.79 per head.

United Producers feeder pig prices this week were $5-15 per cwt above two weeks ago. All of the United pigs weighed 50-60 pounds per head and all sold for $50-69 per cwt.

Slaughter this week under Federal Inspection was estimated at 2,104 thousand head, up 0.5 per cent from 12 months earlier.

Live hog prices Friday morning were $2-3 per cwt below a week earlier. Top Peoria price was $34 per cwt and interior Missouri was $39.50 per cwt. Weighted average negotiated carcass prices ended the week $4.61-5.30 per cwt below seven days earlier. The weighted average negotiated carcass price in the western Cornbelt was $52.55 per cwt, eastern Cornbelt $52.40 per cwt, Iowa-Minnesota $52.72 and nation $52.41 per cwt.

[mikey]

Market Preview: Pork’s Good, Bad and Ugly Scenario
US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.



Corn prices are down! That’s good, right? No, that’s bad because incentives to reduce numbers are low. Oh, that’s bad. No, that’s good because it means producers aren’t losing as much money and thus might be able to hang on until pig production economics improve. Oh, that’s good. No, that’s bad.

This give and take could go on and on, continuing last week’s closing theme, but suffice it to say that last week’s grain and hog markets added a new act to our Hee-Haw tragedy play.

Sharply higher soybeans drove the grain complex higher. That strength included corn, which was apparently along for a sympathy ride since there was no real bad news about this year’s crop. Yes, temperatures are still cool and that makes the first frost date a critical factor. Some parts of the eastern Corn Belt still look rough, but crop conditions in the big corn states are very good and that likely kept corn price increases in check to some degree.

And not only did feed prices rise, but the rally in pork cutout values came to an abrupt halt as hog slaughter swelled and carcass weights remained constant. Are these hogs backed up by slower chain speeds and floating holidays in recent weeks? Or, are these hogs being pulled ahead by very good summer growing conditions? I think it is some of both and the balance may be that we are about normal on marketing pace. Still, I’m concerned that we may have plenty of hogs out there in the short run.

The bottom line is that we still need to reduce output if we are to return to profitability. Demand may increase in coming months, but it almost certainly will not grow enough to cover breakeven costs in the low- to mid-$60s/cwt., carcass weight.

So why aren’t we cutting back more aggressively? The answer is that the market has not (at least until last week) said to do so! That was the message of Iowa State agricultural economist John Lawrence delivered last week at the Livestock Outlook session of the Agricultural and Applied Economics Association (formerly the American Agricultural Economics Association).

Lawrence’s message was clear: Economic theory tells us that a firm will not cease production in the short run until it fails to cover variable costs and, for the most part, the pork industry has covered variable costs – or at least has had solid expectations that variable costs can be covered in the future. In the long run, of course, total costs must be covered but in the short run, firms will operate as long as they can cover variable costs – those that will go away if production ceases.

To support his viewpoint, Lawrence offered a series of charts showing estimated feed, total variable costs and total costs from the Iowa State University (ISU) Estimated Costs and Returns series that he and colleague Shane Ellis track. I have included four of those charts (Figures 1-4) that document hog price and production cost forecasts for 1 April, 20 May, 17 July and 29 July. Note that the only time that projected prices were significantly below variable costs was in the 29 July chart and that the losses vs. variable costs lasted only through January 2010.

 


Some may ask: “Why haven’t producers responded to prices being below variable costs for much of the period since September 2007?”

There are two primary reasons. First, pork producers do not know that prices will be below variable costs when they decide to produce. The theoretical condition of instantaneous adjustment is a luxury not bestowed on pork producers. Second, pork producers know this is a cyclical business. Their plan is always to weather the storm of the low price cycle in order to be standing when profits return. And that storm will often involve some months where variable costs are not covered.

They constantly look ahead to see whether futures markets and other price forecasts offer an eventual respite from the financial pain. Both of those have, for the most part, offered such assurances this year.

Before the H1N1 scare began in late April, futures prices and price forecasts said profits would return this summer. The message was – hang on! Even early last week (29 July), futures markets were saying variable costs would be covered in February and total costs would be covered for several months next summer. And, while last week’s futures price changes were painful, they still indicate profits for next summer with May through August futures near or above $70/cwt., carcass weight, and projected costs per the ISU production parameters in the mid-$60s.

The ultimate question, of course, is this: "Are we still in the ‘short run’ or have we moved into the ‘long run’?"

One can go only so long not paying fixed costs – depreciation (or principal payments), interest, taxes, repairs, insurance. The point at which producers and/or bankers finally say "no more" may be upon us. Last week’s markets moved us closer to that point and as of noon on Monday, corn is up 19-23 cents/bu., soybean meal is up $2 to $11/ton, and hogs are mixed – although October through February are all down more than $1/cwt. The decision point is getting closer.

[mikey]

Weekly Roberts Report
US - Agricultural US Commodity Market Report by Mike Roberts, Commodity Marketing Agent, Virginia Tech.



LEAN HOGS on the CME finished off on Monday. AUG’09LH futures closed off $1.075/cwt at $54.950/cwt; $4.225/cwt lower than a week ago. The DEC’09LH contract slid $1.525/cwt to $51.700/cwt; $2.350/cwt lower than last Monday’s report. Lower cash hogs are creating expectations for further weakness during the week. Fund selling was noted in October futures. The market is still oversold and trading at a discount to the index. Packers were cutting back on processing rates by as much as 100,000 head as six plants shut down on Monday. USDA estimated Monday’s slaughter at 316,000 head vs. 418,000 last Monday and 378,000 a year ago. This will cut pork meat production by 23 per cent. This may support price in the long run but hurt cash hog prices in the short run as supplies languish on the farm. The latest CME Lean Hog index for placed at $59.83/lb, off $0.23/lb and $0.26/lb lower than last report. According to HedgersEdge.com, the average pork plant margin declined $1.10/head to a positive $7.05/head. This was based on the average buy of $39.44/cwt vs. the average breakeven price of $42.09/cwt. It would be a good idea to sell hogs when ready while hedging the next 4 weeks feed needs.

CORN futures on the Chicago Board of Trade (CBOT) closed up on Monday. The SEPT’09 contract closed at $3.580/bu; up 18.5¢/bu and 35.75¢/bu over last week at this time. DEC’09 corn futures finished at $3.690/bu; up 19.5¢/bu and 35.5¢/bu higher than last Monday. The market is anticipating deteriorating crop conditions due to the hot weather. A weaker US dollar contributed to better export expectations while higher crude oil prices boosted corn futures. USDA lowered the US corn crop rating by 2 points in its weekly report late Monday. USDA put corn-inspected-for-export at 47.3 mi bu vs. expectations for 38-43 mi bu. Argentinean corn will begin to compete on global markets as corn export limits were lifted in that country today. Funds bought 18,000 contracts while large speculators decreased net bear positions. It is a good idea to have up to 70 per cent of the 2010 crop sold.

SOYBEAN futures on the Chicago Board of Trade (CBOT) were up on. The SEPT’09 contract closed up 44.5¢/bu at $10.880/bu; $1.43/bu higher than this time last week. The NOV’09 contract closed at $10.304/bu; up 48.5¢/bu and $1.24/bu higher than a week ago. A falling US dollar, tight stocks, gains in the stock market, and higher crude oil prices buoyed prices. USDA placed soybeans-inspected-for-export at 4.6 mi bu vs. expectations for between 10-13 mi bu. Monsoon rains in India are expected to hurt global supplies. USDA to held the US soybean crop rating to week-ago levels in its weekly report. Funds bought over 7,000 contracts while large speculators increased net bull positions. Up 70-80 per cent of the new crop should be priced.

WHEAT futures in Chicago (CBOT) were up Monday. SEPT’09 wheat futures finished up 21.0¢/bu at $5.492/bu; 58.75+¢/bu higher than last report. The JULY’10 wheat contract closed at $6.186/bu; up 22.0¢/bu and 99.5¢/bu over last report. The same factors influencing corn and soybeans supported wheat futures. USDA placed wheat-inspected-for-export at 13.5 mi bu vs. expectations for 13-16 mi bu. The Argentinean government announced it would remove wheat export limits today. This put a damper on futures near the end of the session. The hot, drier weather is seen as a positive for the US wheat crop harvest while putting a damper on prices. Funds bought over 10,000 contracts while large speculators decreased net-bear positions. Consider pricing another 10 per cent of the 2010 crop taking you to 30 per cent priced.