CattleNetwork.com, KS
07-05-06
US Corn Crop Prospects May Extend Hog Profitability
KANSAS CITY (Dow Jones) - In late May and early June, there was a great deal
of talk about the probability that the current long string of profitable months for
U.S. hog producers would come to an end late this year.
While that is still possible, one of the factors --feed costs-- appears to be giving
hog producers more hope since Chicago Board of Trade corn futures have
dropped by about 30 cents per bushel in the past four weeks amid improved
prospects for the current crop.
Hog producers have been facing the possibility of significantly lower hog prices
late this year and for 2007 from the inevitable expansion in production that
comes along with long periods of profitability. As producers seek to take
advantage of higher prices by squeezing a few more sows into their breeding
herds, the expansion eventually becomes too much for the market to bear, and
prices decline.
In addition to lower hog prices, higher feed costs also whittle away at producer
profitability.
On May 18, CBOT December corn posted a contract high of $2.87 1/4 per bushel
amid much talk of expanding demand for corn from the growing ethanol industry,
early-season concerns about high energy costs curtailing planted acreage and
less-than-ideal weather conditions for this year's corn crop in parts of the
Midwest.
However, with better moisture and growing conditions reported across much of
the Midwest, corn futures prices fell rather sharply during the past four weeks.
For example, December corn futures on June 26 hit a five-month low at $2.47 3/4
and closed at $2.49, down 6 1/4 cents, or 2.5%, on the day. That was also down
36 cents, or 12.6%, from the June 2 close. Since then the market has rebounded
on forecasts for warmer, drier weather in the corn belt, but remain comfortably
below their highs. At 11:00 a.m. EDT, December corn futures are at $2.65.
U.S. hog producers have been on a roll profitability-wise for nearly 2 ½ years,
according to calculations on producer returns done by John Lawrence,
agricultural economist at Iowa State University. A database on monthly
returns for livestock operations on his web site shows that the last month in
which hog producers failed to meet their break-even cost was January 2004.
The longest stretch of consecutive profitable months in history was 34, from
December 1967 through September 1970, said Glenn Grimes and Ron Plain,
agricultural economists at the University of Missouri. The next longest period was
33 months, from December 1976 through August 1979. Market conditions this
summer certainly suggest that the current string should at least match the mid1970s run, Grimes said.
June has been a very profitable month for producers, and that pushed the current
run to 29 months. If returns remain profitable through the third quarter as
analysts have predicted, it will put this string at 32 months.
Grimes said for each 10 cent-per-bushel rise in corn prices, it pushes the breakeven cost for slaughter hogs up by about 50 cents per hundredweight.
Therefore, with December corn futures now down about 30 cents per bushel from
what they were in early June, the projected breakeven cost for hog finishing late
this year is about $1.50 per hundredweight lower than four weeks ago.
However, Grimes warns that even though weather conditions and the outlook for
this year's corn crop have improved, "the crop is not yet in the bin," and the
outlook could change.
In addition, ethanol production will increase and use more corn in the years
ahead, Grimes said. This is the driving force behind higher prices in 2007, as
projected by Chicago Board of Trade futures. 2007 CBOT corn prices are
carrying significant premiums to the current year contracts. At 11:00 a.m. EDT
December 2007 corn traded at $3.03, with December 2006 at $2.65.
Based on Grimes' calculations, the difference between these two contracts,
roughly 40 cents, would mean a $2 per hundredweight higher breakeven cost for
hog producers assuming all other input costs were the same.
Due in part to the higher projected feed costs along with expectations of
increased hog production next year, several market analysts have predicted
2007 average hog returns to be in the red.
Source: Curt Thacker; Dow Jones Newswires; 913-322-5178;
curt.thacker@dowjones.com