June 18, 2007

 

US hog producers wary of corn rally

 

 

A sharp rally in US corn prices this week has intensified concerns of higher feed costs among the nation's hog production sector.

 

Triggering the producer worries are lower-than-expected wheat yields in the Plains, uncertain crop conditions in general across much of the eastern corn belt due to short rainfall amounts in some areas and a severe drought to the south. All these factors are pushing corn prices higher.

 

Reduced production of feed wheat in the Plains states results in increased demand for corn from livestock operations.

 

Hog farm managers and owners are keeping a close watch on the corn markets as Chicago Board of Trade futures prices have moved back up to well above US$4 per bushel in all months. The 2007 corn contracts are up about 65 to 70 cents per bushel from cycle lows hit in early May. The contract high for the nearby July corn was at US$4.58 1/2 set on Feb. 26. July corn closed Friday at US$4.19 per bushel, up 9 1/2 cents on the day and 37 cents higher for the week.

 

Market analysts and livestock buyers said hog producers did not reduce the breeding herd to any measurable degree when corn prices climbed to the high levels in February so it is unlikely that they will do so now unless corn continues to rally through the old highs.

 

There are also growing concerns, however, that hog supplies in the fourth quarter will be record large and pressure prices to below producers' breakeven levels.

 

Producers urged to take price protection measures

 

Rising feed costs and lower slaughter hog prices expected for this fall and into 2008 are causing some market analysts and advisers to recommend that producers take measures to protect prices for their hogs and look for opportunities to do the same on their feed input costs.

 

Some also are advising producers to begin culling a portion of their sows, particularly the poorer performing animals, while hog prices are seasonally stronger compared with the lower returns expected this fall and winter.

 

Culling would reduce the number of pigs available for slaughter next spring and summer and would increase overall efficiency of the remaining herd.

 

Some analysts think some producers might not make culling decisions too quickly.

 

"History would tell us that farrow-to-finish operations (those that raise their own pigs and feed them to slaughter size) would have to lose money for two quarters before cutting back on production," said Ron Plain, agricultural economist at the University of Missouri.

 

He said producers typically have not responded in anticipation of poor market conditions based on futures prices or other signals and have done so only after losing money for a certain period.

 

Plain predicts that there will be "red ink" for many producers in the fourth quarter of this year and the first quarter of 2008, so based on history, liquidation of the breeding herd is not likely to occur until the April-June period.

 

Feeder pig prices are declining

 

Feeder pig prices in the negotiated, or spot markets, are declining and squeezing returns for the sellers. The US Department of Agriculture reported feeder pig prices last week were down US$1 to US$2 per head amid "light demand for moderate to heavy offerings" in its national pig market summary. USDA reported pig prices this week were down another US$1 to US$4 from last week's quotes.

 

Pig prices at the Sioux Falls, South Dakota, terminal market Tuesday were US$2 to US$5 lower, compared with the last quotes from two weeks ago.

 

Feeder pig buyers are offering lower prices for the pigs since corn makes up the majority of the feed rations. Also, lean hog futures prices are lower for the fall and winter compared with current levels, and feeder pigs purchased and placed into the finishing barns now will not reach slaughter weight until the fourth quarter.