August 21, 2006

 

US hog producers wary despite recent corn price slide

 

 

Although Chicago Board of Trade corn prices have fallen sharply in recent weeks, analysts say hog producers are wary of higher expectations for corn prices in the years ahead.

 

Feed is the largest input cost for hog producers, and corn and soymeal prices in recent years have been very affordable, providing hog and other livestock and poultry producers with relatively low feed costs.

 

CBOT corn futures surged earlier in the year amid reports of expanding ethanol production over the next several years and on concerns about the size of this year's corn crop. However, the higher prices at that time fuelled additional acres planted to corn plus most of the Midwest has had favourable growing conditions this summer.

 

December corn futures at the CBOT Friday set a new contract low at US$2.33 1/2. The contract high for December was hit in May at US$2.87 1/4.

 

Erica Rosa, agricultural economist with the Livestock Marketing Information Centre in Lakewood, Colorado, said the USDA's recent report for a larger corn crop than it had earlier estimated is positive for hog producers and will be supportive to their returns for this year. However, she does not expect the recent decline in corn prices to have any major impact on hog producers' intentions for the remainder of this year and into 2007.

 

Looking back over the past two years with lower corn prices and positive returns for their hogs, producers have not responded--as would be expected--by expanding the sow herd, Rosa said. This was most likely due to such issues as the process of attaining the required building permits to construct a hog facility, environmental regulations and the like.

 

She also believes that hog producers are fully aware and are taking into account the fact that ethanol demand for corn plays a larger role today than a few years ago. Ethanol companies' ability to pay much higher prices for corn are likely to keep hog producers on the look out for potentially higher corn prices next year.

 

Dave Bauer, analyst with Brite Futures Inc in Cedarburg, Wisconsin, said that the recent drop in corn prices has "put a damper on forward concerns for now". Bauer added that instead of the hesitation that hog producers had in past weeks, they are not even concerned about corn prices since the market has declined.

 

Glenn Grimes, agricultural economist at the University of Missouri, said US sow slaughter coming from domestic supplies from the middle of March through the week-ended Aug 5 was 127,000 more than during the same period a year ago. He said the sow slaughter data along with gilt retention numbers suggest that producers have been reducing the herd slightly.

 

About 40 percent of the hog supplies are coming from producers who market 50,000 head or less per year, Grimes said, and approximately 80 percent of these producers are also crop farmers.

 

The prospects of higher corn prices down the road along with an expected down-cycle in hog prices may be causing some of the farmer-producers, especially those who are older and are not planning to invest in new hog buildings, to exit the business, said a Mid-western livestock buyer.