Profit Opportunities in 2009
By Drew Ryder, Feedlogic Corporation
With a volatile year like 2008 behind us, it takes a brave person to predict what’s in store for the hog market in 2009. But in all that volatility, there were some positive trends for producers. As we close out the year, hog inventories are down, corn and soybean prices are well off their mid-year highs, and crude oil prices are down.
Why look at crude? If there’s one thing we’ve learned from 2008, it’s that grain futures are going the same direction as crude futures. Between Oct 2007 and Oct 2008, pricing trends for each commodity are almost a mirror image (see Figure 1 and 2). You can blame ethanol for that.
Figure 1 – CBOT Weekly Corn Prices
Figure 2: NYMEX Weekly Light Crude Prices
As of this writing, light crude futures for October 2009 were trading at just under $47/barrel. December ’09 corn was at $4.41/bushel. That’s close to the ratio we have seen in cash pricing throughout 2008. It’s also good news for producers. Four dollar corn gives you a much greater chance at profitability than $7 corn, particularly when combined with an expected increase in carcass values.
The ag economists are cautiously optimistic for 2009. Ron Plain of the University of Missouri is predicting hog pricing which would be break-even or better for the average cost producer in the third and fourth quarters, assuming a normal corn crop.
Plain is forecasting an average Iowa-southern Minnesota negotiated price per carcass hundredweight of $67 to $72 for the year. By quarter, he’s predicting a range of $58 to $63 in Q1; $70 to $75 in the Q2; $73 to $78 in Q3; and $66 to $71 in Q4.
The $67 to $72 price prediction is $4 to $8 better than the projected average price range for 2008 of $63 to $64 and $6 to $10 better than the actual average price for 2007 of $61.91. So we’ve been heading in the right direction for the past two years.
Plain expects a 2009 hog slaughter of 113.670 million head, down 2.7 percent from the 116.830 million head projected in 2008, but up from 109.172 million head in 2007. He sees weakness in demand for pork domestically because of U.S. economic woes, but expects that to offset by steady demand for U.S. pork from overseas buyers and fewer expected farrowings next year.
Steve Meyer of Paragon Economics notes that the September and October counts indicate the North American breeding herd is down 3.7 percent compared to a year ago, probably not large enough to drive prices to the point where they cover higher production costs. Even with feed costs easing, he forecasts U.S. production costs to average around $70/cwt., carcass, for most of 2009.
Meyer says the recent pig reports indicate 2009 Canadian-U.S. slaughter to be less than 3% smaller than 2008. Unless hog demand remains excellent or grows, he doesn’t see this as enough to drive prices well into profitable range.
Meyer sees the reductions in breeding herds continuing, but productivity gains eating up much of the declines by the time pigs reach slaughter weight. He cites a Canadian breeding herd that was 7.4% smaller on July 1 yet produced a July-September pig crop that was only 2.5% smaller.
Net of it all: There’s a good chance of profits in 2009. Macro-economic factors will determine how much and how quickly. As we have said before, the most efficient producers will win the biggest – each dollar you take out of production costs is a surer bet than any dollars you’re hoping to gain on the futures market.
Drew Ryder is president and founder of Feedlogic Corporation. Feedback: dryder@feedlogic.com; 320-222-3000
|
