Falling corn prices pose profit opportunities

With solid cash market prices and multiyear lows in the feed grain markets, hog, chicken and egg producers are looking forward to better margins.

ALTHOUGH it may be a longer, tougher road for cattle feeders, the prospects for a return to extended profitability are now much more likely for pork, poultry and egg producers.

With corn prices falling to three-year lows last week, many industry experts are seeing much brighter days ahead.

"This year, the hog outlook is almost the opposite of what it was last year," Purdue University economist Chris Hurt said. "Feed prices, especially for corn, have been falling sharply. The hog outlook is profitable, so producers are more likely to be retaining or building the breeding herd, and weights are expected to increase as producers hold onto market hogs longer to gain profits on every pound."

With a much larger corn and soybean crop coming out of U.S. fields this month, feed prices are expected to be much more favorable in the final quarter of the year and throughout the first half of 2014. In addition, the most recent hog numbers from the U.S. Department of Agriculture showed that inventories were unchanged to somewhat larger than a year ago.

"Yet slaughter in recent weeks has been very low, seemingly indicating a divergence from USDA's reading," Hurt said.

With USDA's Agricultural Marketing Service (AMS) out of the picture during the federal government shutdown, estimates of slaughter figures over the past two weeks have been based purely on private industry guesses.

Farm Progress analyst John Otte said a Dow Jones survey of analysts projected slaughter to be more or less steady with last year, at roughly 432,000 head per day. Between mid-August and the end of September, slaughter rates dropped by an average of more than 5%, and weekly slaughter rates were down anywhere from 3% to 10%.

According to Hurt, one explanation for the perceived difference in USDA's inventory numbers and slaughter rates could be related to animal deaths from porcine epidemic diarrhea virus (PEDV). USDA doesn't track PEDV deaths as a "reportable disease," so those numbers aren't known for certain, and it could be several months before hog markets are able to sort out the effects of the virus.


Better than breakeven

"Given low slaughter numbers, cash prices of hogs have been sharply higher than in the same period in 2012, when they averaged $55 per live hundredweight," Hurt said. "With lower slaughter this year, they have averaged about $68 since mid-August."

Combine those stronger hog prices with lower feed costs, and you get a fairly clear projection of profitability over the next 12 months.

Hurt said eastern Corn Belt live hog prices are expected to average in the mid-$60s in the final quarter of 2013 and the first quarter of 2014, with spring and summer prices expected to move slightly higher.

With the cost of production estimated at $57/cwt., he said cash prices in the mid- to high $60s would mean profits of more than $20 per head.

"These profits will enable producers to recover losses of about the same amount in the past year due to the drought," Hurt added.

Chicken industry leaders shared much of the same optimism during the recent National Chicken Council meeting in Washington, D.C. During a market outlook discussion, leading executives indicated that solid chicken prices and much softer corn prices will help, although soybean meal prices are still an area of concern.

Based on September data from USDA and the Egg Industry Center at Iowa State University, analyst Simon Shane noted that although feed costs per dozen eggs produced actually increased 2.9% in September, egg sector margins are improving as well.

"Producers recorded a positive margin of 14.5 cents/doz. at the farm level in September, compared to an operating profit of 20.3 cents/doz. in August," Shane wrote, estimating an average profit of 27.9 cents per hen.


Market recap

Without AMS data, it's getting harder and harder to gauge cattle prices and slaughter trends. Otte said the absence of USDA price and supply data is becoming more and more of a problem for the industry.

"Packers and producers are being forced to use other price discovery mechanisms," he said. "The majority of U.S. cattle and hogs are currently priced off formulas rather than on a negotiated basis. Sketchy data now being used to drive those formulas are less reliable than the numbers (AMS) normally captures with its vast net of 'Market News Service' market reporters."

Urner-Barry put the Choice beef cutout at $192.19 last Thursday, roughly steady with the previous week, with slaughter projected at 122,000-123,000 head per day.

Otte said packers were asking $123/cwt., while sellers were holding out for $128. Trading in the prior week established prices at $126, more or less splitting the difference.

Hog prices, meanwhile, seemed to hold at $61-64/cwt. at the terminals late last week. Urner-Barry reported the carcass cutout at $92.475, with slaughter running at roughly 432,000 head per day during the week.

In the dairy markets, CME Group announced Oct. 8 that, despite the ongoing absence of USDA cash market data, the Upper Midwest federal milk market order is still expected to release both the weekly and monthly prices as scheduled. As such, the final settlement of the CME milk (Class III and Class IV), cheese, butter, whey and nonfat dry milk futures and options contracts are expected to occur Oct. 30 as scheduled.

Volume:85 Issue:42

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