1998 ALL OVER AGAIN?

Transcription

1 April 15, 2002 Ames, Iowa Econ. Info ALL OVER AGAIN? The recent decline in hog prices on top of an already weak market has raised concerns of whether we are in for a repeat of Live hog prices that December dropped below $10/cwt for a few days at the depths of a 27 month-long streak of losses for farrow-to-finish operations that lasted from November 1997 January The March Hogs & Pigs report indicated that the 4th quarter of 2002 was a potential danger zone, as supplies may rival those of 1998; however, nothing in the report would have predicted the current price decline. Let s look at what may be causing the current problems, try to put the 4th quarter 2002 risks in perspective, and discuss the implications for pork producers for the coming months. Spring and Summer Slump Live hog prices increased from $34-35 lows last fall to over $42 in late January of this year. This pattern is typical of prices during that time period and we would have expected prices to remain relatively stable from mid-february through April. Yet, the cash market fell to below $30 by mid-april. The futures market posted similar losses for the spring and summer months, which are typically the highest of the year. Hog slaughter since the first of the year is nearly equal to that of the same period the year before and very close to predicted levels. Weights are up modestly from a year ago, but not enough to produce the price response we have seen. The culprit appears to be a chain reaction caused by the Russian ban on US poultry imports. This product, destined for Russia, is now forced back on the US market, and is filling cold storage and being heavily featured by retailers, resulting in competition for pork. Frozen pork stocks typically builds from October April and is drawn down from May September. Beef in cold storage hit its highest level in a decade in December Total red meat in cold storage put in a 10 year high in January. Total frozen stocks of poultry and red meat at the end of February was within 200 million pounds of the record cold storage of meat set in late During 2001 the US exported an average of 192 million pounds of broiler meat a month to Russia. In January 2002 we exported 225 million mounds. Thus, a one-month stoppage of poultry exports to Russia would fill cold storage to a record level, meaning that fresh meat will have to be sold. Retailers are featuring chicken aggressively. There are ads offering buy one, get one free for chicken breasts and leg quarters and there are other substantial savings. US and Russian officials are trying to reach an agreement on plant inspections and safety precautions. An announcement was scheduled for April 10th, but the 300-page document had to be translated to Russian and be reviewed before it became official, so announcement of resumed trade was postponed. When the ban is lifted, it will still take time for the extra supplies to clear out of the pipeline and it is likely that trade will resume, but not at a pace to remove the backlogged product from the US market. Summer pork prices have also been awaiting improved exports to Japan. Japan was scheduled to lift its Safeguard tariff on April 1, The tariff was put in place last August when our exports exceeded the predetermined growth level. January 2002 exports to Japan were still 12% above the year before in spite of the tariff. If Japan returns more aggressively to the US market and the excess poultry on the market begins to clear, we will see some strength to hog prices this summer. Fall Factors Pork and poultry issues aside, the 4th quarter of 2002 deserves close attention. Let s examine the supply and demand factors that will influence hog prices and determine what variables to watch as potential warning signs.

2 In comparing 1998 to 2002, one notices that there are fewer hogs in the breeding herd now than there were then and that the rate of growth is slower (Table 1). The total inventory in 1998 was 1.4 million head larger with 800,000 of the difference in the breeding herd. Because of the increased productivity of the breeding herd, the inventory of market hogs is much closer, with the only significant difference being in the under 60 pound category (700,000 fewer today). The pig crops reflect the weight categories. Also note that the market hog inventory in 1998 was growing at an 8 percent clip rather than the 1-3 percent increase in Table 1. USDA Hogs and Pigs Report for March 1998 and March 1998 H&P Report March 2002 H&P Report 1998 to 2002 Mil Hd % Change Mil Hd % Change % Change All Hogs Breeding Herd Market Hogs Under Pig Crop Jun-Aug Sep-Nov Dec-Feb Farrowing Intentions Mar-May Jun-Aug Of particular interest is the Mar-May farrowing intentions, as this pig crop will produce the fourth quarter slaughter. In 1998 we expected to farrow 3.0 million litters compared with 2.9 million this year. However, increased pigs per litter will replace part of this 3.3 percent reduction in total litters. The other factor impacting fourth quarter hog slaughter is imports of pigs and slaughter hogs from Canada. Annually, the number of hogs imported from Canada has increased 29% between 1998 and 2001 (Figure 1). The bulk of the growth has come from imported feeder pigs or weaned pigs. Pig imports in 2001 were 35% higher than in 2000 and were 42% higher in the fourth quarter. 6.0 Hog and Pig Imports from Canada (Million head) Weaned and feeder Pigs Slaughter hogs Figure 1

3 Canada s breeding herd is expanding rapidly. It was up 7.8% on January 1, 2002 compared with that of the year before and farrowing intentions for the first two quarters of 2002 were up 12%. It is safe to assume that at least a portion of these additional pigs will come to the US either as feeder pigs or as slaughter hogs. Table 2 is a sensitivity table looking at a range of possible changes in pigs per litter and Canadian imports targeted for 4th quarter slaughter (3rd quarter pigs plus 4th quarter hogs). It shows that even if pigs per litter decreases a quarter of a percent and Canadian imports are equal to those of the year before, 4th quarter hog slaughter is expected to equal 1998 levels. The good news is that even relatively large changes in pigs per litter or imported hogs make relatively small changes in slaughter levels. Percentage Change in 4th Quarter 2002 Slaughter Compared to 4th Quarter 1998 Slaughter. Increase in Canadian Imports for 4th Slaughter Change in pigs /litter 0% 15% 30% 45% 60% -0.25% % % % However, small changes in slaughter numbers may be enough to cause big changes in price if we bump up against a packer capacity constraint as we did in Since 1998 two packing plants have closed, Farmland at Dubuque, Iowa and Excel at Marshall, Missouri. Other plants have added some capacity through expansion or by changes in cooler management. Steve Meyer, National Pork Board, estimates a weekly capacity at million head on a 5.5 day week. A 4% increase in slaughter over 1998 levels has a weekly average that is still below this rated capacity (2.108 v million head). However, there may still be several weeks when slaughter exceeds this rated capacity. As was the case in 1998, over time, double shift Saturdays, and even Sunday runs are possible, but the packer has to be able to move the product to have the incentive to push workers and equipment that hard. Thus, demand factors such as competition from poultry and beef, consumer spending, and exports will be important. Retail featuring and retail prices will also be important for moving the product through the marketing channel. Beef supplies are expected to stay at or above 2001 levels through midyear and perhaps beyond. Total pork exports are 27% higher in 2001 than they were in 1998 and net exports are 17% higher, providing evidence of higher demand in recent years. Likewise, domestic population growth of approximately 1% a year has built demand. Producer Bottom Line In spite of earlier projections of a profitable summer with concerns in the fall, 2002 is now shaping up to be a very tough year for producers. If the fallout from backed up poultry lingers into the summer, the projected profits may not materialize. With normal demand, 4th quarter prices were forecast to average in the low $30s with a 1-in-6 chance of prices below $25. Considering where they are now, lower prices seem more probable. Much like producer returns in 1996 and 1997, 2000 and 2001 were pretty good years for pork producers (Figure 2). And like 1997, losses for producers began in November of 2001 and have continued. Prices are lower today than in 1998, but so are feed costs. Corn in the spring of 1998 was $ compared to $ today. Prices in the spring of 1998 bottomed out at $32.65, peaked at $45/cwt live in late May, and spent a total of 6 weeks above $40 that summer. The big price decline in 1998 started after Labor Day when weekly slaughter topped 2 million head. Adding to the problem of extremely high slaughter levels (2.265 million head was the highest) in November and December, was that many producers scheduled hogs several days in advance with a packer without establishing a price. As a result, the market was very thin on the days of the largest runs. Watch for the Signs and Act Accordingly Monthly pig crop reports for an indication of actual farrowings and pigs per litter. Imports of feeder pigs as an indicator of supplies finished in the US targeted for 4th quarter slaughter. Demand factors, competing meats, income, pork trade, poultry trade Egg set and hatch, broilers can react quickly and may reduce throughput until the Russian ban is resolved. Find shackle space. Check your relationship with your packer. Consider forward pricing for October January when supplies are expected to be the largest to secure a market. A forward price contract also locks in a basis that was a significant problem in If the futures market recovers, you can buy the board to take part in the recovery.

4 Consider the pros and cons of securing a small to modest loss in place of the chance of an even larger, or very large loss. It is a personal choice. Finally, depending on your time horizon and the flexibility of your operation, consider sitting out a few months and re-enter at a later date. $60 $40 Estimated Returns to Farow to Finish Enterprises ($/head) $20 $- $(20) $(40) $(60) $(80) Figure 2 John Lawrence Jan-96 Apr-96 Jul-96 Oct-96 Jan-97 Apr-97 Beginning Jan 1996 and Jan 2000 Jul-97 Oct-97 Jan-98 Apr-98 Jul-98 Oct-98 Jan-99 Apr-99 Jul-99 Oct-99 WORLD CROP UPDATE USDA s U.S. and world supply-demand reports on April 11 showed a few modest changes from last month in foreign crop and export estimates. The changes should have very little impact on grain prices in the next several weeks. They show a large soybean crop being harvested in South America, corn production in Brazil and Argentina that is well below that of last year and two years ago, and large wheat supplies in India, eastern Europe, and the former Soviet Union, some of which is competing with feed grains. USDA raised its estimates of Argentine corn and soybean production slightly from last month, but left its Brazilian soybean production estimate unchanged, despite reduced estimates by several Brazilian organizations. USDA lowered its estimate of U.S. corn feeding for the current marketing year by 25 million bushels, with about 2/5 of the change due to increased sorghum feeding. This raised its projected August 31 corn carryover stocks by a similar amount. Otherwise, its corn and soybean balance sheets were the same as last month. USDA does not yet project supplies and utilization for the coming year. It also increased projections of China s corn exports by about 40 million bushels from last year. The latest export sales report shows U.S. corn exports and sales continuing to move up near year ago levels. Cumulative exports from September 1 through April 5 and outstanding unshipped sales were down only 0.4% from a year earlier. With indications of sharply reduced South American corn production, this total may move above that of a year earlier in the months ahead. China: GMO Labeling Soybean prices in the weeks ahead will be strongly influenced by the results from China s new zero-tolerance GMO labeling program. U.S. export sales to China have been halted for about two months. If China is to match last year s total imports of U.S. soybeans, it will need to purchase and ship about 55 million bushels of soybeans between now and August

5 31. Trade analysts generally doubt that will happen, based on the slow progress in the GMO approval process in the last two months. If China continues to restrict soybean imports from all sources, its imports of other oilseeds are likely to increase in the weeks ahead, and its processing and livestock feeding sectors are likely to experience strong negative impacts. Foreign Feed Grain Competition USDA raised the estimate of Argentina s corn crop being harvested this spring by 0.8 million tons (31.5 million bushels) from last month, but the crop is still indicated to be down 103 million bushels from last year. A little-noticed detail of the report showed that the increase in the corn production estimate was offset by a decline in estimated production of other Argentine feed grain, which is mostly grain sorghum. Combined production of all feed grain in Argentina is estimated to be 134 million bushels less than last year. Argentina s feed grain exports likely will be down by a similar amount in the April 2002-March 2003 trading year. USDA s Brazil corn estimate was lowered about 40 million bushels from last month, more than offsetting the increase in Argentina. Brazil s corn crop is projected to be down about 250 million bushels from last year due to a major shift into soybeans by farmers in its southern states. The exact size of Brazil s exports last season is uncertain, but trade sources there place the total at approximately 240 million bushels. Its exports in the year ahead are almost certain to be well below those of last year, with total exports of perhaps only 40 to 60 million bushels, because of limited supplies. Figure 1 shows changes in feed grain production last year for major foreign feed grain producers. The largest changes were in the former Soviet Republics, where weather was extremely favorable, and in Eastern Europe and Brazil. All three of these areas are likely to have substantially smaller crops this year, although Eastern Europe and the former Soviet Union will have moderate carryover stocks that could be used to offset part of a probable decline in this year s production. In addition, FSU and E. Europe, as well as India, have substantial supplies of feed wheat that are competing with corn in world markets. Figure 1. Change in Foreign Feed Grain Production, vs. Previous Year 2000 Mil. Bu Likely to decline in 2002 Estimates for spring 2002 crop FSU E. Eur. Argent. Mexico China EU Austr. Canada Brazil Total Despite problems with the U.S. winter wheat crop in the southern plains, wheat also is competing with corn in international markets. Significant sources of competition at this time include India, China, and former Soviet Republics. Figure 2 shows the size of crops in these and other countries last year, the amount of their wheat exports, and their stocks as a percent of annual use. Stocks are more burdensome in India than in the other countries, which helps explain India s effort to export wheat. Early crop prospects there look favorable, although the monsoons are a major influence on the size of crops. As with feed grains, the odds of another bumper crop in former Soviet republics this year appear to be rather low. USDA s U.S. Corn Balance Sheet Official projections now show total use of U.S. corn at million bushels vs. last year s production of 9.51 billion bushels. August 31, 2002 U.S. corn carryover stocks are projected at billion bushels, down from billion bushels on that date last year. Exports are projected at billion bushels, down a very slight 10 million bushels from last year. These projections of total use are slightly below our latest projections shown on this web site: USDA s feed and residual use for is projected at 5,825 million bushels, down 25 million from last month and down 13 million bushels from last year. Our feed use is slightly higher, based on increasing hog and poultry numbers, relatively large numbers of cattle on feed, large marketing weights for

6 Figure 2. Selected World Wheat Producers, Production, Exports,Ending Stocks, and Carryover as 4.00 % of Use 80 Bil. Bu Prod'n Exports End. Stks Stks./use % Stks./Use % 0.00 livestock, and a likely decrease in U.S. wheat and sorghum feeding this summer, because of reduced production of both crops. Our export projections are slightly higher, based on continued indications of sharply reduced corn production (vs. last year) in this spring s South American harvest. Export Sales & Shipments Update Cumulative U.S. corn exports and outstanding unshipped sales since the start of the marketing year (Sept. 1) have gradually moved closer to year earlier numbers as foreign competition has slackened. Soybean and soybean product exports and outstanding unshipped sales remain well above year ago levels, although the increase over a year earlier has gradually diminished in the last several weeks with seasonally increasing competition from South America and the halt in sales to China. Soybean oil exports and outstanding unshipped sales are sharply above that of a year ago due to gradually decreasing competition from rapeseed, canola, and sunflower seed oils. Production of these oilseeds declined last year, partly because of adverse weather in Canada and parts of western Europe, and strong competition for cropland from soybeans in Argentina. Foreign production prospects for these crops remain uncertain, especially in Canada where soils have been dry. Canola and rapeseed are very small seeds that must be shallowly planted. If topsoils are dry at planting time, farmers there are likely to prefer to plant wheat and barley. Also, in El Niño years, risk of drought increases in Malaysia, the world s largest exporter of palm oil. Percentage changes from a year ago in the totals to all destinations through April 11 were as follows for major crops: Corn -0.04; Soybeans +4.2; Soybean Meal +14.5; Soybean Oil +94.6; All wheat -7.3 and Soft red wheat (CBOT futures, produced in E. Corn Belt, Mid South). The small decrease from last year in corn exports and sales was concentrated largely in two countries, South Korea and Mexico, which were down 45% and 21%, respectively, from a year ago. Combined shipments and sales to Japan, our largest export market, were down only 0.4% from a year ago, while Taiwan was down 4.3%. Shipments and sales to the other leading U.S. corn export markets were as follows: Canada +17%; Egypt +03%; and Columbia +13%. A number of smaller Latin American markets also were above those of a year earlier. South Korea s decline to a large extent reflects continued imports of Chinese corn. China also has sold corn aggressively to Indonesia, the world s fourth most populous country. For both Japan and Mexico, increased exports and sales of grain sorghum more than offset the decrease in imports of U.S. corn. Sorghum is a non-gmo crop, and some trade sources indicate the sharp increases in grain sorghum exports and sales (+23% to Japan and +14% to Mexico) at the same time corn imports are down reflects buyer preferences for non-gmo feed. Next year, if the planting intentions are carried out, U.S. grain sorghum supplies are likely to be down sharply from a year earlier. The intentions report indicated U.S. farmers intend to plant the smallest acreage of sorghum in 52 years. In the next 8 months, reduced South American corn supplies are likely to bring increased interest in U.S. corn imports. Robert Wisner FSU E. Eur. China EU India U.S. Canada 0