JUNE 2002 HOGS AND PIGS SUMMARY AND ANALYSIS

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1 July 1, 2002 Ames, Iowa Econ. Info Dear Readers: The Iowa Farm Outlook lost an important "silent partner". For the past 10 years Marci Cox made sure our information was readable, the graphs and tables were legible, and the newsletter was on schedule. She was a dedicated professional who took great pride in her work and held us all to a higher standard. We will miss her subtle hints about deadlines, her perfectionist tendencies, and helpful suggestions. Most of all, we will miss her cheerful personality and genuine enthusiasm for her work and her friends. Marci died of a massive heart attack June 19 at the age of 54. We are deeply saddened, but are better for having known her. JUNE 2002 HOGS AND PIGS SUMMARY AND ANALYSIS Inventory and Production Summary The quarterly hogs and pigs report released June 28, 2002 was consistent with pre-report expectations. The all hogs and pigs inventory was up 2.1 percent from last year. While the breeding herd was nearly identical to last year, the market hog inventory was up 2.3 percent. Most of the increase in market hog inventory was in the heavier weight hogs, as the 180+ lbs category was up 5.1 percent and the lb category was up 3.7 percent. Actual slaughter during the four weeks of June was 6.1 percent higher than the same period a year ago, 1 percent more hogs than the report would have predicted. Part of this difference may be due to increased gilt slaughter compared to the summer of Sow slaughter for the four weeks ending June 15 th was 6.6 percent higher than the year before, suggesting that gilt slaughter may have also increased. However, the increased sow slaughter may also reflect increased imports of Canadian sows added to the US slaughter mix. For the four weeks ending June 15, Canadian sow imports were up 6.6 percent or about 2500 head. This compares to 241,000 sows slaughtered in the US during that four-week period. Revisions were made to the inventory estimates for the last four quarterly reports. These revisions were widely anticipated, given consistently higher than expected slaughter levels. The September 1, 2001 and March 1, 2002 inventories were revised up 0.3 percent, while the December 1, 2001 inventory was revised up 1.2 percent. This report represents the first USDA inventory of pigs that will reach slaughter weight during the fourth quarter (March-May pig crop). The March quarterly report pegged March-May farrowing intentions up 0.9 percent, while actual farrowings based on this report were up 2.2 percent. The March-May pig crop was up 1.3 percent due to lower pigs per litter than the year before. When accounting for Canadian imports, we project 4 th quarter slaughter to be up 2.3 percent from last year. Pork production, including increases in slaughter weights, is forecast to be 3-4 percent higher than the same quarter in 2001.

2 Table 1. June USDA Hogs and Pigs Report Summary 1,000 Head %Change All Hogs 59, Breeding Herd 6, Market Hogs 53, Under 60 20, , , & over 9, Sows farrowing Dec - Feb 2, Mar - May 2, Jun - Aug 2, Sep - Nov 2, Pig Crop Dec - Feb 24, Mar - May 25, Pigs per Litter Dec - Feb Mar - May Fourth Quarter Slaughter Estimates Fourth quarter slaughter rates and the threat of repeating 1998 prices have been a source of concern for the industry. Figure 1 compares weekly slaughter during fourth quarter 1998 to projected weekly slaughter during fourth quarter The 2002 projection is based on an estimated 2.3 percent increase in weekly slaughter compared to the same week in The graph shows projected 2002 weekly slaughter slightly below 1998 levels for most of the weeks. If slaughter patterns resemble last year, 10 of the 13 weeks will see slaughter above 2 million head. Four of the weeks could see slaughter above 2.1 million head and one week would be above 2.2 million head. Fourth quarter 1998 saw five weeks with slaughter above 2.1 million head and two weeks above 2.2 million head. The graph suggests there is a possibility the industry will survive the fourth quarter without breeching packer capacity. However, there may be danger of hitting slaughter capacity if a disproportionate number of hogs are marketed during certain weeks. This underscores the importance of planning ahead and scheduling delivery times with your packer. Actual 4 th Quarter 1998 Weekly Slaughter Compared to Projected 4 th Quarter 2002 Weekly Slaughter 1,000 Head 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, Average Week Figure 1

3 Quarterly Price Forecast Table 2 shows our price and production forecast for the next four quarters. The price forecast represents the range for the quarterly average price. Look for the third quarter average price between $35 and $38. The forecast range for average fourth quarter price is the high $20 s; assuming packer capacity is not breeched. If packer capacity does become a bottleneck, as it did in 1998, cash hog prices could be significantly lower. In that scenario, prices below $20/cwt are not out of the question. The first and second quarters next year should see prices in the mid to high $30 s. These prices are 6 percent-10 percent lower than year ago levels The last column represents the 1 in 6 price based on the historical accuracy of the price forecasts. There is approximately a 16 percent probability that the actual quarterly average prices could be less than the value stated in the column. Table 2. Supply and Quarterly Average Live Iowa Hog Price Forecast Quarter Pork Supply Change Price Forecast 1 in 6 Price Jul-Sep +4% $35-38 $33.00 Oct-Dec +3% $27-30 $22.50 Jan-Mar 03 +4% $34-37 $29.50 Apr-Jun 03 +3% $35-38 $29.50 Trade Developments Consistent with industry expectations, exports have declined from last year when FMD in Europe caused a sharp increase in US pork exports. Net exports through April are down 26 percent from Canadian feeder pig imports through mid-june are up 33 percent from last year. Some of these pigs enter as weaned pigs marketed in approximately 6 months, and some are feeder pigs marketed in approximately 4 months. Imports of Canadian slaughter hogs have been relatively stable, down about 1.6 percent through mid-june. About half of Canadian hogs are imported as feeder pigs. In total, Canadian hogs represent approximately 6 percent of US hog slaughter. Thus, the 33 percent increase in feeder pigs and stable slaughter hog imports combines for a percent increase in total Canadian hogs, or about a 1 percent increase in total US pork supplies (6x.16). Gary May ACREAGE AND STOCKS REPORTS BOOST PRICE SENSITIVITY TO WEATHER USDA s June 28 planted acreage and grain stocks reports cleared up some of the uncertainty in the grain supply situation. The two reports are a caution to grain producers that both corn and soybean prices may be more volatile this summer than in recent years. That s because even with normal yields, stocks of both crops appear likely to decline in the year ahead. The smallest US winter wheat crop in decades also increases the sensitivity of corn prices to weather. Producers may want to consider some forward pricing of crops and purchases of call options to retain upward price flexibility in case summer weather problems continue. Pricing new-crop soybeans is especially risky unless options are used, since prices as of July 1 for harvest delivery were still well below the downward-revised 2002 loan rates. Locking in a price below the loan rate protects against price declines but exposes farmers to the risk of declining LDPs if prices rise further. For corn, new-crop prices in most areas in late June were at least slightly above the upward-revised 2002 loan rates, and LDP risk was not a major concern. Possible Future Acreage Revisions The USDA acreage survey was taken the first week of June and is subject to possible further revision, since plantings in several states were not yet completed. Weekly Weather and Crop Bulletins for early June indicated 4.8 million corn acres remained unplanted on June 2 and 1.2 million corn acres were still unplanted on June 9 in the five eastern Corn Belt states plus Kentucky and Missouri. The planting season of 1995, in some respects was similar to 2002, with delayed plantings in the eastern and southern parts of the Midwest. That year, the end of June planted acreage report picked up about four-fifths of the reduction in planted acreage, with later reports showing slight further downward revisions. In 1995, farmers had 0-92 as a program alternative that may have given some farmers an incentive not to plant after early June. This year, revenue insurance for farmers who had policies in effect also provided some incentive not to plant after early June.

4 Eastern and Western Corn Belt Patterns Offsetting Current estimates indicate farmers in parts of the eastern Corn Belt reduced corn acreage and increased soybean plantings by about a million acres from earlier intentions. However, these developments were almost exactly offset by opposite changes in plantings in the western Corn Belt and South. Indicated U.S. corn acreage for harvest as grain and soybeans for beans point to reductions in carryover stocks of both crops in This is expected to be the second consecutive year of declining corn stocks and the third consecutive year for soybeans. That s provided that yields are near the long-term average trend yields. Delayed plantings in the eastern and southern parts of the Midwest, and hot, dry early summer weather in the western part of the Belt hint that below-trend yields are possible this year unless weather is quite favorable from now through fall. The corn carryover is expected to remain moderately above normal working-stocks needs of the agricultural sector this fall and next fall, although soybean stocks are expected to drop to about minimum working-stock needs, assuming yields are near trend levels. But there are no large reserve stocks of either crop that would offset major droughts such as those of the 1980s. The balance sheets on our web site ( ) show our latest projections of U.S. corn and soybean supplies, utilization, stocks, prices for the year ahead, and comparisons with recent years. Column A represents continued weather problems the rest of the season, while Column B represents approximately normal weather through harvest. Column C reflects better than average growing conditions throughout the summer and early fall. A key question now is whether the U.S. average yield will be close to the Column B trend yield of 139 bushels per acre. Keep in mind that on May 27, the Weekly Weather and Crop Bulletin reported that about one-fourth of the nation s corn acres had been planted later than normal or were not yet planted. Late plantings in the eastern and southern parts of the Belt were partially offset by record early plantings in much of the western Corn Belt. Crop Condition Ratings Decline in Late June The July 1 Weekly Weather and Crop Bulletin indicates that crop conditions deteriorated modestly in the last week due to hot, dry weather. Soybean crop conditions are marginally lower than a year earlier, and corn conditions are moderately lower. Percentages of the crop rated good-to-excellent for major Midwest producing states on June 30 are shown below. Soybean crop conditions in the South ranged from a low of 34 percent good-to-excellent in Louisiana to 64 percent in Arkansas and 74 percent in Tennessee. The crop condition ratings can change considerably this early in the season, depending on week-to-week changes in weather conditions. They provide a general indication of how crops look at this point in time, and later in the growing season are much more closely correlated with national average yields. We have focused on the percent of the crop rated good-to-excellent because that is the portion of the crop that is judged to have the potential for normal or better than normal yields at this time. Note that for corn, only four major producing states show G/E ratings at 60 percent or higher, namely Iowa, Minnesota, Wisconsin, and Indiana. The part of Indiana s crop that was planted on time appears to be doing well. For soybeans, the over-60 percent rating includes these same four states plus Arkansas and Tennessee, which in total have about 4.1 million acres of soybeans. Grain prices in the next several weeks will remain quite sensitive to weather developments from Nebraska to Ohio, and from Minnesota to Missouri. Further declines in percentages of the crop in good/excellent condition likely would push prices higher. USDA s weekly crop condition reports can be found on our web site by clicking on the link Crop Progress and Crop Conditions in the right-hand column. Check the Current Weather by State link a little lower in the same column on our web site for indications of current precipitation and temperature patterns around the Corn Belt.

5 Table 1. Planted Corn & Soybean Acres and Percent of Crops in Good-to-Excellent Condition on June 30, 2002 Corn Acres Planted Corn: % Good/Excellent Soybean Acres Planted Soybeans: % Good/Excellent Iowa S. Dakota Nebraska N. Dakota Minnesota Kansas Missouri Illinois Indiana Ohio Wisconsin Mich Arkansas 0.3 Not Avail U.S. 6/30/ U.S. 6/23/ U.S. 6/30/ World Crops & Condition In the world feed grain picture, South American corn exports for the year ahead are indicated to be 316 million bushels below last season. The crop in these two countries has just been harvested. Production in both Brazil and Argentina dropped sharply this spring because of weather and a shift from corn to soybeans. These two countries normally would be the main alternative suppliers of corn for world markets during the summer and early fall. Lower production there creates positive opportunities for U.S. corn exports for the next several months. Partially offsetting factors include expectations the China will remain a major corn exporter despite its entry into WTO, and increased feed wheat carryover stocks in Eastern Europe and the former Soviet Union that can be exported in the new marketing year. For a graphic view of U.S. corn and soybean exports so far this season vs. a year earlier, click on Current Corn and Soybean Export Charts in the upper left hand column of our web site. World Stocks: Lowest Since ? World feed grain carryover stocks as a percent of use are expected to be lower than revised stocks. When compared to stocks initially estimated for that year, they are the second lowest. In , corn and wheat prices set record highs in response to perceived tight world supplies. Five years later, China s grain carryover stocks were revised sharply upward, making world supplies look much more plentiful that generally believed in Global stocks are projected at 8.4 weeks supply this year, compared with pre-revision stocks at 5.9 weeks for Revised estimates now place the global stocks at a 9.4 weeks supply. For soybeans, South American competition is expected to partially offset the developing tightness in U.S. supplies. Economic problems in both Brazil and Argentina will encourage farmers there to shift acreage from other crops that are more costly to plant to soybeans. U.S. export demand has been supported this spring and early summer by slow movement of new-crop Argentine soybeans, but its exports are expected to increase in the fall as its farmers face cash needs for crop plantings. World soybean carryover stocks at the end of the marketing year, at 9.7 weeks supply, are projected to be the lowest since , the most recent year of tight soybean supplies. In , world stocks dropped to a 6.1 weeks supply. Along with feed grains, the world wheat supply situation is projected to tighten to 13.6 weeks supply at the end of the marketing year, compared with pre-revision estimates of a 9.9 weeks supply in Revised estimates for that year now place stocks at a 12.9 weeks supply. Nearly one-fifth of the world s wheat supply is fed to livestock and poultry, so tightening wheat stocks also may tend to strengthen corn prices some. Robert Wisner