October 1, 1996 Ames, Iowa Econ. Info. 1703 PROFITABLE HOG PRICE EXPECTED THROUGH MID-1997 The USDA September Hogs & Pigs report released September 27 indicated 4 percent fewer total hogs on U.S. farms compared to September of 1995. The breeding herd inventory was 2 percent lower and the market hog inventory was off 4 percent compared to the same period a year ago. Iowa-Southern Minnesota barrow and gilt prices are expected to average in the low to mid- $50s through the fourth quarter 1996 and first quarter 1997 before moving higher into next summer. Given current expectations for the 1996 corn crop, cost of production for average Iowa hog producers is estimated to return to the mid- $40s for the year ahead. As a result, hog enterprises are expected to be profitable for the year ahead. The September 1, 1996 hog inventory stood at 58.2 million head; 6.77 million breeding animals and 51.43 market hogs (Table 1). The inventory of hogs 180 pounds and over was 2.1 percent lower than the previous September and in line with commercial hogs slaughter (-1.8 percent) for the four weeks since the inventory was taken. The remaining weight categories had four and five percent smaller inventories than a year ago indicating tighter supplies and relatively strong prices in the weeks ahead. Although supplies are forecast to be less than a year ago, the fourth quarter continues to have the largest number of marketings. In addition, heavier slaughter weights, particularly when new corn becomes available, will increase pork supplies at the retail counter. Supporting factors for hog prices will be increased gilt retention this fall, reduced beef supplies through November, and a strong economy. The inventory was lower in this report, but total pork supplies will not decline as much as the inventory suggests. Productivity increases from heavier carcass weights (Figure 1) and improved sow herd productivity (Figure 2) will add to pork supplies. Since 1980, barrow and gilt carcass weights have increased an average of 1.13 pounds or 0.66 percent per year. Average pigs weaned per year per animal in the breeding herd December 1 has increased 0.23 pigs per year. Production and Prices... Fourth quarter pork supplies are forecast to be 4 percent below the same period last year based on the March-May pig crop and hogs in the 60-179 pound categories. Prices that averaged $42.70 last year are expected to average in the low to mid- $50s on strong demand and the tighter supplies. October and December futures closed near contract highs and chart resistance ahead of the report. These price levels offered hedging opportunities at or above the high end of the forecast price range. November lows could reach $50s. Based on the reduced numbers of the June-August pig crop and the under 60 inventory, but offset by heavier slaughter weights, first quarter pork supplies are expected to be 3 percent lower than a year ago. Prices are forecast in the low to mid- $50s as well, but could rally in March in anticipation of the April 1, 1997 removal of the Japanese tariff on pork. This move is well known and built into the market; however, any shortage of hogs at that time will greatly strengthen hog prices.
Second quarter hog supplies should begin to show year-to-year increases. September-November farrowing intentions are even with year-earlier levels. Increases in the pigs per litter number and slaughter weight will increase pork supplies by approximately 3 percent. Growing export demand and beef supplies smaller than those of the previous year will be supportive of hog prices. Prices are forecast to average in the mid- $50s in the second quarter with higher prices likely as we enter summer. Third quarter 1997 pork production will be determined largely by December-February pig crop. Farrowing intentions for this period indicated that producers plan to farrow about the same number of sows as they did the year before. Given the increase in litter size and slaughter weight, pork supplies are expected to increase slightly over the third quarter this year. Prices are forecast to average in the mid $50s. Supplies and prices beyond third quarter of 1997 are difficult to predict, but it appears that producers are looking to expand. The June breeding herd was 5 percent below the previous year and this report indicated a 2 percent smaller breeding herd than a year earlier. The next report should indicate a year-to-year increase in the breeding herd. Coupled with the productivity increases from larger litters and heavier slaughter weights, the resulting pork supply increase in the fourth quarter of 1997 will be larger than the increase in the breeding herd alone. State Races... The regional shift in pork production continues. The record high corn prices of the last few months had a greater impact on the hog inventory of major corn producing states than it did in corn deficient states. Five of the leading states reported increases in the breeding herd inventory: Kansas (+28%), Minnesota (+2%), Missouri (+16%), North Carolina (+11%), Oklahoma (+10%), and the 33 lesser hogs states increased by an average of 28 percent. These expanding states added 377,000 breeding animals from a year ago. Top 10 states that decreased their breeding herd include: Iowa (- 11%), Illinois (-11%), Nebraska (-10%), Indiana (-12%), and Ohio (-12%). Twelve of the top 17 states that reduced their breeding herd cut 505,000 animals. Both Kansas and Oklahoma are now top 10 states. At least part of this growth can be attributed to the Seaboard slaughter and processing plant that opened in Guymon, OK last fall. The Illinois breeding herd continues to decline. Formerly second only to Iowa, Illinois is now tied for third with Minnesota. Iowa's breeding herd has declined 36 percent or 700,000 head since September of 1992. Its market hog inventory declined 3.2 million head or 21 percent over the same period. Feeder pigs are being imported to fill part of the void left by the declining breeding herd. Table 1. Summary of USDA September Hogs & Pigs Report. U.S. %Chg. Iowa %Chg. (1,000) 1995 (1,000) 1995 All Hogs and Pigs 58,200 96.1 13,000 90.9 Breeding Herd 6,770 98.1 1,250 89.3 Market Hogs 51,430 95.9 11,750 91.1 Under 60# 19,330 95.5 3,750 84.3 60-119# 12,800 94.6 3,350 93.1
120-179 # 10,600 96.5 2,550 94.4 180# & Over 8,700 97.9 2,100 97.7 Pig Crop Mar-May 25,092 95.1 4,788 88.7 Jun-Aug 23,650 95.4 4,250 82.9 Farrowing Intentions Sep-Nov 2,801 99.5 510 89.5 Dec-Feb 2,707 98.6 460 86.0 The 700,000 fewer breeding animals would have produced approximately 9.73 million market hogs. These hogs would have consumed 126.5 million bushels of corn and 827,000 tons of SBM, and would have required over 12 million hours of labor. At the 1990-1995 average return to labor and management reported by the ISU Swine Enterprise Records of $15.45/hr., there was $150 million not earned....john Lawrence GRAIN PRICES REFLECT LAGGING EXPORTS AND SLIGHTLY LARGER-THAN-EXPECTED STOCKS Several Factors Pressuring Prices... Grain market psychology has turned negative, reflecting cumulative 1996-97 corn exports through late September that were down 139 million bushels or 64 percent from a year earlier and an approximate one-third decline in summer quarter U.S. corn feeding. Updated indications of summer quarter corn feeding were obtained from analysis of USDA's September 30 grain stocks report. While domestic use of soybeans has been stronger than corn in recent weeks, cumulative soybean exports from Sept. 1 to Sept. 26 were down 42% from a year earlier, and have been a negative influence on soybean prices. The European Union's decision to resume export subsidies on barley and wheat also contributed to weakness in grain prices. EU reportedly offered a subsidy of around 60 /bu. on a recent barley sale along with about 18 on wheat. The trade views these numbers as indicating that prices have overrationed demand. That, along with a slight drop from last year in hog numbers, increased harvesting and negative chart signals may push prices for both crops a little lower into the peak harvest period. December 1996 corn has a gap in the $2.92 to $2.96 range which may be a downside objective. Relatively strong support appears to be present in the $2.85 range. Currently, December corn futures at $2.96 are trading at the lowest level since last January 29. November soybeans on September 30 were at the lowest level since August 19. The November contract appears to have chart support in the $7.35 to $7.45 area. Several indicators suggest prices may recover at least modestly into mid-winter, with soybeans appearing to have greater upside potential than corn. Exports of both corn and soybeans should move closer to those of a year earlier as new-crop supplies become available. Corn feeding should increase substantially this fall and winter since wheat prices are no longer competitive with new-crop corn. Soybean crushings are expected to be relatively strong because of increased U.S. broiler production and limited South American supplies this fall and winter. Also, farmers are expected to store much of their 1996 crops to shift income into next year for tax purposes and to wait for updated supply-demand prospects after the first of the year. Soybean prices this winter and next spring will be
potentially quite sensitive to any serious weather threat in the South American Soybean Belt. Corn prices from late winter onward will be sensitive to U.S. weather and the amount of CRP land returning to production. Carryover Stocks in Perspective... September 1 stocks of both corn and soybeans were slightly larger than the trade anticipated. Corn stocks at the equivalent of 2.6 weeks' annual utilization were the lowest on record relative to use. If the corn crop forecast holds at 8.8 billion bushels, a 700 million bushel carryover would be possible by September 1, 1997. That would be about 8.2 percent of annual use or a 4.3 weeks' supply. Carryover stocks at that level would be more adequate for trade needs than this year, but would be only a little above normal minimum working stocks. Little reserve supply would be available to offset possible 1997 weather problems. U.S. soybean stocks on September 1, 1996 were equivalent to approximately 4.1 weeks' usage. If production is near the September crop forecast, U.S. soybean stocks next September 1 would be expected to drop slightly to about 3.9 weeks' supply, assuming South America has good weather for its winter-spring growing season. Table 1. Stocks by state. Corn % Change Soybeans % Change State Mil. bu. v. 9/1/95 Mil. bu. v. 9/1/95 Iowa 82.7-81 45.1-42 Illinois 633.0-71 32.4-44 Nebraska 42.4-77 19.2-41 Minnesota 44.2-81 22.2-59 Indiana 39.7-55 8.0-52 Ohio 22.4-65 10.0-29 Wisc. 37.1-55 2.1-67 Mich. 11.4-64 3.7-43 Missouri 8.5-68 11.8-36 S. Dakota 12.1-80 4.3-58 N. Carolina 3.2-63 3.3-24 U.S. 426.3-73 183.2-45 In Iowa, 39 percent of the September 1 corn stocks were on farm. That compares with 46 percent of the corn stored on farms nationally. About one-third of the U.S. and Iowa September 1 soybean stocks were stored on farms. Crop Conditions Vary... Frost the week of September 14 damaged some corn and soybeans in north central Iowa and southern Minnesota. The extent of injuries varied even within relatively small areas. Soybeans appeared to be damaged more than corn. Some unofficial estimates indicated frost damage may have reduced the soybean production potential of the two states by 10 to 14 million bushels. Corn crops are generally in good-to-excellent condition in Nebraska, the northern half of Iowa, southern Minnesota, Missouri, Kansas, and central Illinois. In other areas, including northern and southern Illinois, Indiana, Ohio, Michigan, and parts of southern Iowa, conditions are less favorable. USDA's next two crop reports will be released October 11 and November 12. Past supply-price relationships indicate a 100 million bushel change in the
corn crop forecast should move the marketing year average corn price about 6 in the opposite direction. Under present market conditions, prices may be a bit more responsive than in the past. For soybeans, past market relationships suggest a 25 million bushel change in the crop estimate would likely move the marketing year average price about 20 in the opposite direction. Export Sales... Outstanding unshipped new-crop corn export sales and shipments to date on September 19 were 21% below a year earlier. While sales to most markets except Korea were below those of last year, sales to Latin America were up sharply. Western Hemisphere purchases of 1996-crop U.S. corn and shipments to date, excluding Mexico, were up 70% from a year ago. For Mexico, the total was down 16%, along with decreases of 11% for Africa, 7% for Japan, 24% for Taiwan, and 95% for the European Union. Combined Korean purchases and shipments to date were up 49% from last year. Through September 19, China had purchased no 1996-crop U.S. corn. A year ago in mid-september, China had already purchased 72 million bushels of U.S. corn. USDA projects this year's Chinese corn crop to be about 80 million bushels above last season. In addition, China is believed to have modest reserve stocks of corn. Its demand for corn has grown rapidly because of expanding hog and poultry production. China is a shrewd grain traderþits production data may be less accurate than those of other countries. An official from a large international grain company, speaking at an Asian grain conference, indicated he expects China to be in a neutral trade position on corn this marketing year. In other words, it may neither export nor import corn. If that pattern develops, it would slightly temper late fall, winter, and early spring corn prices. In the marketing year ended August 31, China accounted for about four percent of all U.S. corn exports....robert Wisner