Hog market won't rebound anytime soon says economist
Wednesday, April 2, 2008
by BETTER FARMING STAFF
John Lawrence, an economist at Iowa State University, predicts the price break will come when supply dwindles, which he figures will happen some time around December.
On hand at the London Swine Conference held this week, Lawrence made his predictions in the midst of another round of volatile market activity for grains and oilseeds sparked by Monday’s release of the U.S. Department of Agriculture’s prospective planting report, and a report the previous week that showed American pork production was even higher than expected.
Pork producers’ ability to make it through to that time will depend on finding efficiency in feeding and — given the rise in oil prices which are not only affecting fertilizer costs but also transport costs — their proximity to corn supplies. Lawrence noted there is now a significant range in local prices for corn. In Iowa, where the costs of shipping corn is lower, the range, along with savings for fertilizer, has created an “almost a $7 (a pig) advantage, that didn’t exist in 2002.”
Other factors that will shape the hog market in years to come include: the implementation of COOL (Country of Origin Labeling) in the United States; a debate concerning the use of farrowing crates, which could end up creating two distinct markets for hogs; and an aging, prosperous population that would consume less but be more demanding about what it is buying. The latter factor would create opportunities for small niche markets and would also mean export markets would become a more important destination for commodity products.
Lawrence also noted “brands are the new regulations,” pointing out that companies such as Wal-Mart are setting the standards of how animals are raised. ‘Natural’, ‘green’ and ‘local’ niche markets currently offer premiums, but what happens if they become accepted as normal and everything else is discounted? he asked.
He observed that the 2006 outbreak of circovirus “postponed the downturn in the market.” Reduced productivity resulting from the disease kept prices higher than what the market would have otherwise dictated in the first portion of 2007, he explained. In turn, the advent of the vaccine also had its impact on prices by creating a sudden and significant increase in the number of animals reaching the market.
On the subject of ethanol, Lawrence noted that ethanol manufacturers are currently making money processing corn that costs US$5.43 a bushel and would be able to pay US$6 or more for corn “and still not close the doors.” American targets set for ethanol production in 2022 are well on their way to being met and could be hit a decade ahead of schedule “unless something changes.”
Dried distillers’ grains (DDGs) are being adapted as a replacement for corn in the diets of different livestock, and have come down in price, Lawrence said. But he warned producers about some recent efforts to harness the same cellulose used to create DDGs to make ethanol. If successful, this new development could put a “floor price” on DDGs, he said.
To weather current conditions, Lawrence urged producers to consider their corn storage capabilities and a lower finishing weight on pigs to conserve feed.
“The futures markets are trying to ration demand,” he said, pointing to prices ranging from $5.50 to $6 listed for December corn futures from 2008 to 2010. Those prices aren’t about fighting with other crops for acres, he said. “They’re trying to send a signal to somebody – ethanol or feed users or export – to back off.” If the strategy works, prices will fall. If demand doesn’t decrease, then everyone is going to have to learn to live with $5.50 to $6 corn, Lawrence said. BF