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Tuesday, August 24, 2010

Pork Prices? Corn Prices? Where Is The Equilibrium?


When corn is $2 per bushel, feeding it is usually more profitable than hauling it to town. But when corn is $4 per bushel, is it more profitable to feed it or haul it? Adding value to corn is quite dependent upon the price of livestock at the time, but where is the eqilibrium?

Purdue livestock economist Chris Hurt calls it “walking corn to market” if economics call for it to be fed rather than turned into ethanol or otherwise sold as cash grain. In his latest newsletter Hurt says corn prices averaged $2.06 per bushel from 1999 to 2005, but if the corn was fed to hogs it averaged $3.78 per bushel. While some other economists may take issue with the simplicity of his calculations, they indicate the flexibility that your ancestors implemented when there was a choice of raising hogs or just selling corn.

When the price shift occurred for corn in 2007 and 2008, the average price of corn jumped to $4.13, but at the same time if it were fed to hogs, it would have averaged only $2.63 per bushel. That reflects the lower price of hogs that hit the livestock industry at that time and continued until recently. There was considerable expansion which reduced market prices, but then production costs rose when corn doubled in price. As many producers halted hog production and left the business, pork supplies came more in line with demand and hog prices rose to the point of being able to cover the higher costs of feed. Hurt says the beef, pork, and poultry sectors have all been through the cycle and now have product prices high enough to cover $4 corn.

But as corn has edged higher since the August Crop Report, some livestock feeders are wondering how they will be able to afford higher feed costs. Pork producers particularly, are looking at profitability through late into 2011, and then return to a period of expansion that might not allow pork prices to be high enough to cover higher feed prices.

That period of questionable profitability sets in during the third quarter of 2011 when production will surpass the same quarter of 2010, instead of being less as it has been for the past year. The numbers are detailed in a survey by University of Missouri livestock economist Ron Plain and colleague David Miller of Iowa Farm Bureau when they recently surveyed Extension economists about their predictions for livestock production and profitability. They report that pork production will increase by 0.9% in 2011 over 2010 and that 51-52% lean barrows and gilts will sell for an average of $72.73 in 2011, even though the 2nd and 3rd quarters of the year will see average prices in the $75-76 range.

Hurt says corn prices are not threatening with live hog prices at $60 per cwt, and hog producers could theoretically pay $6 per bushel for corn. However with the outlook for $53 hogs this fall and winter, and on into next spring, $5 would be about tops for corn prices that could be covered. With USDA’s forecast for $3.80 corn prices for the new crop, and the futures market pointing toward $4.05, many pork producers will be looking hard at whether they can remain profitable and whether the breeding herd should continue to expand. With live hog prices expected to drop to $48 in the fall of 2011, Hurt says the pork industry has to be cautious about expansion or producers will be unable to even cover a $4 price of corn.

Will $4 be the new “normal” for corn prices? Hurt says no one knows, even though production continues to expand with enough consumption for stocks to fall at those higher prices. The Purdue economist says the livestock industry has adjusted to $4 corn, but producers will have to protect their profit margins in an era when wide swings might be anticipated.

The relationship between corn prices and hog prices has always created opportunities for producers who have the flexibility to sell either grain or pork. As corn has doubled in price over the past decade, the pork economy has been challenged to find equilibrium with feed costs. The future indicates the breeding herd is expanding and pork prices may be dropping late in 2011 which could be another profitability challenge if corn prices continue their upward trend.

Posted by Stu Ellis on 08/24 at 01:33 AM | Permalink

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