Pigs galore, pigs galore: something is wrong

Something is wrong. Taken at face value, the March hog and hog report would imply that we should be harvesting less than 2.4 million animals per week right now. Someone is not reading the book correctly.

So what are you supposed to believe? The USDA or those pesky facts? Strange as it may seem, I believe the current weekly counts are an aberration of an otherwise balanced condition between hog supply and the packer’s desire to fill manila space. Consider this:

  • Dr Steve Meyer’s work would indicate that the final weeks of larger than expected fellings would not fall outside the normal range of our forecast with a steady reduction in available numbers reaching data just before June 1.
  • Bad weather for humans this spring has been great weather for growing pigs. We believe that market animals have been pulled forward by favorable conditions for gain. We should see that reversed on the reported weights harvested last week during our 90s weather series.
  • Prices for piglets weaned in January – these animals should be marketed in June – were $90. If pigs were so plentiful, why would anyone pay such a high value? The answer, of course, is that they wouldn’t.
  • Recent statements from the reporting bureaus suggest our production struggles continue and the impact of the disease is still widespread. We are not yet turning the corner on our production problems.

The author is confident that our fall from grace shortly after the March hog and hog report will be met with a rally of comparable proportion in the coming weeks as buyers discover that market weight animals are not available and the number of harvests slips in a proportional relationship. Remember that $100 isn’t what it used to be. Inflation and bad government policies have reduced our purchasing power at the gas station or the grocery store. Hog producers also know that the three-digit hog gold ring must be evaluated in context, as our production costs have eroded the margin normally associated with these values.

The USDA also gave us a grain recap last week, it was our first look at the 2022/23 balance sheet. It also contains a few things that fall into the “interesting” category. For context, the USDA has only changed the projected yield in the May report from the February forum numbers once in the past 20 years. That was in 2019, when the harvest was a little slower than this year and the prospects for better weather conditions in the long-term forecast were nil.

Although we are very similar in our planting progress, the open window of more favorable conditions was fully anticipated at the time of the USDA report. Yet the USDA cut projected corn yields from 181 to 177, then danced demand to deliver a balance sheet that didn’t scream “ration!” I think there are several troubling elements with this approach, the most glaring not even on the US balance sheet – it’s the world stage.

Global demand for maize is growing at around 35 million tonnes per year, there has only been one year in the past 15 (2012) where the world has experienced negative demand growth, that is the year we took corn to nearly $8.50. My friend, Jake Moline of FCStone, is always quick to point out that, accounting for inflation, $8.50 worth of corn in 2012 equals $10.50 today.

Kerns

You may have already guessed where I’m coming from, the USDA cut global demand for corn in this report. So if our analogue year for production is 2019 (yield 167.5) and our analogue year for demand compression caused by a supply shortage is 2012, what does that mean for prices? Pain for the corn consumer, a new pickup (if he can find one) for the corn farmer. In my view, this current balance sheet paints us somewhat in a corner where we have already priced in demand destruction as a mitigating factor to disappearance and any supply disruption has absolutely nowhere to hide.

Our summer weather forecast isn’t exactly Captain Fantastic. The persistence of La Nina, coupled with a pervasive negative Pacific Oscillation Index, offers an increased chance of warm, dry weather on the west side of the Mississippi River – similar to what we experienced last year. But wait. Last year we had record yields, why should we worry.

Two reasons to have the panic button ready in my opinion. Firstly, the depletion of subsoil moisture over a wide swath of the western belt leaves little room for margin this year and, secondly, last year’s exceptional planting conditions provided the crop with a good start before fading. There is no lead on this year’s harvest, it will take great weather from here on out to reach trendline yields, any hint of hot and dry weather will likely cause the market to fluctuate wildly.

I need to be a little nervous to help contextualize the USDA’s impact in this report. Since 2012 the USDA has used a model of two of them, Paul Westcott and Michael Jewison, to predict the return, the regression is attached below. Their work yielded a powerful correlation with an R-squared of 0.964, meaning the vast majority of deviations are accounted for via this prediction equation, which is truly impressive.

What’s odd is that the USDA chose to quietly drop the methodology of using this equation before making the yield adjustment. Time will tell if this was a good idea or not, what it tells us is that we can no longer rely on the USDA to track their past behaviors. This too will add to market volatility as it turns an old “known” into another “unknown”.

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Here is the bottom line. Margin management has never been more important for pork producers. The recent slump in the futures market represents more than $50 per person in terms of profitability. The recent appreciation of the grain market represents a gap of more than $30 per head between last year’s producer price and the forecast for this year. These massive market moves are largely unpredictable and it is increasingly difficult to expect market timing for commodities. here are several good risk mitigation tools available to growers, call us if you need help.

The comments in this article are market commentary and should not be construed as market advice. Trading is risky and not suitable for all individuals. Click here to contact the author.

Source: Joseph Kerns, who is solely responsible for the information provided and fully owns it. Informa Business Media and all of its affiliates are not responsible for any content contained in this information asset. The opinions of this author are not necessarily those of Farm Progress/Informa.