Ethanol Impacts

     Taking a look at the Lean Hog Futures contract prices one really wonders whether we are setting up for the same situation as last year.  Everyone knows that hog prices will get substantially higher over time but the question is a little confused by the seasonal pattern.

     Current prices indicate that packers are making a lot of money since their demand is the sum of both domestic demand and international demand.  The futures today and for the recent past show the December contract above the October for 2008, even though the volume of animals in the fourth quarter of the year almost always is the highest volume of the year.

     Externalities is a concept in economics that I have written about here before but is rapidly becoming the lynchpin argument behind efforts to curb capitalism on a global scale.  It is the primary focus of the attack on modern swine production at the present time at almost every level and across almost any dimension of production (from antibiotic use to shipping products across the ocean).  

Recently I spent a week in London and everywhere I went I noticed how cars were getting smaller and smaller as Londoners faced the skyrocketing cost of fuel. The typical public service worker in London makes about 26k (pound sterling) and the typical private sector worker makes about 35k (pound sterling). They buy their gasoline by the liter and it costs about 4.5 pound sterling a gallon. As I have mentioned, if you are a tourist from the U.S. that's about $9/gallon if you rent a car.

There were a lot of very strange looking conveyances which I suppose classify as cars including the so-called Smart Car. You can check one of these out at www.smartcarpictures.com.

After nearly getting there on June 24 of this year, the June 2009 Lean Hog Futures contract on the CME closed above $100 today.  It opened trading in mid April of this year in the high $80s.  If that price holds, it represents a near doubling of the carcass price for hogs since January of this year.

Don't worry though, we are constantly reminded that such a small percentage of commodity costs roll into the final retail price that you will probably not even notice this impact for the summer barbeque season next year. 

As for me, I'm still on the "buy the biggest freezer you can afford and fill it now" kick but you can wait if you like.  Try to get the cryovac type packaging if you take my strategy, it freezes well for a lot longer than the typical cellophane wrapped cuts. 

One of the consequences of moving to a new equilibrium trading range for commodities is that most of the contracts which define the relationships among cooperative producers have become woefully inadequate and are in need of major revision.

Among others, these contracts include weaned pig purchasing agreements, production contracts where the grower supplies feed, many packer contracts (at least those with a price risk management feature) and contracts which include a "basis" calculation to establish a price.

The typical forms of the weaned pig purchasing contract are 1) a flat fee with a trading range to establish a minimum and maximum and 2) some factor times the deferred lean hog contract. The permanent escalation of feed ingredient costs now make these contracts inadequate to properly compensate the parties.

News comes this week that the Belgium beer brewer, InBev is considering making a move to acquire St. Louis beer maker, Anheuser-Busch. Rapid consolidation in the beer business has been going on world-wide for a long time with many of the local brews with hundreds of years of history in central and western Europe being rolled up into giants like InBev and SABMiller of London. The same has been taking place in Mexico and South America where local beers with brand value are giving way to acquisition as either next generation family members don't want to or can't manage the businesses or the economics of scale make consolidation compelling.

SwineCast 0305 Show Notes:

• Replacing Plum Island Animal Disease Center
• Looking at the economics of biofuels with Dr Matt Roberts of THE Ohio State University
• Talking with VP for International Trade at AMI, John Reddington, at the Pork Management Conference
• Action in the Senate on immigration... an update with Chris Galen 

Worldwide alarms are now beginning to sound regarding the devasting impacts of U.S. (and other Western nation's) ethanol policy which has combined with growing food demand and sequential droughts in key grain growing areas around the globe to produce an impending humanitarian food crisis.

The UK Telegraph says food-based ethanol production may be reaching its political and moral limits. By forcing, through mandate and subsidy, a fifth (and soon to be one third) of the U.S. corn crop out of the food chain and into your gas tank, a mounting humantarian crisis has begun to emerge on a global basis.

The consumer price index is based on a bundle of goods and services purchased by consumers in the U.S. and is a measure of the changing cost of such items. http://www.bls.gov/cpi/ Dr. Elizabeth Hoyt was instrumental in the foundational work leading to the creation of this index and I had the pleasure of being officed near her at Iowa State University during the final year of so of her life and career when I arrived there in the late 1970's. She was in her upper 80's at the time of her death but still came into her office frequently.

According to the most recent release of the index for January 2008, energy costs are on track to rise over 40% (based on an annualized average of the last three months) and food costs are rising at an average rate of about 4.3%. Of course averages betray the distribution beneath.