prices

Its time to revisit the notion of opportunity costs. Opportunity costs are measured by the value of the next best alternative that you rejected when you make a decision. Opportunity costs and in fact all costs predate the invention of money. Even in our religious and wisdom writings, opportunity costs abound. For instance, what was the cost to humanity of Eve eating the apple? No money exchanged hands but the cost was the loss of paradise in exchange for knowledge. What is the current (and on-going costs) of choosing your current spouse, if you have one? That usually gets the point across.

Mark Greenwood
March 2008 

It is not getting any better – The losses are continuing in the swine industry. This past month feed prices kept going up while hog prices improved some but not near enough. Losses in the open market are still close to $40 a head and everyone keeps wondering when will it get better and what do prices have to get to before we start getting profitable? Well, the first thing we need to do is to somehow get supply reduced. The last cold storage report shows that we have an abundant supply of product. Even though exports have been very good we need to reduce supply to get any significant improvement in prices.

Mark Greenwood
February 2008

Producers are Nervous – I attended both the Minnesota and Iowa Pork shows this month and there are a lot of producers that are nervous about the future of the Pork industry. I spoke to several groups and outlined what I am currently seeing in the countryside. There are very few systems that locked in 4th quarter and 1st quarter of 2008 margins. I have been asked to give an estimate on margins that were covered and I would say 30-35% have feed coverage and hog coverage through that time period. These producers that locked in that amount of coverage are still losing over $20 per head. Even if you locked in the futures on hogs, the basis widened dramatically because of the large slaughter numbers. In summary, swine economics are ugly and people are hoping that we will see some liquidation.

Mark Greenwood
January 2008

Bad As I Have Ever Seen - The current economics of the pork industry makes me look back at 1998 and 1999 and that seems not as bad. With most producers in the last 60 days getting maybe a $100 for their hogs on the open market and with cost of production on close outs at $140 a head producers are losing money quickly. The other part of this equation is that cost of production keeps going up with corn in Southern MN at $4.75 a bushel and soybean meal at $330 a ton. In looking at cost per head on a farrow to finish operation we are over $90 per head! We were almost at a point where feed costs were not being covered by what the producer was receiving for revenue. The mood of the industry is one of almost disbelief and fear.

     The seats were still warm on the Board of Governors chairs at the FED as they arose to announce their last interest rate cut this month when the DOW plummeted over 200 points.  The past two cuts were met with at least momentarily rising markets but now the expectation is that the FED will need to be much more aggressive in 2008, perhaps one large interest rate cut or two moderate ones to stem the tide of the economic slow down which seems to be appearing (but has not actually arrived in any benchmark statistics yet)..

     Explaining the big drop, commentators pointed out the huge role expectations have in markets.  If you expect more and bigger cuts, these incremental quarter and half percent moves are just delays in the inevitable and investing will have to wait until the big one comes (and lowers the cost of investing even more).  This is the same pattern that is well documented in inflationary times.  If you expect prices to rise, you buy now and that drives up the cost of goods.  If you expect prices to fall, you delay purchases and collectively, that results in a price decline to move building inventory.