Soybean Meal Prices

     The pig production business has always had its ups and downs but developments over the last few years have resulted in the structuralization of increased levels of price and financial risk.  By structuralization, I mean that these factors are now regular, recurring added risks that are no longer random, isolated events which no risk management process can adequately predict or mitigate effectively.  The factors include the predicted and now realized reduction in the average level of the stocks-to-use ratios for corn and soybeans placing feed prices in a continuing, annual, heightened state of price risk volatility.  Bob Wisner, retired crop extension professor from Iowa State University told World Pork Expo attendees that we will end up the soybean year with as little as 2.2 weeks of the supply remaining.  The cold, rainy corn belt conditions which delayed the corn planting period in the U.S.

     Here is a handy little abbreviated table to guesstimate your cost of production for a 270lb live weight animal.  Glenn Grimes at the University of Missouri has just indicated that there is a 100% probability that the average COP for pork producers in 2008 will start with a "5" on a liveweight basis.

     Within the table below, you pick a combination of corn price and soybean meal price.  If you pick the combinations in the top part of the table as your guess for the average 2008 feed ingredient prices, use the COP forecasts with a "1" label.  If you pick the corn price/bean meal price combination in the lower part of the table, choose the COP forecast with a "2" label.  I have provided them in both carcass and liveweight amounts to cover everybody's favorite way of thinking.

So let’s play around a bit with this variation stuff and see how the future cost of production might look for hogs if we forecast it by first forecasting corn and soybean meal prices and then putting those forecasts into a cost of production model to generate a forecast for future carcass prices.

This hog cost forecast was generated assuming that corn would average about $3.50/bushel and that soybean meal would be about $250/ton on average.  Under those circumstances and some stuff I will share in a minute, the average hog cost of production for a 270lb animal would be about $62.50/cwt on a carcass basis.  However, by using the variances and the correlation between the input prices in the forecast model, we can create a forecast not only of the average price but the range over which it is likely to wander and the probability it will reach any one price in the range.