Hot / Humid and the Price of Feed The Chinese farmers are aware of the US drought conditions and had lots of questions on how bad it might be and where it drought is occurring in the United States. Corn prices in China (Shandong province, China) are about $10.50 and soybean meal (SBM) prices are around $540/ton. Pigs are at break-even levels for the year or even less for some. Excellent producers are now making less than $15/head. It is possible that corn in China will go to $15/bushel this next year and SBM to $600/ton.
Much of the poultry industry is failing and falling fast. Most of the feed companies are not making money this year at best and losing a load at worst! The weather has been mild in their eyes, but I find that heat and humidity are pretty much like the worst in the Midwest. Corn looks real good and everything is green! They use irrigation and can do that with individual water hoses that are dragged from row to row by the owners. This is best described by a clear plastic tube that looks to be about 2 ½ inches and pretty light plastic (we ran over one on the driveway and it started a nice water shooting display) [Editor note: text Jim Lease, JBS United].
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.