The Balancing Act Continues

     I traveled through the midwest corn production areas last week and I must admit, the corn looks exceptionally good.  This falls in line (and my impression is no doubt influenced by!) the recent USDA corn report which puts acres planted for the coming year at 87 million (which is second in acres to 2007, the all time ethanol corn demand plantapalooza), up a million acres.  Acres planted by June 1 were within 1% of the 10 year average despite some muddy conditions early in the Spring.  This comes as we also find a record soybean planting spree, again, all in response to the dramatic supply/demand imbalances set off by diverting a third of the corn crop to fuel.  This will be bad for crop producers, many of whom bought their inputs for the 2009/2010 crop year at inflated prices from the last cost escalation caused by worldwide demand to make bigger crops. Not to mention, they will be teeing up these crops at harvest into a not so hungry livestock industry that will most likely (by that time) be smaller.

     For swine producers, all of this is welcome news as it takes some of the COP pressure off, however, until demand returns or there is a measureable reduction in production, not much can be anticipated in terms of margin improvement.  The massive stimulus spending is not yet bearing much fruit as unemployment creeped up again this month approaching 10% (and now equal with the average of the EU nations).  High unemployment means lower household income and a remixing of the menu down from historical average meat consumption levels.  The fixation on H1N1 is still strong and may be getting stronger which also tends to dampen global demand for pork due to the low levels of education in many developing nations which associate it with consumption of pork.

     As I have maintained, any restructuring or downsizing in the pork production capability of the USA will be lender led as individual producers, by and large, are not going to throw in the towel on their own.  With weaned pig prices in the spot market now selling at $20+ below contracts, we are close to the point where contracts fail, especially those that are flat or do not have a market price adjustment mechanism, at least over some range.  Producers are also looking at all the various packer contract pricing schemes which pay more under current conditions and are I am sure, talking to their packer about shifting their current pricing to those methods.  My observation has been that when this happens, you jump out of the frying pan into the fire as current conditions shift within a few months and now you are priced unfavorably again (as your original pricing strategy comes back into its own!).  For some reason, packers don't like to switch pricing practices or allow producers to jump to alternate pricing schemes whenever it is favorable to the producer.