Pork: Get Ready for Higher Input Costs

May 06, 2008

Commentary by Victor Aideyan, Farms.com Risk Management

While inputs will remain high, livestock prices should also be favorable in 2009.The United States Department of Agriculture (USDA) provides a gauge of livestock and crop intentions through its quarterly reports. Sometime those reports create angst and uncertainty among producers, as was the case with the March Hogs and Pigs report as well as the March planting intentions report. From a swine perspective, the biggest surprise was the prediction of larger than expected hog supplies through September 2008. “The initial reaction on the production side can only be described as shock and despair,” says Farms.com Senior Risk Management Consultant Victor Aideyan. “The Hogs and Pigs report was a negative surprise, to say the least.”

While the market reacted with lower prices for the first few trading days following the report, they have since rebounded, says Aideyan. “Farms.com Risk Management believes that tightening hog supplies in the 2nd quarter compared to the last quarter will support hog prices between April and early June,” he adds.

For pork producers, it will continue to be important to manage input costs, including corn, meal, and any protein sources. “The price risk management work you do during this period will determine your level of profitability, if any, during 2009,” points out Aideyan. “Barring any exceptional events, we expect the meat complex (hogs and cattle) to hit all time highs in 2009.”

Soybean Acres Ahead of Corn

The USDA Planting Intentions Report released in late March indicated more acres planted to soybeans than expected and slightly fewer acres planted to corn than anticipated. If these intention reports are correct, the situation points to U.S. corn production in 2008 being substantially less than projected for the 2008 marketing year. Soybean production would be on track to meet 2008 requirements, but it would leave the marketplace relatively tight for the 2008 marketing year.

“The implication for corn is that it seems destined for higher prices going into this summer, at least,” predicts Aideyan. “This is good news for cash crop producers as corn and soybeans will go higher, but bad news for livestock producers.” “Given tight reserves, Farms.com Risk Management believes that in the spring of 2009 the competition for acres between soybeans and corn will be even more pronounced than this year,” Aideyan notes. He adds cautiously, “But don’t forget, the crops are not planted yet, and things could easily change.”

What This Means

For livestock producers, Farms.com Risk Management had already advised clients to have one to two years worth of corn hedged using cash bookings and bull call corn option spreads. In addition, crop producers had been advised to buy back any corn they had priced, using call options or preferably bull call spreads. The company advises its clients to maintain this position.

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