Read this article in:

Cheap feed, cheap gas, lots of pork

US pork industry is enjoying the lowest feed costs in quite some time. A significant number of new hogs to be raised in the U.S. is expected. Will the production arrive ahead of the new slaughter capacity?

Thursday 17 September 2015 (3 years 3 months 1 days ago)

The United States pork industry is enjoying some of the lowest feed costs in quite some time. The reasons are many and the forces contributing to feed cost seemed to all line up just in the right place.

First, because of the PEDv epidemic of last year and the still reduced cattle-on-feed inventory, the demand for feed grains has been down some. Cattle numbers are inching back but are still below normal levels for this time of year due to the decimation the industry faced from extended drought and the massive South Dakota snow storm that killed tens of thousands of animals a few years ago. Retailers have had to soften the sky-high cost of beef some as people shifted in large numbers to lower cost pork and poultry as pork production quickly regained the PEDv productivity loss and supplies burgeoned earlier this year. This has resulted in losses now for the big cattle feedlots so they are trapped in a hard place.

Total feedstuff demand did not go down as much as you might think last year because record prices to pork producers drove market weights to record levels last year. This made the short fall in total pork tonnage much less compared to the reduction in head marketed. The reduced demand and massive crop however has led to a very ample carryover close to 1.8 billion bushels for corn and 200+ million bushels of soybeans and the 2015 harvest is well under way.

Crop producers do their typical ineffective tactic when prices fall. They have built so much excess storage during their “banner” years from the ethanol enhancements of corn prices that they now attempt to store everything when prices sag until they get the price levels they want. That might work except too many of them have to pay back crop production loans and the constant leak becoming a flood of corn sales to pay off operating notes ruins the strategy for all of them. Most of them hold their corn until prices drop even farther from new crop harvesting and then they panic and sell it all for an even bigger loss.

Adding to that, the oil price wars have made gasoline so cheap in the United States (except in large coastal cities where taxes are the majority of the price), that ethanol has been a hard sell. The normal mix in the United States is E-10, a 10% ethanol blend per gallon of gas mandated by government. Even though it degrades performance compared to plain gasoline, the overall effect of the mix has been to slightly lower the cost of gasoline as ethanol is normally much cheaper to produce.

We have an increasing number of cars in the U.S. which are specially formulated to accept either E-85, (which is up to 85% ethanol) or E-10, the normal gas, as current prices dictate. The problem now is that the oil stand-off has lowered gasoline prices to the point that it is below the cost of production for ethanol. E-85 prices are normally 30-40 cents cheaper per gallon than E-10 but recently there has been an inversion and the much worse performing (miles per gallon) E-85 has been up to 20 cents higher than regular gasoline as blenders attempt to keep a floor at their cost of production. Even with cheap corn, the distillers are being battered by the gas prices.

The latest USDA estimates of the 2015 crop is that there will be a little less corn (not enough to move the needle much) and some added soybeans no one was expecting. Combine the big crop with the substantial carryover and you have cheap feed and cheap fuel costs for as far as the eye can see. The big questions remain about the gradual expansion of production which is already underway. We have two, big new packing houses coming on line in the next couple of years and now the announcement that Indiana Packers, a mid-size packer which is a joint venture with a Japanese company (Itoham Foods) is making a sizeable increase in their Delphi, Indiana plant to produce substantially more processed pork for the U.S. and export markets. All of this suggests there will be a future market for a significant number of new hogs to be raised in the U.S.

Two tricky things (at least) remain. Will the production arrive ahead of the new slaughter capacity? Low feed costs will help but producers can lose a lot of money even with low feed costs if numbers overwhelm harvest capacity. Will older slaughter plants retire when the new, cost efficient ones come on producing a reduced “net” new slaughter capacity? Something to keep our eyes on but for now, cheap feed, cheap gas, lots of pork and maybe enough demand to keep December from being a disaster. That’s what the cards look like today.


Step by step or nature's inexorability02-Oct-2015 3 years 2 months 16 days ago
Battle of attrition: exhausting conflict03-Sep-2015 3 years 3 months 15 days ago

Article Comments

This area is not intended to be a place to consult authors about their articles, but rather a place for open discussion among users.
Leave a new Comment

Access restricted to 333 users. In order to post a comment you must be logged in.

Not a registered user of 333?sign upand access swine prices, the search engine, ...
It is fast and free
Are you registered in 333?LOGINIf you've forgotten your password we'll send it to you here