Marketing Decisions are Key in Good and Bad Years!
By Maurizio Agostino
RECORD FEED PRICES = LARGE LOSSES
The record feed prices of the last couple years generated huge financial losses for hog producers. Does anyone remember the 2012 drought that caused feed prices to soar by as much as $65/head unless you grew your own corn to feed your hogs? Poor feed booking decisions in late 2011 and early 2012 could have cost a hog producer a bundle of money.
It was an even bigger loss as hog futures fell by as much as $37/cwt or $74/head in just a few months after peaking in early July of 2012. Corn in 2012 averaged a record $6.67/bushel and soybean meal averaged a record $440/ ton. Hog breakeven costs were $68.16/ cwt., live weight, up $3.14 from the 2011 record. U.S. sow slaughter rose as some producers tried to quickly reduce their herd size and others decided to exit the industry, while the industry advanced shipments of market hogs to reduce losses on every pound being produced with lower market weights. As a result slaughter was up over 5% from mid-August - September of 2012. Poor marketing/feed decisions in 2012 amounted to a loss of $25-$30/ head, while in 2013 the per head losses dropped to $12 as feed costs moderated.
OUTBREAK OF PEDV = HUGE PROFITS
Roll ahead into the future and falling feed costs and rising hog futures have created a hog barn full of record profits for some producers. As with any industry there are winners and losers and some hog producers in the past 12 months have had to pay a big price as an outbreak of PEDv since April/May of 2013 has caused the U.S. hog industry to shed as many as 4 million pigs.
PEDv is known to strike very young animals, with mortality rates of up to 100%. The number of new cases of PEDv continues to climb. Each of the last 6 weeks prior to March of 2014 increased the number of farms with the disease by more than 250. There are 27 states with PEDv. Iowa, Minnesota and North Carolina have the most cases.There will be hog producers who lost 100% of their pigs and will not be able to experience the record profits that some are enjoying today. 2014 will be one for the history books as there will be the “haves” and “have not’s.”
In the fall of 2013, when 2014 hog futures were trading at $94/cwt and feed was at $5.00/bushel many in the industry locked in feed and hogs because there was a margin. But was this the right decision? Knowing when to hold and fold like in poker, was the key to huge profits in 2014. Some are now experiencing huge margin calls not willing to accept the fact that U.S. slaughter could be down as much as 7-10% and futures could rise above old record highs of $108/cwt.
“decisions made for short-term savings may not be in our best long-term interests and need to be reviewed”
RECORD HIGH HOG FUTURES IT’S ABOUT TIME
In fact, prior to February of 2014, no hog futures contract had ever closed above $108/cwt. The last record high was in August 2011 when August futures traded to $107.47/cwt. Since the beginning of March hog futures have literally soared to record highs on a daily basis. At the time of writing, the April lean hog futures contract is up $20.2/cwt or +22.3% to hit an all-time record high of $127.05/cwt. Putting CME Lean Hog futures ranked the 3rd best performing commodity for the 1st quarter of 2014. May hog futures are also +14.5% or $16.1/cwt to reach an all-time record high at $127.525/cwt. Some are now thinking that U.S. slaughter could be down as much as 15-20% for some weeks during the summer and this has sent 2014 June hog futures soaring to all time record highs at $133.375/cwt +19% just in the month of March or +21.15/cwt. (Please see 2014 June hog futures daily chart price counts above provided courtesy of www.qtplus.com)
The 2014 June weekly futures chart only has 1 gap thus far as we continue to climb into record territory. The July contract is +15.5% or +$17.225 and the August contract is +14.5% or +$16.15/cwt. Many are wondering if the further out months like October and December futures of 2014 will be impacted as futures have stalled. Speculators could be spreading long front months and selling the deferred months, but it will take time for the markets to know what impact PEDv will have on the fall and winter months of 2014.
A very wise and patient hog producer knowing that PEDv cases were rising with seasonality around the corner should have done nothing to date and has been rewarded thus far. So has the producer who booked their feed needs at the beginning of 2014, as higher demand prospects from the USDA caused corn prices to jump 12% or +$0.53/bushel and soymeal prices moved higher by $50/short ton or +12.5%.
“decisions made for short-term savings may not be in our best long-term interests and need to be reviewed"
SO WHEN DO YOU PULL THE TRIGGER?
If you are the hog producer who is thanking their lucky stars and has not experienced PEDv yet and is enjoying these record high futures when does one pull the trigger? Many have already pulled the trigger on fears that they may miss out on very good margins and profits. While sailing into unchartered territory it is never easy and one needs to continue to watch the closing future prices (higher closing highs are important) and the FOB pork cutout value for an indication of a potential top. Greed is setting in as the speculators continue to add to their net long positions at +77,000 contracts (record high near 100,000). U.S. packers will continue chasing hogs until the pork cutout falters. Once that happens, kill/cut margins will fall quickly into the red, and the rally should stall. The timing depends on when buyers/consumers draw a line in the sand on pork prices. (Please see chart below, source Farms.com Risk Management)
As the old saying goes “Bulls make money. Bears make money. But pigs get slaughtered.” The 2014 March USDA Hogs and Pigs Report released on March 28, 2014 indicated significantly larger-than-expected market hog inventories and farrowing intentions than PEDv case accession data. 2014 USDA March 1 Quarterly Hogs & Pigs Report showed an impact of PEDv on inventory numbers but it did not capture all of the impact? Hog futures may have peaked near-term and we will most likely need to buy more time before we will know for sure what the real impact will be and that is many months later. With hog futures almost 90 degrees to the upside we all know that this performance is unsustainable. Farms.com Risk Management’s advice to hog producers is to be careful not to over-stay your welcome; the time is near to “fold, not hold” in swine poker in the coming weeks and months. Any decision you make today could leave some money on the table, but your risk is no longer that you may end up leaving another $10/cwt in profits, the great risk is that futures could drop $10 - $20 from here. You know what to do and what is right for you.
Moe has over 30 years of experience in commodity and equity trading with the past 12 years focused on commodity risk management and marketing. Moe is head of the Farms.com Risk Management division within Farms.com and is the Managing Commodity Strategist. His primary areas of expertise include the feed, grain and livestock industries. Moe uses email and text marketing programs to assist clients, both retail and corporate, in protecting themselves from the excesses and volatility in commodity price swings. In 2013, the division provided hands-on marketing advice on 3.0+ million hogs and over 700,000 acres of crops to both retail and corporate clients across North America with a value in excess of over $1 billion. Farms.com also owns a 2100 corn, soybeans and wheat acre farm in Port Dover, Ontario.