Market Watch

Corn acreage in 2009 should be maintained at least at the level of 2008, according to University of Illinois Extension marketing specialist Darrel Good

“A small increase may be warranted, depending on yield and consumption expectations. There appears to be no need for increased soybean acreage and a small decline may be warranted, depending on yield expectations.

“With winter wheat seedings down by 4.2 million acres, there does not appear to be a looming battle for acreage of spring-planted crops in 2009.”

“For a significant number of (U.S. corn and soybean) acres, the planting decisions have not been finalized. Producers continue to wait on additional information about the cost of spring-applied fertilizer, crop revenue insurance prices, and the likely prices of corn and soybeans during the 2009-10 marketing year.”

The core question is: how many acres of corn and soybeans are needed in 2009?

“The answer depends on three factors: the level of consumption next year, the magnitude of stocks at the end of the current marketing year, and U.S. average yields in 2009,” he said. “Acreage decisions, however, will be made before consumption prospects, stocks, and yield are known. The market must assess those factors and direct appropriate acreage decisions based on those expectations.

“The difficulty, of course, is that not all market participants have the same expectations and expectations continue to change.”

One useful exercise is to calculate how large consumption would have to be in 2009-10 to require more corn or soybean acres than were planted in 2008 under the assumption of trend yields in 2009 and 2008-09 year-ending stocks at the level currently projected by the USDA.

For corn, the USDA estimates that 85.982 million acres were planted and 78.64 million acres were harvested for grain in 2008. The difference of 7.342 million is marginally larger than the previous five-year average of 7.263 million due to slightly more abandonment in 2008.

If 85.982 million acres are planted in 2009, harvested acreage might be near 78.7 million acres. The U.S. average yield expectation for 2009 is likely based on a trend yield calculation. There is no evidence that average yields have increased at a faster rate in recent years of the trend yield for 2009 is near 153 bushels per acre.

With unchanged acreage and trend yield, the 2009 crop would be near 12.4 billion bushels, slightly smaller than the 2008 crop.

“The USDA projects 2008-09 marketing year-ending stocks of corn at 1.79 billion bushels. That level of inventory reflects some surplus that could be used in the 2009-10 marketing year.

“Recently, year-ending stocks have been as low as 1.3 billion bushels, so the current projection for this year represents a surplus of at least 490 million bushels.”

“Under the scenario outlined here, consumption during the 2009-10 marketing year would have to exceed 12.53 billion bushels in order to require an increase in planted acreage in 2009.

“That level of consumption is 580 million bushels–4.9 percent–larger than the USDA’s current projection for the 2008-09 marketing year,” he said. “If the market believes that trend yield is larger than 153 bushels, an even larger increase in use would be needed to require an increase in corn acreage.  An expected yield of 155 bushels, for example, would mean that consumption next year would have to exceed 12.689 billion bushels to require an increase in planted acreage.”

If the Renewable Fuels Standards are binding, a large increase in ethanol use of corn will occur in the 2009-10 marketing year. If world wheat production declines from the record level of 2008, U.S. corn exports will also increase.

For soybeans, the USDA estimates that 75.718 million acres of soybeans were planted and 74.641 million acres were harvested in 2008. The difference of 1.077 million acres is slightly larger than the five year average of 895,000.

“If 75.718 million acres are planted in 2009, about 74.8 million acres would be expected to be harvested. The calculated trend yield for 2009 is 42.3 bushels per acre. No change in acreage and a trend yield in 2009 would point to a crop of 3.164 billion bushels.

“The USDA projects 2008-09 year-ending stocks of 225 million bushels, representing a surplus of about 40 million bushels. Use during the 2009-10 marketing year would have to exceed 3.204 billion bushels to suggest a need for increased acreage in 2009.”

That level of use is 256 million bushels–8.7 percent–larger than the USDA’s current projection of use during the 2008-09 marketing year.

Source: University of Illinois College of Agricultural, Consumer and Environmental Sciences.

Real average weekly earnings rose by 0.6 percent in December, according to the U.S. Bureau of Labor Statistics.

A 0.3 percent increase in average hourly earnings and a 0.9 percent decrease in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) were partially offset by a 0.6 percent decrease in average weekly hours.

Over the year, real earnings in the U.S. increased 2.9 percent.

Hog producers may see modest profits in 2009, depending upon costs of production and other factors, accordng to Purdue University Extension marketing specialist Chris Hurt.

“The industry has had six consecutive quarters of losses from the final quarter of 2007 through the first quarter of 2009. The return to profits sometime this winter is predicated on controlling corn and soybean meal costs and keeping the size of the breeding herd down.

“While producers have some optimism of getting back in the black, they do not want to turn any optimism into breeding herd expansion. Plus, the year of 2009 holds continued uncertainties as the pork industry is caught up in both feed price adjustments and a world economic slowdown.”

The pork industry’s U.S. breeding herd has been in a period of reduction during the last half of 2008. Prospects for a return to profits are based upon some moderation in feed prices from record levels in 2008 and to somewhat higher hog prices as pork production drops about 1 to 2 percent in 2009.

Hog producers continued to reduce the size of the breeding and market herd by 2 percent, according to the USDA’s December inventory report. The breeding herd has been below year-previous levels since June 2008.

Fall farrowings were down 6 percent and winter and spring intentions are reduced 2 to 3 percent. The related pig crops are not down as much because the number of pigs per litter continues to set new records.

Pigs per litter for 2008 increased to 9.4, or by 2 percent, the largest annual increase since 1996. As a result, the pig crop for the past fall was only down 4 percent.

Slaughter supplies are expected to be down about 2 percent in 2009, with the largest percentage drop of 4 percent coming in the second quarter. Total pork production is expected to be down 1 to 2 percent due to somewhat heavier weights in 2009 resulting from higher hog prices and lower feed costs.

“Trade prospects are not expected to be as robust in 2009. Net trade–exports minus imports–represented 18 percent of U.S. production in 2008. That figure is expected to decline to about 16 percent in 2009.

“Fewer exports mean that about 1 percent more pork will be available domestically, but this will be offset by a similar increase in population so that domestic per capita availability will be unchanged in 2009.”

In 2008, the average live hog price for 51 to 52 percent carcasses was about $48. If domestic pork availability is unchanged, does this mean the weakened consumer demand will take pork and hog prices lower in 2009?

“The answer is ‘no’ as hog prices are expected to be somewhat higher in 2009 as the U.S. recession is not expected to have a measurable impact on pork demand. This is because pork is a lower-priced meat compared to beef, and some consumers seem to be shifting away from the higher-priced beef and toward pork.”

Live hog prices are expected to average about $51 in 2009 compared to $48 last year. Prices should rise sharply from the first of the year into spring. Prices are expected to average about $47 in the first quarter and then move to the low to mid-$50s in the second and third quarters. The final quarter of the year is expected to see live hog prices in the higher $40s.

“Costs of production in 2009 will again hold an important key to whether the industry has profits or losses. Using corn and soybean meal futures prices on Jan. 5 and adjusting them to expected cash prices, suggests that costs of production may decline by $3 to $4 per live hundredweight in 2009. This assumes that 2009 corn prices are down about 60 cents per bushel and soybean meal is about $25 per ton lower.”

In 2008, estimated cost for average farrow-to-finish producers was near $53 per live hundredweight with prices about $48, resulting in losses of about $5 per hundredweight or near $15 per head.

For 2009, costs are expected to be near $50 with prices about $51, for profits of $1 per live hundredweight or about $3 per head.

Source: University of Illinois College of Agricultural, Consumer and Environmental Sciences.

• Market Watch
• Pork
• Farm Supply

The Producer Price Index for Finished Goods fell 2.2 percent in November, seasonally adjusted.  This decline followed decreases of 2.8 percent in October and 0.4 percent in  September..

Prices for goods other than foods and energy advanced 0.1 percent in November, compared to 0.4 percent a month earlier.

Source: Bureau of Labor Statistics

Hog producers may be helped by the current recession because of lower feed costs, according to Purdue University Extension marketing specialist Chris Hurt.

“Lower costs in combination with smaller pork supplies in 2009 could be the combination that puts the industry back into profitability. Hog prices may actually increase a few dollars in 2009 as the pork industry in both the United States and Canada reduces breeding herds due to this year’s losses. However, many uncertainties continue for the pork industry.”

Hog prices recently collapsed along with all other farm commodities. From a high of $62.56 average in August, live hog prices are expected to average about $39 for November. The last time prices dropped this much from their summer highs was in 1998 when prices dropped by more than $25 per live hundredweight.

“Surprisingly, most of the decline is attributable to demand factors. Pork exports were flying high this past spring and summer as a result of a weak U.S. dollar and aggressive buying by China prior to hosting the August Olympics. In the period from April through July, exports represented 24 percent of U.S. production compared to 13 percent for the same period in 2007.”

“After the Olympics, China greatly reduced their purchases from the United States. In the first half of 2008, China accounted for 50 percent of the growth in U.S. pork exports. Their peak activity came in the second quarter when Chinese purchases reached about 7 percent of all U.S. production. Chinese purchases then collapsed in the third quarter, dropping by more than 60 percent to about 2.5 percent of U.S. production.”

The exchange rate of the U.S. dollar has increased about 20 percent since July lows, making pork more expensive for foreign buyers. This has resulted in USDA’s export projections being lowered by 7 percent for 2008 and by a more robust 12 percent for all of 2009.

“The financial crisis has had severe impacts on hog prices as well. Since Sept. 26, when the crisis began to unfold, December lean hog futures have fallen by about $9 per carcass hundredweight, or about 14 percent. The impact on meat consumption is related to concerns about the depth of the recession. Generally, the negative impacts are greater for beef than for pork. Pork is generally a lower cost retail product relative to beef and is somewhat favored when consumers become more value conscious. Retail pork prices so far this year have averaged $2.92 per pound compared to $4.31 for retail beef.”

What does all this mean for hog prices and producer incomes in the coming year?

Pork production is expected to drop by 2 to 3 percent in 2009. This may help hog prices average a few dollars per hundredweight higher than the $48 live price in 2008.

Estimated costs of production in 2008 were near $53, but current localized futures prices suggest costs could drop into the $46 to $48 range for 2009.  Current forecasts are for cash corn to average about $3.50 in the coming year compared to about $4.60 a bushel this year. Soybean meal is currently about $260 (at Decatur, IL) for 2009 compared to an estimated $330 for this year.

“Farrow-to-finish pork producers operated under losses for much of 2008, average about $5 per live hundredweight, or about $14 per hog. For 2009, the current price relationship could return the industry to about $5 per hundredweight of profits as prices move from the mid-to-upper $40s in the first quarter to the lower-to-mid $50s in the second and third quarters and finish the year in the very high $40s.”

“Feed prices, while more moderate now, will remain a key to a profitable 2009. Opportunities to both hedge lower feed prices and profitable lean hog futures prices for 2009 are now available. All producers will welcome these improved prospects, and high-risk producers will especially want to consider taking some of these positive margins.”
Source: University of Illinois College of Agricultural, Consumer and Environmental Sciences.

Is there any basis for optimism that corn prices will increase as the marketing year progresses? Not much, according to University of Illinois Extension marketing specialist Darrel Good

“At this point, it is not clear where the fundamental support will come from to generate such a recovery. At the risk of sounding like a broken record, a recovery in financial markets and energy prices will likely be required to generate higher corn prices in the near term.”

The corn market continues to struggle with a number of negative fundamental factors. As a result, prices continue to hover just above marketing year lows.

“The most significant fundamental factor influencing corn prices is the sharp decline in ethanol prices. Over the past 15 months, the price of corn has been highly correlated–more than 90 percent–to the price of ethanol. The price of ethanol–December 2008 futures–has declined from near $2.35 per gallon in late August 2008 to the current price near $1.67 per gallon.”

The average price of ethanol at Iowa plants reached a high of $2.82 on July 3, but was reported at $1.57 per gallon on Nov. 14. The decline in ethanol prices has followed the decline in unleaded gasoline prices which has followed the decline in crude oil prices.

The wholesale price of unleaded gasoline has declined by about 40 percent since early October. While ethanol production will likely continue to expand as new capacity is completed, that expansion will only occur at relatively low corn prices as long as ethanol prices are low.

“Concerns about feed demand for corn have also emerged as livestock prices have declined. February lean hog futures, for example, reached a high near $85 per hundredweight in late June 2008. That price was still near $80 when the financial crisis began to unfold in early September, but is currently near $62.

“Live hog prices at terminal markets have declined from the mid-$60 level in August 2008 to the current level in the upper $30 range. Some further liquidation of the breeding herd may result from these lower prices, even as feed costs have declined.”

Corn export demand was especially strong during the 2007-08 marketing year. Exports reached a record 2.436 billion bushels in the face of record-high corn prices. Demand was supported by two consecutive years of a shortfall in world wheat production, growing world economies, and expanding livestock production.

“The relatively low value of the U.S. dollar also made U.S. corn very competitive with corn from other exporters,. That strong export demand has given way to a much weaker scenario for the 2008-09 marketing year.

“Record-large wheat and coarse grain crops in the rest of the world, slowing economic growth, and a stronger U.S. dollar all contribute to that weaker demand scenario. The USDA projects exports during the current year at a four-year low of 1.9 billion bushels, 22 percent below the record shipments of last year.”

Source: University of Illinois College  of Agricultural, Consumer and Environmental Sciences.

On a seasonally adjusted basis, the U.S. Consumer Price Index decreased 1.0 percent in October after being virtually unchanged in September, according to the Bureau of Labor Statistics.

The consumer price index for all items less food and energy decreased 0.1 percent in October after increasing 0.1 percent in September.

The Producer Price Index for Finished Goods fell 2.8 percent in October, seasonally  adjusted.  This decrease followed a 0.4-percent decline in September and a 0.9-percent  fall in August.

Prices for goods other than foods and energy rose 0.4 percent for the  second consecutive month.

Source: Bureau of Labor Statistics

U.S. productivity rose 1.1 percent in the nonfarm business sector in third-quarter  2008, as hours fell faster than output, according to the Bureau of Labor Statistics

Unit labor costs grew 3.6 percent.

Manufacturing productivity declined 1.0 percent; unit labor costs increased  6.1 percent.

All rates are seasonally adjusted annual rates.