Peeking around the corner

Producers should considering locking in profits into 2023.

 

Joseph Kerns, National Hog Farmer 

Sep 19, 2022

 

The USDA released its monthly report “World Agricultural Supply and Demand Estimates” report last week, catching many on the grain side by surprise. The decrease in bushels/acreage was largely anticipated as the combination of lower yields and reduced acres put a crimp on production. This led to a manipulation of the balance sheet that was on the edge of uncomfortable. Additionally, the USDA also provided livestock balance sheets that were secondary but also worth noting. Here is a tale of the tape.

 

Corn yields are declining given the absence of rain in the month of July. As a marker, Des Moines reported roughly half of normal precipitation for the timeframe that is the most critical to yield. The USDA regression emphasizes rain in July as the most important predictor of yield; stumbling on this one makes it hard to compensate, even if all else is favorable. Note on the attached chart that the R-squared (a measurement of how much of the variation is accounted for in the equation) is an impressive .96, a solid regression. The biggest component is July rain. We fell short and should not be surprised with the compression in yield.

 

This, in turn, led to some gymnastics in the balance sheet as feed, exports, and ethanol grind were all trimmed a bit just to make a carryout number that was plausible without widespread panic. The market responded with a sharp increase in value in both corn and soybeans and has stabilized for a moment as it awaits the next input. In the short term, demand looks lackluster and harvest weather looks favorable.  If we get a compression in the market, I am an advocate for pork producers to obtain coverage of inputs and consider the sale of revenue item to secure profits using a window strategy.

 

The livestock component of the report is where things got “interesting” for pork producers and the animal ag industry as a whole. Poultry production is anticipated to increase a bit, and pork production is also forecast to increase, although not to a level that threatens shackle space in 2023. Beef production is anticipated to drop precipitously (Table) and more than the bump up in pork and poultry. We are going backwards on available protein supply into the future. This, too, is not a huge surprise and has largely been incorporated into the forward curve of values that look favorable to pork producers (summer months well above $100) for another year.

 

It is against this backdrop of stable grain prices and no perceived production threat on the protein side that I am an advocate of producers considering locking in profits into 2023. That may seem counter-intuitive, but consider this:

 

more, including tables

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