For many U.S. pork producers, 2012 was one for the record book: record corn and soybean prices, record summer temperatures and, for some, record production losses. The challenges posed by the 2012 drought and the highest-ever corn and soybean prices made most producers happy to turn their calendar to the new year.
In addition to crop-withering summer heat and record-setting feed prices, many restaurants, supermarkets and institutional food suppliers have stacked another layer of challenge on the industry. The move to eliminate gestation stalls from pork supply chains by major food retailers, including McDonald’s and Kroger, will require considerable investments by those operations that comply with retailers’ directives.
In yet another setback for the industry, the U.S. Environmental Protection Agency was unable to find evidence of severe “economic harm” associated with its Renewable Fuel Standard which will require the ethanol industry to purchase some 4.9 billion bushels of the nation’s corn crop in 2013. Instead, the EPA found that waiving the mandate would only “reduce corn prices by approximately 1 percent.”
While 2012 was a severe challenge to your operation, you now turn your attention to the trials that 2013 has in store. Will we get a break from the drought? Will input costs moderate? When will hog prices be sufficient to yield a profit? Here to provide perspective on some of the issues you will face in the new year are several industry analysts with their outlook for 2013.
Providing the 2013 outlook on hogs, corn and soybeans are three economists from Doane Agricultural Services, a sister company of Pork magazine. Rich Pottorff, chief economist, gives his outlook for hogs while Marty Foreman, senior economist, provides his corn forecast for the new year. Bill Nelson, senior economist, offers the outlook for soybeans.
Hog Outlook 2013
The drought has resulted in some breeding herd cutbacks that will affect pork production in 2013, according to Pottorff. Futures market prices suggest that hog production profitability will return by the spring of 2013.
Pottorff sees a reduction in breeding herd inventory and farrowing intentions as the key to the return to profitability. In recent hogs and pigs reports, the breeding herd inventory was down compared to previous quarters as well as previous years. “Reductions in farrowing intentions are an even stronger indication of the potential adjustment,” Pottorff says. ”If producers follow through on these intentions, the result will be fewer hogs by spring.”
Still, a couple of factors may stand in the way of higher hog prices. Pottorff believes that while some reduction in farrowing has occurred, it may be less than reported. “Futures prices for spring and summer hogs may have been enough to keep producers from cutting back as much as they intended,” he says. Plus, recent data for sow slaughter shows little if any reduction in the breeding herd is currently underway. In addition, a sizable gain in the number of pigs saved per litter is likely if producers culled their least-productive sows.
Still, Pottorff expects hog prices should be higher in 2013, even if pork production doesn’t change much. “The June futures contract shows some nice profits if hog prices attain that level,” he says. “If high hog prices are coupled with falling corn prices, producers may be boosting output again by the second half of the year.”
Under any scenario, Pottorff expects consumers will pay more for pork. “USDA is forecasting a 4 percent drop in beef production and a 1.4 percent drop in pork production for 2013,” he says. “Total red meat and poultry production is forecast to fall by 2 billion pounds and there will be less meat available.”
Pottorff believes 2013 should be a better year for producers than 2012. The breeding herd inventory is expected to be down modestly as the year begins but should move higher by the end of 2013, assuming a successful corn crop. “If corn prices are between $5 and $6 per bushel by summer and fall, producers should see decent margins during the second half of the year.”
Corn Outlook 2013
Currently, the focus is on the market’s ability to ration corn demand for the 2012 crop of 10.7 billion bushels, which is down 13 percent from 2011. “This is the smallest corn crop in six years,” Foreman says. “We expect nearby futures to hold above $7 per bushel through the winter and have difficulty pushing above $8.”
According to Foreman, the corn market must slow consumption enough to wind up with Sept. 1, 2013, stocks at 600 million to 700 million bushels. “That means corn use in 2012/2013 must be cut by 1.3 billion to 1.4 billion bushels from last season.” This would be the largest decline in absolute terms in history.
So how is demand shaping up? With exports off about 45 percent from a year ago, Foreman predicts corn exports for the marketing year at only 1.2 billion bushels, down 22 percent from a year ago. “This would be the lowest export total in nearly 40 years and negative for the market.”
While U.S. exports got off to a poor start for the marketing year, they are expected to improve in early 2013. However, low water and shipping restrictions, or even closure of a stretch of the Mississippi River, could all be setbacks.
Ethanol is generally positive for the corn market. The corn-for-ethanol forecast for 2012/2013 is 4.5 billion bushels, which implies a lower rate of ethanol production of 12.4 billion gallons. However, because alternates for ethanol are limited and more expensive, ethanol demand could support higher corn use, according to Foreman. “We believe that current blending margins and structural demand for ethanol will be positive for corn demand and prices.”
Corn for feed use is a wildcard. High feed costs have caused livestock producers to curb production. Feed and residual use is forecast at 4.1 billion bushels, down 10 percent from last season. The large cut will also reduce DDGS production. “Given historically tight supplies and uncertain demand, it’s not clear that rationing will occur at the needed pace,” Foreman says. “The stage is set for volatile markets in response to the stocks reports.”
While continuing dryness next spring will be supportive, with timely planting and rainfall, prices become increasingly vulnerable to the downside through the spring and summer, Foreman says. “With normal moisture levels and yields in 2013, December futures have downside risk to $4.50 per bushel by the fall.”
With soybean and meal prices vaulting to records in 2012, all eyes will be on the growing season for South American production, according to Nelson. “Prices in 2013 will be largely dependent on the success or failure of the South American crop harvest,” he says. “If another disappointing harvest in South America occurs during this first quarter, we would expect soybean prices to rally sharply and remain high into the second half of 2013.”
At the same time meal demand has been strong, soybean export shipments remained strong during the fall of 2012 into early winter. Then, there’s the China factor, which also could drive exports sharply higher. “With the 2012 Chinese soybean crop a disappointment, 2013 Chinese import prospects appear poised for more growth,” according to Nelson.
Because demand for U.S. beans has been so strong and will continue that way over the next two to three months, U.S. soybean supplies are projected to be at multiyear lows on March 1. “If things were to play out in the real world as they look on paper, the United States will be largely out of beans for export, either as beans or as meal, by April 1,” Nelson says.
Soybeans on hand in spring and summer 2013 will be just enough to meet domestic needs, ahead of a large fall harvest, and likely not much more than that.
If soybean prices are to moderate in 2013, Nelson says two things must happen. “If it turns out that South America produces some decent crops, soybean prices will be vulnerable,” he says. Nelson also sees the possibility of more soybean acres. “Our general view is that U.S. plantings will be a little higher in 2013.” However, corn will compete for acres, and that competition is the major impediment against a multimillion-acre increase in soybean plantings.
Under favorable weather conditions, soybean prices may reach back toward harvest lows at $12 per bushel, maybe lower. Meal prices would retreat to around $300 per ton late in the year. But if there are more production losses in either South America or the United States next summer, $15 or higher soybeans could be the rule.
Grain Price Volatility Clouds 2013 Outlook
Volatility in input prices and revenue requires producers to capture opportunities when the marketplace provides them, according to Kent Bang, vice president, client services, AgStar Financial Services, Mankato, Minn. “Risk management will be a key to success in 2013.”
Increasing volatility has reshaped pig production, and producers will need to rethink the long-term strategy of their business model. “One could make a case that 2013 corn prices could be $4 per bushel, and one could make the case that corn could be $9 per bushel. “
Feed prices have been the key driver to most of the risks the industry has faced, and in 2013 that risk seems even bigger, according to Bang. He believes corn rationing will play an important role in 2013 as there are few alternatives that will add to the supply. “Corn users may not be doing enough to ration the available supply.”
However, users of corn have been responding to some degree, he adds. Pig weights have been held below the prior year, dairy farmers have been reducing herds, broiler placements have been down slightly and feedlot numbers are off by 5 percent at the last report.
Bang also cites a reduction in ethanol production, with several plants idled and many running at less than capacity. In addition, exports of corn have fallen as prices spiked. But the ethanol mandate and ethanol demand will keep that industry from deeper cuts in corn use and even more rationing will be necessary, he adds. Soybean meal prices will likely face similar volatility.
Success in 2013 will be a matter of execution in production, controlling revenue and costs, as well as risk management, Bang says. From a lender’s perspective, risk-management strategies need to manage revenue and input price risk simultaneously. “Margin management is the key to an effective risk-management strategy.”
Bang cites production metrics such as feed cost per pig, percentage of full value pigs marketed and finishing space utilization (pounds per space annually) as vital measures for success. Producers also need to be thinking about how to manage physical inventory of grain. “As a client told me one time, ‘you can’t feed the pigs a corn contract,’” he concludes.
Optimistic for 2013
Even with all the volatility, Bang remains optimistic about 2013. While he doesn’t look for a banner year for pork producers, he says the United States has the opportunity to grow pork exports, particularly in the second half of the year. “Without increased exports, we will face pressure in passing higher costs of production along to consumers in a slowly growing economy. “
Bang expects reduced pork production in the European Union due to their law banning gestation stalls by Jan. 1. “U.S. pork will be in a great position to fill a portion of the demand because much of that volume goes to markets in which we are already well positioned, such as Southeast Asia.”
Gestation Stalls in 2013
In 2012, the Humane Society of the United States and Mercy for Animals intensified their campaigns against sow stalls, and 2013 will bring more of the same, according to Ed Pajor, professor of animal welfare at the University of Calgary. He also cites an unprecedented number of announcements from food-industry retailers indicating intentions to purchase only gestation-stall-free pork.
“The reality is that in North America an overwhelming majority of pork is produced from gestation-stall systems,” Pajor says. “While some major pork producers have started transitioning to group systems, the industry’s ability to meet the request for stall-free pork in a timely manner is unclear.”
A number of scientific research projects comparing the welfare of sows in different systems are underway. “In terms of productivity, studies have reported that, with proper management, performance in group-housed systems can equal or be superior to stalled systems,” Pajor says.
“However, the costs of transitioning to alternate housing systems are substantial.”
There is also evidence that such changes will likely result in further consolidation of the industry and fewer independent family farmers. “Without economic incentives or compensation for producers, transitioning may take more time than expected,” Pajor says.
While animal-activist groups and retailers are often identified as drivers for change, Pajor believes the issue is much larger and more complex. “There are numerous drivers including globalization as well as a shift in the traditional economic power from producers to retailers,” he says.
The most important underlying reason is a change in social attitudes toward animals, according to Pajor. Few consumers have any contact with farms and their only connection to animals is their relationship with pets. “This has significant implications on how the public expects farm animals to be treated,” he says.
The pressure to regulate on-farm management practices such as sow housing will increase in the future, according to Pajor.“If voters remain unconvinced by voluntary standards, state bans of gestation stalls will provide the evidence that the public believes more must be done, which may lead to discussions on national legislation.”
Concern over animal welfare will center on the quality of life that animals are provided, Pajor says, and may soon encompass breeding stalls or farrowing crates. And there’s more. In addition to housing systems, public concern is growing over pain management in animals, he adds.
“It is clear that concern about animal welfare is part of consumer expectations and thus part of future demands on producers,” Pajor says. “Gestation-sow housing is but the tip of the iceberg.”
More Sows, More Risk in 2013?
December’s USDA Quarterly Hogs and Pigs report released Dec. 28 indicates that higher risk levels may be on hand for U.S. producers in 2013.
Expected reductions in the U.S. swine herd due to record 2012 feed prices have not materialized, according to industry analysts in a press conference following release of the report. The report indicated the nation’s breeding herd, at 5.817 million head, was up 0.2 percent from a year earlier. The average pre-report estimate on the breeding herd was for a reduction of 0.7 percent.
The report also shed some light on hog slaughter levels expected in 2013. “It appears that the pig crop through 2013 could reach record highs,” according to Bob Brown, independent meat market consultant, Edmond, Okla.
In addition to stronger than expected animal numbers, sow productivity is continuing to rise. The report showed a record 10.15 pigs saved per litter, up 0.8 percent — a larger increase than predicted by pre-report estimates. “Large production units that dominate the U.S. pork industry are constantly turning over their breeding herds, bringing in new genetics. It’s just one thing they all have to do to stay in business,” Brown said. “The productivity train just keeps on running.”
First quarter 2013 hog slaughter levels will be about as expected, according to Kevin Bost, president, Procurement Strategies, Inc., Des Plaines, Ill.
“Beyond that, there will be a bigger increase than the market has priced in.” Bost sees no reduction in second- through fourth-quarter 2013 slaughter numbers from those registered in 2012. “That is not what the market has been expecting up to now.”
The analysts speculated on the reasons pork producers have not reduced hog numbers in the face of high feed prices.
“An increasing number of producers have been actively managing risks and margins and have been able to avoid the losses indicated by cash markets,” said Steve Meyer, president, Paragon Economics. “Producers came into last summer and fall in better financial shape than many of us expected.”
U.S. pork producers are betting on a significant improvement in the 2013 growing season and the moisture levels needed for driving much better yields than experienced in 2012. “There are huge risks being taken by many producers currently,” Meyer said. “From my perspective, and from what I see in the industry and hear from producers, everything is on the line.”