USDA released three crucial reports at the end of March: the Quarterly Hogs and Pigs Report, the Quarterly Grain Stocks Report and the Planting Intentions Report. These reports outlined the pork and feed grain supplies for the rest of 2012. While corn is in relatively short supply now, the outlook for both pork and corn supplies is higher, as expansion is occurring in both sectors.
In the hog sector, both breeding and market inventories are higher than year-ago levels. The biggest increases are in the lighter-weight hogs (less than 120 pounds). With gains in litter size offsetting declines in farrowing intentions, pork production looks to be 1.5 percent to 2.5 percent higher this year than in 2011. Lean-hog futures have held above $90 per hundredweight through August, then slide into the lower $80s as fourth-quarter supplies come on line.
Fortunately, the decline in hog prices lines up well with the anticipated drop in corn prices as the 2012 crop enters harvest. But nearby corn prices have found strength. The Grain Stocks Report showed lower corn levels in storage than the trade expected. Ethanol demand for corn was strong in the first quarter of the year, and $6-per-bushel corn is still the norm as planting time begins.
But some relief may be on the horizon. The Planting Intentions Report indicated that U.S. crop producers plan on planting 95.9 million acres of corn. That would be the most corn planted in this country since 1937. If we can capture a trend line yield and harvest 92.5 percent of this acreage (that would be a little higher than average), then 2012 corn production would be in the 14.5 billion-bushel range. That would be a record by roughly 1.5 billion bushels and over 2 billion bushels more than 2011’s production. The potential for a very large 2012 corn crop has opened up a sizable spread between old- and new-crop corn prices. While April and May corn prices in central Iowa are in the $6.30- to $6.40-per-bushel range, bids for harvest-time delivery are around $5 per bushel.
Margin management will be key over the next year, and the variability in corn prices can play to a livestock feeder’s advantage. Corn futures are still reflecting a weather premium based on drier than usual soil conditions, especially if you look from northwest Iowa through the Dakotas. But the prospects for timely spring rains and a quick start to planting could pressure prices as we move through April and May, opening up feed pricing opportunities.
Another factor that points to lower corn prices is the saturation of the domestic ethanol market. For the 2010 and 2011 corn crops, approximately 5 billion bushels of corn was used for ethanol each year. That’s enough corn to produce nearly 14 billion gallons of ethanol. But with gasoline demand in the 135 billion-gallon range, 10 percent ethanol blending would suggest domestic demand around 13.5 billion gallons. The ethanol industry has hit its blend wall, and the U.S. Department of Energy’s outlook for gasoline demand suggests that the blend wall will not be moving up anytime soon.
Projections are that gasoline usage will hold near 135 billion gallons for the next couple of years, limiting domestic ethanol demand unless higher blends are approved and incorporated into the fuel stream. As we have seen with the discussion of E-15 blends, that process can take a long time.
Ethanol had been the major growth sector for corn demand, so stabilization of that demand should imply lower prices as we progress through the next year. Back in February, USDA’s outlook cited $5 per bushel for the 2012 corn crop, but that was based on a planted acreage of 94 million. With nearly 2 million more acres hitting the corn market and limited prospects for growth in ethanol demand, the potential exists for even lower feed costs.