One short year ago, farmers were facing a wet spring, but the worst was still to unfold. June floods plagued much of the Midwest and other areas and set up a real scare to start the growing season. The weather certainly presented serious consequences for many producers; yet for others, it turned out better than expected.
Weather always poses a risk to the emerging crop and, consequently, to your pork operation, but opportunities this year may present themselves to those who are positioned to take advantage of them.
After cutting back herds due to months of production losses, livestock and poultry producers’ demand for corn is falling, bringing its price to the lowest level since late 2007. There is hope this year that lower feed-grain prices will offer an opportunity for improved profit margins for pork producers, but it will require close observation of planted acreage as well as growing-season weather conditions.
Corn acreage is forecast to slip this spring to 85 million acres, down 1 percent from last year and down 9 percent from 2007, according to USDA’s Prospective Plantings Report. Crop growers said they intend to plant 76 million acres to soybeans this season which, if realized, would be the largest planted soybean area on record.
Among the bigger surprises in USDA’s acreage report, however, is the predicted total area planted to principal crops, which is expected to decline by approximately 7.8 million acres. “While it is possible to see some decline in total acres planted this year due to lower crop prices, I think that a good portion (of the 7.8 million acres) will end up being planted,” says Darrell Mark, Extension livestock marketing specialist, University of Nebraska. Mark believes that a lot of those acres will ultimately go into corn and soybeans — especially given the price rally that followed USDA’s report.
Others believe the shortfall in planting intentions may grow further. “The biggest surprise in the report was the 7.8 million-acre decline in total planting,” says Rich Pottorff, chief economist, Doane Agricultural Services. “It’s interesting to note that in five of the last six years, intentions have been higher than actual acreage planted, so the trend is for farmers to plant less than they say,” he notes.
It is understandable why crop growers may be reluctant to step up plantings this spring. For example, the cost of planting corn in Illinois is expected to rise as much as 34 percent this year over last, according to a University of Illinois survey. Fertilizer and seed costs remain high, and while fuel costs aren’t at record levels, they are still not a bargain when it comes to running machinery up and down the fields.
As the global recession continues to erode incomes, export demand for U.S. feed grains will suffer. Could corn prices drop below $3 per bushel? Some say it’s possible. “Cash prices of soybeans will probably drop 28 percent, while corn will tumble 31 percent this year,” predicts Bill Gary, Commodity Information Systems president.
However, just because corn and soybean prices may ease in the near term, it’s no reason to disregard the long-term risk that could still develop as the growing season unfolds.
The “D” Word, a Growing Possibility
As always, the weather is the wild card. “Right now, weather conditions look only slightly more favorable for the 2009 growing season than they did last year,” says Elwynn Taylor, agricultural meteorology professor at Iowa State University. “We were very lucky last year in that we ended up with a bigger crop than most people expected and that was partly because of a cool summer.”
Due to the weather cycle, which Taylor watches closely, he’s constantly wary of the possibility of drought. “We’re a year past the average date when we would expect a drought,” Taylor warns. “The average time between severe droughts is 19 years and the last major one occurred in 1988.”
Taylor reports that in the past 800 years the longest period between droughts has been 23 years. “If we don’t have a drought in the next three years, it would set a record for the time between them,” he adds.
If a drought does occur, Taylor does not think today’s “drought-resistant” crops will provide a complete solution. “We do get higher yields, even in dry years,” he concedes. However, even with more advanced corn yields, which commonly produce 150 bushels per acre, Taylor believes a major drought could still reduce those yields by half.
“The kind of dry weather that cut the yield in half during the 1930s would likely still have the same impact today,” he says. “Of course, today we start out at a much higher yield level.”
Sub-soil moisture levels early this spring give Taylor some optimism about the year’s growing season. “Basically, the level is ample to slightly above normal,” Taylor says. He adds that it could, however, cause planting challenges due to excess moisture as well as increase the risk of flooding. While the crop meteorologist does not see a high probability of repeating last spring’s flood episode, the possibility still exists.
“If no significant weather problems develop, there might be feed-grain buying opportunities for pork producers as we move through the May-to-June time frame,” Mark predicts. However, he cautions that if a widespread weather problem surfaces like last year — wet or dry — it would be quite possible to see the market rally significantly. “Livestock producers who are worried about that prospect, or who may be highly leveraged, should think about buying some out-of-the-money calls to protect themselves,” Mark says.
He’s much less concerned about crop yields falling short due to weather issues. “It is important to remember that yields are less susceptible to weather issues today than they were historically, because the genetics we now plant hedge against those weather risks.”
Another factor working in this year’s corn and soybean crops’ favor is the fact that La Niña has diminished as of the end of March. “Without a significant La Niña, the U.S. corn yield is likely to be above the trend,” Taylor predicts.
Of course, beyond spring, the July and August period set the stage for the eventual yield outcome, which makes it another period worth watching.
In the end, even if 2009 brings the prospect of lower pork production input costs, don’t relax your risk-management strategies. They demand constant attention and the alternative is just too big a price to pay.