Agriculture has always been a gamble, whether it involves crops and weather or animals and disease concerns. But clearly the message in the last few years is that volatility is the new normal.

While pork producers have produced nearly too abundantly for their own good, it’s the input side that has inflicted the sharpest pain.

“The big question that I ask clients everyday is ‘what are your feed costs going to be in the foreseeable future?’” says Mark Greenwood, vice president with AgStar Financial Services. “It looks like the average breakeven will be $66 to $68 per hundredweight (carcass), which means you need hog prices above $70 to be profitable.” That’s new territory.

The short-term and long-term outlook seems to be all about new territory. “For corn prices, $3 to $4.25 per bushel is the new normal range,” says Steve Meyer, president of Paragon Economics. Of course, ethanol’s corn demand is part of what’s driving that new normal.

Ethanol’s strong link to the crude-oil price means corn also is linked to the crude-oil price, especially when those prices move beyond $70 per gallon, Meyer says. In response, corn is likely to push into the $4- to $4.10-per-bushel mark.

While ethanol’s corn usage is still growing, it has slowed. There are 193 ethanol plants in production today; 13 are operating under capacity. Ethanol plants are expected to use 4.66 billion bushels of corn this year, with the capacity to use 5.2 billion bushels. “There’s not much downside for corn prices because the extra capacity will come in,” Meyer says.

Many have pegged hopes on getting things like the blended tax credit rescinded. But Meyer points to a FAPRI study which shows that if the blended tax credit, import tariffs and the Renewable Fuels Standard were all dropped, the result would reduce corn prices by about 13 percent or 50 cents per bushel. “The bottom line is the capacity is there,” Meyer says.

Two Kansas State University agricultural economists dug into how ethanol production can impact corn prices. Daniel O’Brien and Mike Woolverton studied the average weekly cash corn prices and trends in major ethanol-production states from October 2006 to December 2009, using USDA Agricultural Marketing Service data.

They found that corn prices generally gyrated between $3 and $4 per bushel. For the 167 weeks, corn prices for the “ethanol-producing region” averaged $3.96, with a median price of $3.65. The high/low range was $6.93 to $2.40 per bushel.

Here’s a look at the states in the study.

  • Indiana: The state’s corn prices trended 16 cents per bushel higher than the region’s average, with Indiana averaging $4.12 for the 167-week period (median, $3.84).
  • Illinois: Corn prices for the study were only available beginning in October 2007, but the average, checked against Indiana’s during an identical period, came out as $4.36 per bushel (median, $3.93).
  • Eastern Iowa: Price varied from 10 cents to 15 cents below the regional average to 10 cents to 20 cents above it. For the study period, eastern Iowa’s average came in at $3.93 per bushel (median, $3.68).
  • Western Iowa: These prices also trended higher relative to the ethanol-production region’s average but to a lesser degree than for eastern Iowa, illustrating ethanol’s competitive impact. Western Iowa’s corn price averaged $3.92 per bushel (median, $3.62).
  • Southern Minnesota: Cash prices there consistently averaged 10 cents per bushel lower than the multi-state region but, as O’Brien and Woolverton point out, with “a fair amount of variability around the trend.” Average price was $3.84 per bushel (median, $3.55).
  • Nebraska: The trend there is to be 10 cents per bushel lower than the regional average. Prices averaged $3.91 per bushel for the study period (median, $3.62).
  • Eastern South Dakota: Corn prices followed a similar pattern to Nebraska’s, averaging 20 cents below the region. The economists speculate the trends in South Dakota and Nebraska “may be due to somewhat more competitive or tighter corn supply/demand conditions than in other parts of the Corn Belt.” Prices averaged $3.76 per bushel (median, $3.40).
  • Kansas: Central Kansas prices averaged 10 cents per bushel above the regional average. In western Kansas where there’s more livestock competition for corn, prices ranged from 25 cents above the regional average to 12 cents below. O’Brien and Woolverton note the trend reflects the fact that livestock feeders have to more aggressively compete for corn supplies. For the study period, central Kansas averaged $4.02 per bushel (median, $3.69).

The economists concluded that cash prices vary significantly due to the competing factors in an area, including the number of ethanol refineries. As a result, they believe  the ethanol industry will influence the reshaping of agriculture structurally for many years to come.

What to Expect on the Hog Side?

“U.S. consumers will notice much tighter pork supplies in 2010,” says Chris Hurt, Purdue University agricultural economist. Pork production for the year, depending on market weights, will fall 2 percent to 3 percent. However, domestic supplies could drop as much as 6 percent due to stronger U.S. pork export sales.

USDA forecasts pork exports to rise to 4.6 billion pounds, which will grab 21 percent of U.S. production, Hurt notes. That’s up from about 4.2 billion pounds in 2009, which equaled 18 percent of production.

“A 6 percent decline in per capita availability is a relatively large supply reduction, but improved (domestic) demand also will be a critical factor in the drive to higher pork prices,” Hurt says. Important unknowns continue to be the strength of the economic recovery and the consumers’ buying patterns.

USDA expects food price inflation this year to run 3.5 percent versus the more typical 1 percent to 3 percent. Pork’s protein competitors should have lower supplies than in 2009; however, reductions in chicken (down 3 percent in 2009) and turkey production (down 6 percent) are slowing.

“There has been a huge reduction in cold-storage meat supplies,” says Steve Meyer, president, Paragon Economics. “Pork supplies are dramatically low heading into the spring.”

Both Meyer and Hurt look for 2010 to be a better year for U.S. pork producers. Even with relatively high production costs, “pork producers are not expected to go backwards financially in 2010,” Hurt says.

Even last year, some producers sold well above the spot-market hog price, whether that involved futures, packer contracts or some other pricing option, Meyer notes. “The futures’ carrot is good again, offering some opportunities,” he adds. “Of course, that could reduce some liquidation.” He says that the North American sow herd needs to drop 12 percent, or down to 6.8 million for the two countries.

For the year, Hurt’s average market hog price is $67 per hundredweight on a carcass basis; Meyer estimates it at $64, with the second and third quarters in the $70 to $77 range.