Affordable feed grain has been the one consistent bright spot you've had during the last several years. But, like all good things, that may come to an end this year as weather problems could rally corn and soybean meal prices.
USDA projects corn carryover stocks to be 1.62 billion bushels on Sept. 1. The projection for beans is 210 million bushels. In both cases, inventories are smaller than in 2001, which indicates that stocks are tightening up.
That's due in part to fewer acres planted in 2001. Corn acreage last year was down 3.5 million acres from 2000, while soybean acreage dropped 200,000 acres.
This year, growers planted just less than 79 million acres, which is about 3 million more acres than in 2001, says Darrell Good, University of Illinois, agricultural economist. Soybean acreage this year is about 73 million acres, down about 1 million acres from 2001 levels. "The market expected to see less corn and more soybeans because of delayed plantings, but that wasn't the case," says Good.
Another reason for the smaller carryover stocks is a sharp rise in grain exports, particularly soybeans. "China and Western Europe have had an increased appetite for soybeans this year," says Good.
Supplies should be smaller than last year throughout the current grain-marketing year. Not only are carryover supplies lower, but the corn and soybean crops are shaping up to be much smaller than last year's.
"This year's crop has deteriorated," says Bob Wisner, Iowa State University agricultural economist. "This is the lowest overall crop rating for the major corn and soybean producing states since the 1988 drought."
Only three of the top 18 corn-producing states – which make up nearly 85 percent of U.S. corn production – had more than half of the corn and soybean crops rated "good" to "excellent" by late July. All other major corn- and soybean-producing states had only 20 percent to 40 percent of their crops rated that high, notes Wisner.
In the end, only 42 percent of this year's crop was rated "good" to "excellent at the end of July," says Wisner. That compares to 64 percent for last year's crop. "There's a clear indication that the corn and soybean crops will be less than ideal, across most of the Corn Belt," he adds.
Weather has been the biggest limiting factor this year. A dry winter left the soil with less reserve moisture than usual. Follow that with a wet spring in the eastern Corn Belt and then the hot, dry summer that much of the Corn Belt has seen, and it results in struggling crops.
Wisner has a computer-modeling program that has pegged the national average corn yield at 126 bushels per acre based on late July conditions and a five-year average of 134 bushels per acre. That's down from 138 bushels per acre in 2001.
August to mid-September weather will be crucial to this year's final crop development. Corn yields could be anywhere from 123 to 129 bushels an acre.
Weather late in the growing season will be even more crucial to soybean development Wisner notes. Soybean yields are projected for 39 to 40 bushels per acre, but could easily drop if the drought continues.
Good expects to see corn yields drop below 130 bushels an acre. For beans, he looks for yields to decline by two to three bushels per acre from last year, putting the average near 36 bushels.
If Wisner's expectations pan out, he sees corn prices around $2.15 to $2.20 per bushel, which is up from last year's national average of $1.95. For 48 percent soybean meal, Wisner expects those prices to be $198 per ton, up from last year's average of $180.
"In a best-case scenario for growing conditions, corn might average 138 bushels an acre, but that's very optimistic," says Wisner. "That would probably require record yields in Iowa, Minnesota, Wisconsin and some parts of Illinois, to compensate for drier parts of the Corn Belt. If that were to happen, corn prices would average about $1.90 a bushel, which is 5 cents lower than last year."
The computer model shows that with severe crop damage, corn prices could rally to a $2.65-per-bushel national average, with a significantly higher price peak.
For 48 percent soybean meal, under the best growing conditions prices could be $170 per ton. If the soybean crop is smaller than expected, meal prices could exceed $200 per ton.
The weather uncertainty at the time of this writing makes pricing options a bit tricky for pork producers.
"As the growing season winds down, corn and soybean meal prices could spike," says Good. "Pork producers might want to look for some price protection against that spike."
Locking in prices now does not seem to be a favorable option for producers in the longer term. That's because corn and soybean meal prices have already increased in response to the hot, dry weather.
Wisner suggests rather than locking up prices, some producers could use a bull-call spread option at or close to the underlying fututes price. Wisner says this would give price protection within a range.
For example, if you look at a strike price that's 40 cents out of the money, but you don't think the market has the potential to go up 40 cents you would sell that call option. If the market goes up 25 cents to 30 cents you've protected yourself from rising feed costs, while accepting the risk that the price won't rise 40 cents or more, says Wisner.
However, Wisner does not recommend this strategy unless you are very familiar and comfortable with the futures and options markets.
Ultimately, you will have to keep your eyes on the weather through mid-September to get a clearer perspective of the upside potential for feed costs this year. But prepare for the worst, as feed costs are likely to rise at a time when live-hog prices will be turning south. That could add up to a pretty rough period for your profitability.