CME: Commodity price changes affect profitability outlook

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Changes in market prices for corn, soybean meal, cattle and hogs have driven some important changes in profitability outlooks for the various segments of the meat/poultry protein sector — changes that have some important implications about the outlooks for 2012 and beyond.

The travails of the chicken sector have been well documented in these pages. By our calculations, continuing losses are stilldriving major reductions in egg sets, placements and slaughter. Lower average weights — hopefully driven by some reductions in the supply of larger birds destined for boning — have finally driven production downward as well. But the reductions have gained little traction for breast prices (thus our hopes for fewer large birds!) and broiler margins are, by our estimates, still deep in the red. To improve the outlook, breast meat prices have to increase. They simply count too heavily for profits to return without a rebound.

The beef sector is, as is often the case, a tale of two very different outlooks. The top chart at right shows the price vs. breakeven cost situation for Southern Plains cattle feeders as estimated by the Livestock Marketing Information Center in Denver. Note the sizable losses that have occurred this year and projected breakevens of well over $130 into 2012. The last observation on this chart is for February 2012 at $134. A major driver of these costs, of course, is higher feeder cattle prices and that situation is likely to get worse before it gets better. Readers should note that LMIC’s estimates are for custom feeding costs and include yardage and a markup on feed. In addition, the price shown here does not include quality or specialty program premiums which a number of cattle now garner.

The situation in the cow-calf sector is completely different. The higher feeder prices that hurt feedyards help cow-calf operations by pushing up calf prices. LMIC’s August estimate of 2012 profits at $88.31 per cow does not include either lower grain prices or higher hay prices seen this fall. Our guess is that those will be about a wash. Some strength in calf and feeder markets may push the 2011 results a bit higher but we think it is safe to say 2012 will be an even better year for cow-calf operations. That is, of course, provided you have enough forage for your cows. Drought conditions, though better, still persist in Texas and Oklahoma, damaging the profit picture in those states. Other parts of the country are in a position to add cows and capitalize on this opportunity.

Finally, the profit picture has once again turned for the better in the hog sector. Based on the production parameters used by Iowa State in its estimated costs and returns computations, average farrow-to-finish breakeven costs will average around $83/cwt carcass in 2012. That is the lowest estimate we have had for 2012 costs yet. Should those costs hold, they would be about $3/cwt lower than 2011 costs. At the same time, Lean Hogs futures have held firm, pushing projected 2012 profits back above $10/head. That number has fluctuated wildly since last summer, going from -$14.60/hd. on August 31 to +$15.38/hd. on October 7 and then back to only $6/hd. the first week of November. We doubt that $10/hd. will fuel much growth.

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