MANAGING THE RISK OF PRICING LIVESTOCK      



January 15, 2013

 

The use of Profit Trak© begins with the input of production history, allowing one to understand the breakeven cost of producing (growing) and marketing livestock. Profit Trak© enables the formation, execution and administration of a strategy to manage the risk of livestock marketing. Profit Trak© provides a means of centralizing the disciplines and record keeping in one easy-to-access and easy-to-manage location. After bringing livestock to sale weight, historical marketing factors are used to calculate the net effect of selling at a particular weight, the effects of premiums and sort loss for carcass desirability, selling and administration costs associated with actual delivery.

 

Swine Fundamental Analysis

 

USDA expects pork production for the first quarter of 2013 to be down 2.3% vs. one year ago with the 2nd quarter about unchanged, up .8% for the 3rd quarter, and up 2.1% in the 4th quarter, with total pork production up slightly for the year. Prices for 2013 are expected to be $81-$84/cwt. dressed in the first quarter, which is right within the current cash range for hogs deliveries, $85-$92/cwt. in the 2nd quarter, $85-$94/cwt. in the 3rd quarter, and $73-$79/cwt. in the 4th quarter.

 

If correct we’re talking about some June and July potential prices at the level we’re selling live hogs for right now, which at $7.50 corn are not making a profit, in addition to selling fall hogs at below the profit margin. It might be a wise move to prices the futures in at the present level for at least 50% of total production in each quarter. April is currently at $87.85, with June at $96, and October at $86.00. 50% might be a little strong because we’re supposed to get an April rally. But I would hesitate to leave everything to the rally and somehow miss it. Remember last year and how prices reacted during the course of the spring months? We didn’t really get a rally until late May of June and by then cash prices were so good one didn’t care. However, back in February of 012 one could have prices October hogs at a neat $87 and that never happened again.  Remember what we were selling live hogs for in September. If memory serves me the low was $63.50/cwt. dressed. Expectations are that the April rally this year will top out at $92-$94 and if so that’s a home run. The current cash price, though good doesn’t give much room when feeding $7.50 corn, but 92 to 94 sure would provide a little breathing room.

 

Iowa State has calculated the estimate of the average Iowa market hog sent to slaughter during October cost a record $73.29 per hundred of live weight to raise and was sold at a loss of $31.16 per head. I can identify with that and I think that almost everyone is leaving $25 to $35 per head on the table. Cost of production for 2012 is expected to average over $68/cwt. $3 above the 2011 record. When over with losses are expected to average $11 to $12 per head, making this the worst year financially since 2009. I remember 2009 and if you’ll recall live carcass prices never got over $60 all year. That’s certainly not true for 2012 – in fact we’ve had a lot of good hog prices during the late spring and summer months. Also, September was a bearcat but the October and November prices came back to the middle 80’s and that’s not bad for this time of the year. Prices have not been the problem – it’s the cost of production basically premised on the price of corn in a drought ridden ethanol driven economy. That’s the problem and it’s too bad politically it has to be that way.

 

Swine Recommendations:

 

All producers, even those not averse to risk taking, should now have 100% blanket coverage through February and 55 to 60% into July and August. I recommend that the majority of producers handle the risk of protecting prices through the use of forward or hedging contracts 13 to 6 months out, with the use of options to protect the bottom end in the event they are not able to price at a favorable level near term, and the use of futures hedging especially during the last three to five months.

 

 

The Feedstuffs Fundamental Analysis

 

Corn traded sharply higher for a couple of days following the Friday USDA grains report and did climb through the support level of $7.17 for the March corn contract. Friday could be called an everything day trading sharply lower in the A.M. and then sharply higher but closing at $7.09 for the day. Some are forecasting higher intermediate corn prices but I don’t know anyone ready to predict a return to the high sevens into $8.00. The market was oversold going into the report and ripe for a technical bounce. I’ll go along with a technical bounce – one bounce. My guess is that S. America and a few timely rains in the U.S. will have something to do with that, and as a livestock feeder I certainly hope for a lot of timely rain. Currently corn is at a carryover figure of 602 million bushels, which is said to be at or near pipeline minimums. The extremely low corn exports means we have lost world U.S. corn demand, and why not?? Who would want to buy very much of it at the present price level?

 

Rabobank’s report that corn, and soybean prices will climb in the first part of 2013 and then weaken in the second half of the year is probably pretty much a given. I don’t think they’re correct in predicting corn prices of $7.90 in the first quarter. It looks like Argentina is experiencing a year like 2011, with producers there saying they will produce 20% less corn due to excessive rains from August to October but Brazil is drying up nicely. The harvest is expected to be delayed until May and June.

 

The exporting of corn continues to slowly but surely falling apart, in large part because much of the world cannot afford to pay $7.50 per bushel. Why should we be surprised? The U.S. ethanol plants can’t afford it and are reducing output and closing their doors in response to the reduction in corn supplies. The livestock feeder can’t afford it and is slowly going broke, and according to Darrel Good, Extension Economist at the University of Illinois the trend will continue through into 2013. As of Oct 19th production of ethanol was down 12 percent from last year and the year-over-year reductions are likely to continue to be large. It is known that set-aside acres are being prepped for production next year that haven’t been around for a long time and other farmers are tearing out fence lines just to pick up another 5 or 6 acres in every quarter.

 

With soybean meal my suggestion is that all users price SBM at the present level of cash only in the range of $400 to $420/ton and only for a 60 to 90 day period. Typically SBM tends to bottom out a seasonal low in the first week of October and during that week Dec SBM traded at a low of $268 and is now trading at $400+.  No large percentage of meal to be fed this coming year should be priced at this level. The board should be used to protect pricing and watch for a correction to the down side. If meal does not decline significantly more continue to include more DDG’s and alternate feed ingredients to offset the need for bean meal protein.

 

Following is a strategy for the purchase of soybean meal for the balance of this year, assuming you don’t already have your meal priced in the 280.00 to 310.00, and assuming prices could continue to go up along with the beans. Depending on which part of the country you are in, add or subtract basis from the purchase figure.

 

 

 

Soybean Meal Purchase

(Up/Down Market)

 

 

 

 

 

 

 

 

 

Monthly Use (ton)

   Price
   Futures/Cash

Apr

May

Jun

Jul

Aug

Sep

Oct

   Monthly usage

400

400

400

400

400

400

400

   320

60

60

60

60

60

60

60

   310

 

60

60

60

60

60

60

   300

 

 

60

60

60

60

60

   290

 

 

 

60

60

60

60

   280

 

 

 

 

60

60

60

   270

 

 

 

 

 

60

60

   260

 

 

 

 

 

 

40

 

 

 

 

 

 

 

 

   Cost of 

   Soybean Meal

 

 

 

 

 

 

 

   320

$ 19,200

$ 19,200

$ 19,200

$ 19,200

$ 19,200

$ 19,200

$ 19,200

   310

 

$ 18,600

$ 18,600

$ 18,600

$ 18,600

$ 18,600

$ 18,600

   300

 

 

$ 18,000

$ 18,000

$ 18,000

$ 18,000

$ 18,000

   290

 

 

 

$ 17,400

$ 17,400

$ 17,400

$ 17,400

   280

 

 

 

 

$ 16,800

$ 16,800

$ 16,800

   270

 

 

 

 

 

$ 16,200

$ 16,200

   260

 

 

 

 

 

 

$  10,400

   Total Cost

$ 19,200

$ 37,800

$ 55,800

$ 73,200

$ 90,000

$ 106,200

$ 116,600

   Average Cost
   per ton

$ 320.00

$ 315.00

$ 310.00

$ 305.00

$ 300.00

$ 295.00

$ 291.50

 

 

Purchasing Corn for Short-Term Livestock Feeding:

 

 

In the feeding of hogs and cattle the price increase of corn this past fall has dramatically changed the cost of rations. Most producers entered this period totally unprepared for the rapid increase and immediately became concerned about how long it would last and how much it would affect their future as livestock feeders.

 

I have insisted from the beginning that sooner or later the price of corn would moderate and make it possible for feeders to purchase future needs at something less than $ 4.00 per bushel. The charted strategy for purchasing future corn needs with a significant drop in prices was revised to reflect current conditions. Hopefully it will help some producers get on top of their corn cost and bring rations back into reason with other costs.

 

Following is the strategy presented for purchasing corn in a down market. Assumptions used are: 1) the producer uses 60,000 bu. per month, 2) an average $ .40 basis, and 3) the need to cover corn price into harvest of 2008. The strategy asks the producer to purchase corn at predetermined down-cycle intervals at: $ 4.00, 3.90, 3.80, 3.70 and 3.50/bushel.

There are significant technical markers to support the prices used, and it is important not to leave the decision to an uneducated judgment factor.

 

Cash Corn Purchase

(Down Market)

 

 

 

 

 

 

 

 

 

Monthly Use (bu)

Price
Futures/Cash

Apr

May

Jun

Jul

Aug

Sep

Oct

 

60,000

60,000

60,000

60,000

60,000

60,000

60,000

4.40/4.00

15,000

15,000

15,000

15,000

 

 

 

4.30/3.90

15,000

15,000

15,000

15,000

15,000

 

 

4.20/3.80

30,000

15,000

15,000

15,000

15,000

15,000

 

4.10/3.70

 

15,000

15,000

15,000

15,000

15,000

15,000

3.90/3.50

 

 

 

 

15,000

30,000

45,000

 

 

 

 

 

 

 

 

Cost of Corn

 

 

 

 

 

 

 

4.00

$ 60,000

$ 60,000

$ 60,000

$ 60,000

 

 

 

3.90

$ 58,500

$ 58,500

$ 58,500

$ 58,500

$ 58,500

 

 

3.80

$ 114,000

$ 57,000

$ 57,000

$ 57,000

$ 57,000

$ 57,000

 

3.70

 

$ 55,500

$ 55,500

$ 55,500

$ 55,500

$ 55,500

$ 55,500

3.50

 

 

 

 

$ 52,500

$ 105,000

$ 157,500

Total Cost

$ 232,500

$ 231,000

$ 231,000

$ 231,000

$ 223,500

$ 217,500

$ 213,000

 

 

 

 

 

 

 

 

Average Cost
per bu

$ 3.87

$ 3.85

$ 3.85

$ 3.85

$ 3.72

$ 3.62

$ 3.55

 

 

 

About the Author

Donald M Fedie is President and majority owner of Agri Control Co., Inc., a Sioux Falls, South Dakota based financial and management advisory firm specializing in agricultural business clients. The firm has a 40-year history of working with Ag producers to solve financial challenges, systematize reporting of operations and manage the risk of pricing hogs and feed ingredients. For additional information on the firm please visit the company website at www.agricontrol.net, or call 605-367-9376.






 
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