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"For those who want to reduce price risk, buying corn and meal
futures now and also pricing lean hog futures should enable them
to about cover their costs this year," said Chris Hurt. "Given
the current anxiety, this should be pleasing to some. For those
willing to take some added price risk, buying a portion of corn
and meal futures now and then waiting until early May to price
lean hog futures would play more favorably to the seasonal price
patterns and might enable producers to pick up about $1 to $2
per hundredweight of profits for 2007." Hurt's comments came
as he reviewed the hog market, where producers "remain on pins
and needles," he noted.
"The size of the 2007 corn crop will largely determine their
financial fate for the next 18 months," Hurt explained. "A large
crop means a big sigh of relief, while a small crop means
sharper liquidation of the breeding herd and deeper financial
losses.
"The situation faced by hog producers is no different than
other end-users of corn, including ethanol plants, foreign
buyers and other livestock producers. If ever there was a year
when U.S. agriculture needs a favorable growing season, 2007 is
it."
Hog prices so far this year have been somewhat higher than
anticipated, he added. Year-to-date prices of eastern Corn Belt
51 percent to 52 percent lean carcasses on a live weight basis
have averaged $46.57 per hundredweight. What might the rest of
the year hold?
"Using actual cash prices so far this year and lean hog
futures prices on March 2, 2007 for the rest of the year --
adjusted for historical basis, the expected yearly price is
$50.37," he said. "This also is higher than early year forecasts
near $48. These somewhat higher prices seem to have originated
from modestly lower production in the first quarter than had
been expected and from continued strong exports.
"Exports in the last quarter of 2006 were up by 15.5 percent,
and imports were down 8 percent. The weakness of the U.S. dollar
continues to be a positive force in keeping exports growing and
imports dropping. For all of 2006, the United States exported a
record 14.3 percent of domestic production.
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 Cost-of-production estimates for 2007 are near $50 per live
hundredweight. Using futures prices for corn and soybean meal on
March 2 (and adjusting for basis), estimated costs for the first
through fourth quarters, rounded to the nearest 25 cents, are $49,
$50.25, $51.25 and $49.75, respectively.
"If current futures markets are correct and live hog prices also
average near $50 per live hundredweight, then producers will escape
a potential bombshell with a nearly break-even year," Hurt said.
"However, there is still a long way to go before the final 2007
results for the hog industry are written into the record book."
Coming up is the spring period of large uncertainty for the corn
and soybean markets and the strongest tendency to have seasonal hog
price increases. The uncertainty of the growing season often reaches
a peak between mid-March and mid-May, sometimes with the highest
prices of the year, if weather ultimately turns out to be favorable
for average or above-average yields.
Assuming normal to above-normal yields, corn prices have higher
odds of peaking in the spring and then moving lower by perhaps 50
cents per bushel into early August. On the other hand, harmful
weather would be expected to cause prices to make new highs around
the weather event.
"Long-term odds of a drop in corn yields by 5 percent or more
from trend are 22 percent," he said. "Given the higher possibility
for a La Nina event this summer, those odds might move upward
somewhat.
"Keep in mind, however, that the odds would be over 50 percent
that a weather event would not reduce yields by 5 percent or more."
Cash hog prices tend to make their spring low in early April,
then shoot up to yearly highs between mid-May and mid-June. Lean hog
futures tend to rise in both March and April and make their highs in
early May.
"These seasonal tendencies give some possible clues for pricing
strategies," Hurt said. "My view is that corn and meal prices have
not reached their peak and that one should be a buyer of the price
breaks.
"Opinions will, of course, vary sharply."
[Text copied from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences]
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