steve-meyer
Steve Meyer is an economist for Kerns and Associates.

One of the bright spots for pork producers as we move through 2018 is production costs. And even the South American weather-driven (or South American weather rumor-driven) grain rally of late January has not dulled the glow.

In the past five years, we’ve seen the five largest U.S. corn and soybean crops in history. Generally, good growing conditions in other parts of the world over that time have left the world awash in grain and protein sources.

After setting a record in 2016 of 227 million metric tons (MMT), 2017 year-end world corn stocks fell to just over 200 MMT, the fourth highest ever. Year-end world soybean stocks were up nearly 95 MMT in 2016, topping the previous record by 25 MMT. And 2017 brought a new record of 96 MMT.

Meanwhile, world wheat ending stocks set four consecutive records and, at 268 MMT, are now projected by USDA to be nearly 39 percent larger than just five years ago.

Ample Grain Sets Stage for Continued Low Costs

Corn and soybean meal futures prices indicate that pork producers’ costs in 2018 will remain low and may challenge 2017’s $61.79/cwt carcass costs, which were the lowest since 2007. On Feb. 6, my model pegged average costs for 2018 at $62.67/cwt. The model is based on Iowa State University’s Costs and Returns parameters and represents the best 10 to 15 percent of producers.

At $62.67/cwt, it’s less than $1.00/cwt higher than last year in spite of the recent rally for both corn and soybean meal that was set off primarily by concerns about Argentine growing conditions. Any improvement in South America and any progress toward another good U.S. growing year likely will push costs even lower.

Stumbling Blocks?average-costs-and-returns-farrow-to-finish-operations

Producers need to realize that a lot could go wrong for the Feb. 6 scenario to materialize. Continued dryness in Argentina and rain in parts of Brazil are risks to the South American harvest.

And the U.S. Weather Service’s Drought Monitor map is looking more foreboding. Severe or worse drought conditions covered 19 percent of the United States on Jan. 30, with another 38 percent of the nation considered “abnormally dry.”

Concerns over a strengthening La Niña are widespread and, should it intensify, dryer and hotter weather would be expected in the Midwest. Some USDA temperature and precipitation forecast maps for this summer look scary, at best.

But even a short U.S. crop will not take us back to 2012 and 2013 cost levels. It does not appear that the South American crop will be bad even if it is somewhat smaller than previously expected. But feed ingredient prices could easily be higher than what they appeared to be in early February.

Producers can limit ingredient cost increases at reasonable costs in a number of ways. Some strategies even leave the downside of the market open in case another record year develops.

A Profitable 2018

Low costs are good on a number of counts. In the short run, of course, they mean higher profits. The costs cited above and the Feb. 6 Lean Hogs futures prices indicate that low-cost producers could average just over $26/head in profits in 2018, with average producers at $14 to $18/head. Not bad on either count.

In the long-run, low costs mean lower prices for consumers as producers’ increased output allows prices to fall. While healthy producer profits may decline, pork consumers will get a better value, and lower prices will provide ample incentive to consume the larger offerings.