The annual Wisconsin pork producer pilgrimage took place last week with another big gathering at the National Pork Industry Conference in the Dells. This is the 26th year of this meeting and it continues its streak of excellence – I strongly encourage those with an interest to attend next year. The program was solid with many stimulating speakers.
Here are some of my observations as well as thoughts on the market:
- Dr. Meyer is… friendly. I’m not referring to his personality as he’s usually quite friendly. Its market outlook is optimistic. It comes from the guy who describes himself as embracing the dismal science of economics devoid of human emotion. The facts are the facts. And the current fact is that the domestic demand for pork has been fantastic. Combine that with the projected animal numbers from the June Hog and Hog report and you have the recipe to keep us in Q4 at projected values higher than where we are currently trading the CME. You read that right: Dr. Meyer is mildly optimistic.
- The expansion is not going to bite us. There are a few Prop 12 renovations underway which are the biggest building projects on the books. There are some reproductive biosecurity considerations, but there is little outright expansion for a myriad of reasons. We have no new processing capacity underway (there is a planned site in Sioux Falls that has not yet started). That leaves us with three large plants that could double (Fremont, Eagle Grove, Coldwater) with nothing more on the horizon. We have no new push from the current range of packers to offer attractive contracts, construction costs are high, food prices are high, labor is tight, cost of production is rising. All of this has settled into a situation of stagnation where there are enough profits going forward to maintain current production with not enough financial incentive to expand. Potential growth in pig production will likely come from health improvements, not from increased sow numbers.
- Grain volatility is not going away. So far this year, the driving factors for the corn and soybean market have less to do with traditional fundamentals than with the tertiary markets, especially crude oil. Pegging corn to energy is nothing new since the expansion of the ethanol industry from around 2005. Larger global economic factors overwhelmed agricultural markets, with crude oil serving as an index to global macroeconomic forces. The volatile nature of global politics will likely maintain a premium in our energy markets, which will impact the corn market. Attached is a chart of corn versus crude oil. Corn, shown in blue, responded with a highly correlated factor to oil (green bars) before Putin’s invasion and these two markets remained pegged to each other. The recent slump in corn values has apparently bottomed out and values have rebounded. We’ve shaken up fund participation and – at the time of this writing – are responding appropriately to drier weather forecasts. We will never completely lose the influence of the weather on the grain, I believe that the power of a larger force will become the dominant factor in the trade. Corn goes where the oil takes it.
The grain base should remain erratic/high. I have written before in this column about the upcoming changes in the balance sheet associated with the expansion of the renewable diesel industry. This will require more soybean acres – apparently causing corn acres to dim – which should, in turn, lead to lower corn exports. This is important because the current CME price discovery mechanisms focus on math and export logistics. If we give less importance to exports, it will be up to the basic market to regulate the internal transport of cereals. We are already seeing wild swings based on geography, regional corn yields and transportation – this one will likely play a bigger role in price discovery as we stall.
Pork exports are promising. It may seem odd when you look at the attached chart and see that we are at 20% for the year. Recall that the year-on-year comparison has the large Chinese exports in 2021 prevailing in the first half of the year, the balance of the year will be against a lower volume denominator. Additionally, there has been interest in fresh muscle cut exports to China as their market has rebounded. Hmmm. Whether Canada ships the product or it comes from the United States, the rebound in Chinese commercial interest is a welcome contributor to our export window.
The long game may hinge on whether Brazil has access to fertilizer from areas that are currently somewhat hostile. Note that the American crop is largely self-sufficient in fertilizer, with the exception of potash, which comes from our neighbors to the north. Brazil, on the other hand, is highly dependent on imported fertilizers for its agricultural needs, much of which comes from turbulent parts of the world. Brazil is currently negotiating an energy agreement with Russia, an ongoing fertilizer agreement is probably not excluded between these two countries. Brazilian President Bolsonaro is fighting for his political life as his economy teeters on the brink and an oil deal with Russia is seen as a stabilizing factor for their economy. Brazil has kept a very low profile taking sides in the face of global dismay, they claim to have positive relations with the United States, China and Russia at the same time. This bouncy ball is probably worth tracking.
The comments in this article are market commentary and should not be construed as market advice. Trading is risky and not suitable for all individuals. Click here to contact the author.
Source: Joseph Kerns, who is solely responsible for the information provided and fully owns it. Informa Business Media and all of its affiliates are not responsible for any content contained in this information asset. The opinions of this author are not necessarily those of Farm Progress/Informa.