Focus on Margin Opportunity to Lock in Profits24 July 2013
US - I just returned from my annual pilgrimage to the Wisconsin Dells for the National Pork Industry Conference (NPIC). Again this year the conference was very well attended, with more than 750 producers from across the United States, writes Steve Meyer in this week's "Market Preview" published in National Hog Farmer magazine.
This diverse crowd gives me the opportunity to get a pretty accurate crop report from individuals driving to the event from all directions. The overwhelming sentiment? The corn crop looks good with some parts of the United States even starting to become a bit dry. This was a shock to me since I left Wells, MN, for the conference surrounded by preventive planted corn acres and water standing in the fields. We have to remember that the Corn Belt stretches across a wide swath of the United States, and a disaster in one area may be isolated relative to the entire country. With that said, I do believe the warmer temperatures have allowed the upper Midwest to improve crop conditions over the past couple of weeks.
USDA Crop Report
The US Department of Agriculture (USDA) is reporting 97.379 million acres of corn planted for 2013. This was over two million acres more than the average trade estimate. With the USDA forecasting the 2013/14 carryout at 1.959 billion bushels, it’s possible we may see prices into the $4/bushel range. Just a few weeks ago, I was telling everyone that with the delayed plantings it was up to Mother Nature to provide adequate heat to accumulate the growing degree days necessary to bring the crop to maturity. Based on the past couple of weeks, we are getting exactly what the Corn Belt needs, heat and plenty of it! Short of an early frost, it looks like we will start to stabilize US corn inventories again, which is providing margin opportunities for producers in 2014.
Hog Margins and Margin Opportunity
Maybe it’s just a coincidence, but I have seen very good margin opportunities around the NPIC conference over the past few years. However, what you need to remember — regardless of trying to lock in the seasonal high — you need to be looking at margin opportunity. We are currently over the 90th percentile for profitability for the 4th quarter of 2013 and the 1st quarter of 2014 with 2nd quarter profitability over 80 per cent.
On average, producers have the opportunity to lock in profits for the next 12 months in the $12 - $15 per head range based on current input prices. With the condition of the current corn crop we should be able to avoid the inverted basis that has plagued the industry this year. I know producers were wary of locking in margins when they saw their projected margins deteriorate due to having to purchase corn with a positive basis of $1.20 or more this summer. Locking in margins at a price where you are certain you will achieve a profit is a solid strategy. Yes, prices can go up, but in this volatile market and uncertain weather, they could go down as well. You may be waiting for a better price that never comes.
At AgStar we have been a strong proponent of margin management for many years. We have seen our clients embrace this philosophy over the past several years and it was never more evident than the information Mark Greenwood presented on AgStar’s swine portfolio at the NPIC conference at the Dells.
We’ve developed a data base from operations that comprise 1.2 million sows and compared the information to the Iowa State profitability model for 2010, 2011 and 2012. The Iowa State model assumes you are buying corn and soybean meal and selling hogs on the open market using cash prices.
In our study, our data base clients reported profits of $16.30, $22.95 and $8.84 for years 2010, 2011 and 2012, respectively. During the same period, Iowa State’s model for cash returns was $12.94, $4.92 and ($12.47) per head. This is a $14.23 per head average advantage over the past three years. We understand there are several factors that impact the profit per head number. However, risk management decisions are a major component imbedded in this difference.
Malakowsky has more than 16 years of experience with AgStar Financial Services. For more insights from him and the AgStar swine team, including their weekly video Hog Blog, visit www.AgStar.com. If you’d like more information on AgStar’s Margin Manager Tool, check it out at www.AgStar.com/MarginManager.As published in National Hog Farmer's Weekly Preview.