Reasons to be bullish about livestock prices are everywhere, but analysts at GrainWorld warned producers to not assume present prices can last.
Somebody’s margin is going to get squeezed, and it will likely be the farmer’s.
“…we need (20 to 40 percent) higher prices (in grocery stores) to give everybody a margin,” said Informa Economics vice-president Richard Andersen in an interview at the recent conference in Winnipeg.
“My guess is that we’ll get 10 to 15 percent up and that will be a pretty monumental adjustment in a year’s time.”
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Andersen said his firm is urging its hog producers to lock in the spread now between summer hog futures prices and corn prices because Informa thinks hog futures are likely to fall and corn likely to rise.
Cattle market analyst Jerry Klassen of GAP S.A. Grains and Produits also predicted that cattle prices will find a ceiling.
“Cattle prices will likely level off in the next year,” said Klassen.
“Cattle prices, beef prices, are very dependent on disposable income for the average American consumer . . . The market is starting to ration demand at these higher levels.”
Andersen and Klassen said many bullish price projections are based on ill-understood supply and demand dynamics, with non-agricultural investors assuming that higher production costs for hog and cattle producers will inevitably mean higher meat prices in order to encourage production.
Andersen said this theory, while true in the long run, does not take into account consumer demand, which does not easily swallow giant increases in food prices.
Klassen said U.S. consumer income has risen only slightly in the past two years, but meat prices have risen much more quickly. At some point the consumer will balk.
The present rise in hog futures prices since late 2010 is so large that consumers face a shock if retailers pass all the prices on, and summer lean hogs futures prices contain another shock that may just be too high.
“We’ve been chugging this higher,” said Andersen.
“We have already put in a typical (annual low-to-high) price move into the market. Now the futures market is putting another one on top of that. It just seems a stretch, in my mind, that the market can continue to move higher and earn the premiums that are already built in.”
Andersen said he thinks Chicago lean hogs futures will have to drop down to the low $90s US, which is where Informa thinks they are justified.
That makes them about $10 overvalued right now.
Corn prices -the other half of the hog producer’s margin equation -are more likely to rise than fall. That makes now a good time to lock in margins.
“Lock the feed inputs against the forward curve on the hogs, capture that $20 or $30 a head margin, and don’t think you can sell the hogs today and buy the corn maybe a dollar cheaper (in the future),” said Anderson.
“It might end up two dollars higher, and that margin will disappear.”
Andersen thinks it’s reasonable for hog prices to make a 20 to 24 percent increase by the end of 2012, but the danger for hog producers is that the present market has shot too high too fast and there is a serious risk of a correction.
