Source:  Rita Jane Gabbett, MEATINGPLACE.COM, 10/11/10

USDA’s dramatic cut in U.S. corn production and corn stock prospects Friday morning sent corn futures prices today soaring for the second day in a row, leading some analysts to predict $6 corn, cutbacks in poultry, beef and pork production, tighter margins for processors and higher meat prices for consumers.
What won’t likely suffer will be U.S. meat and grain exports, expected to gallop on, as a weak dollar meets escalating global demand.

Corn futures prices hit a two-year high of $5.73 per bushel for December delivery as trade began on the Chicago Board of Trade this morning before backing down to about $5.60 in midmorning trade.

A market report on DTN/The Progressive Farmer put the next corn futures price target at $6.08 per bushel, adding, that level may be tested sooner rather than later due to increasingly bullish fundamentals.

Pork
The break-even corn price for most hog producers at current hog prices is about $4 per bushel, University of Missouri agricultural economist Ron Plain told Meatingplace. To cover the cost of $5 corn, producers would need about $60 per hundredweight for their hogs on a live weight basis.

“The hog guys thought they had bottomed and were preparing for (production) growth. It won’t be that hard for them to change their minds,” Plain said.

Smithfield Foods, which raises and slaughters hogs, has apparently hedged its feed grain costs out to March, 2011. The company confirmed in an SEC filing late Friday its hog raising costs will remain in the mid-$50s for the remainder of its fiscal 2011, which ends in April, according to Stephens Inc. analyst Farha Aslam.

“We believe that the company has successfully hedged grain out to March 2011 and is opportunistically locking in strong hog production profits,” she wrote in a note to investors.

Aslam raised her fiscal 2011 earnings per share estimate for Smithfield to $2.20 per share from $2, but lowered her fiscal 2012 forecast to $1.65 from $1.90 as higher feed costs kick in.  

Margins
Livestock and poultry producers, “have plenty of reasons to be afraid,” according to livestock analysts Steve Meyer and Len Steiner in the CME’s Daily Livestock Report.

“While cattle, hog and broiler prices are sharply higher than a year ago, livestock and poultry producer margins may be in worse shape than they were in 2009, and those margins are getting worse by the day as corn prices advance,” the DLR warned.

Higher meat prices will be needed (via demand improvement or supply cuts) to keep these producers in business, the report noted.

“Cattle feedlots, in particular, are caught in a vise in this market environment,” wrote Oklahoma State University Extension Livestock Marketing Specialist Derrell Peel in a newsletter. He noted that feedlots were already looking at breakevens approaching $100 per hundredweight and inflating feed costs will push breakevens higher still.

Meanwhile, boxed beef values have eroded over the last month on dampened domestic demand, squeezing packer margins and pressuring fed cattle prices back into the mid $90 level.

Cattle herds have already been shrinking for the past three years and will likely continue to do so, Plain predicted.

Poultry producers, which were already expanding, can and probably will need to respond the soonest. Corn is a key poultry feed ingredient, with fewer feeding options than hogs or cattle.

Exports
Even as poultry and livestock producers cut back, however, analysts expect export markets to remain strong.

Aslam noted beef supplies are expected to be down 6 percent globally next year, “which should support the export market across the protein complex.”

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