It is all about the denominator

Thursday’s USDA grain report further solidified what has been developing all year – we have a big crop coming at us. This is not new information, it is simply confirmation that we are closing in on yield numbers that we have never seen before on both corn and soybeans – corn at a solid 6 bushel advantage over the previous record of last year, soybeans at a more modest 1 bushel record.  

Prices of both corn and soy are in the realm of sane as depicted by the charts below that show us at/near the price relationship that correlates to a corresponding carryout to use ratio. If you were going to argue that something is askew, you could contend that beans are priced too high and I would nod my head in agreement. The world is currently awash in soybeans and the expanded acreage anticipated from Brazil should add to the burdensome stocks. I suspect we will migrate toward $9/bushel cash beans rather than the current values that are closer to $10. (October bids for beans delivered to Cedar Rapids were posted at $9.97 on Friday)

Beyond the headlines, there a couple of nuances to the report that warrant consideration and further monitoring. 

The USDA seems to have their foot to the floor in their projection of foreign demand and I would not expect us to reach the lofty export numbers in the grains sector.  Of specific note, we saw a reduction in import projections into China of 2 mmt for both corn and soybeans. The cooling Chinese economy does not bode well for a surge in imports and – even if they do emerge – the origin of favor is Brazil, not the U.S. 

Second, while the general focus of the monthly WASDE report is the grain sector, the USDA also publishes a protein update each month as shown below.  

Note that the USDA shows a pork production increase of almost 2% in 2025 relative to 2024 with prices remaining under pressure. The USDA still reports live price for some reason, the $58 on the table is just shy of $80 in carcass weight pricing. Beef production is expected to be down, chicken production up and when you net out the three major proteins the total production is projected to be nearly identical in 2025 compared to 2024.

Something does not feel right about the pork numbers. Our internal projections would indicate a 2-3% reduction in sow inventory on a Sept-to-Sept comparison. When you factor in an increase in productivity (graph below) and slightly higher carcass weights, we show total production down 1.5% or so. The item that is necessary to internalize in this equation is the denominator. Note, we are not going to see a 1%+ increase in pigs saved per litter because we are comparing to a higher number from a year ago. We are solidly back on the trendline that existed pre-COVID and the numbers are still on the increase, the math just sounds smaller when expressed in a percentage. Before I get too critical of the USDA numbers, it is important to note that their harvest projections have been right on target given the inventory numbers from the June report, it is the math going into 2025 that is in question. 

The bottom line of all of this is one of cautious optimism. The outlook for feed prices to moderate and remain in the realm of reasonable is good for the pork producer.  The USDA report is showing an increase in production of about 2% while we see a reduction of roughly 1.5%. That is enough of a discrepancy to make a difference. 

The forward curve of our revenue market is discounted relative to our projections. Throw in a continued contraction of the EU herd and some opportunities for US exports to shine in 2025 in perpetuation of our 2024 experience and suddenly you can get a bit friendly to our profit projections.