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South American grain adding to pork woes

Robert Wisner says he’s never seen the kind of drop that occurred in grain production in South America this spring. Farmers in Argentina and Brazil are expected to harvest 675 million fewer bushels of corn and 711 million fewer bushels of soybeans than they did in 2007-08.

The decrease, which could prove to be even greater when USDA issues a new forecast on June 12, was not good news for pork producers attending the World Pork Expo in Des Moines, Iowa. Those producers, struggling with higher feed costs for months, have been hoping for some relief in the corn and soybean markets.

“I’ve been analyzing grain markets for almost 43 years, and I’ve never seen anything close to the decline that we’re looking at in South America this year,” said Wisner, an agricultural economist with Iowa State University, who spoke at a marketing seminar at the Expo.

The shortfall in South American production is just one of the factors having an impact on the outlook for a return to profitability for the nation’s hog producers. The declines were due to the lack of timely rains in Argentina and southern Brazil in January and February, the middle of summer in the reversed seasons in the southern Hemisphere.

Some grain analysts are expecting USDA to lower its forecast for Argentina’s soybean production by another 36 million to 72 million bushels when it issues its June world supply and demand outlook estimates (June 12).

“They could also reduce the soybean crop estimate for Paraguay,” said Wisner, who works with Iowa State’s Ag Marketing Resource Center. “Those numbers won’t be anywhere near as large as in Argentina, but it’s part of a trend of decreased South American production.

Other factors affecting grain prices and the outlook for feed costs:

• After an absence of several months, commodity index or hedge funds have become active in the grain markets. “They have become quite a significant force,” he said. “I would anticipate more purchases by commodity funds as the economy begins to recover.”

• Adverse weather conditions continue to slow the planting progress in the eastern Corn Belt states and in North Dakota. As of June 1, USDA was reporting 4.1 million acres of corn that farmers had planned for 2009 still were not planted. “The big question mark is how many of those acres might be pushed over to soybeans,” he said. “The second question is what are the delays going to do to corn yields?”

• The value of the dollar has been declining, which means crude oil prices are rising. “If crude oil goes up, that means gasoline prices will increase along with ethanol and corn prices.”

• On the other hand, China reportedly has cancelled orders for 48 million bushels of U.S. soybeans and some soybean meal in recent days, a move that could be bearish for soybean prices.

• Declining livestock numbers could also have a negative impact of feed demand and take some of the steam out of the corn and soybean markets.

• Meanwhile, dry conditions are causing concerns in northeast China, where most of the country’s corn and soybeans are grown, and in western Canada. Officials in the Ukraine have said wheat production in that country could be down 200 million to 240 million bushels due to weather problems last year.

The increases in crude oil prices of recent days have, indeed, been negative for the pork industry, said Glenn Grimes, professor emeritus with the University of Missouri and a speaker at the marketing seminar.

“High oil prices led to high gasoline prices to high ethanol prices, to high corn prices and to red ink for the livestock industry,” said Grimes. “A weak economy is doing the same in reverse. Your problem is not demand, it’s rising costs.”

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