1

Understanding the

Hog Crush Margin

John D. Lawrence

Extension Livestock Economist

Iowa State University

2

Overview

• What is a “crush margin”

• How is it calculated

• How to use it

• How has it performed?

• Refer to ISU Crush Margin http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/margins/

3

Crush Margin

• Comes from soybean processing

• Single measure that captures most of the

market volatility and that is hedgeable

• The remaining revenue used to pay all

other costs and, hopefully, return a profit

• Manage margin risk by managing the

variable input prices

4

How is it Calculated

• ISU definition of crush margin

• Value of the hog less the cost of the pig, corn and SBM

• CMT = 2 x LHFBT - WPT-5

- 10 x CFBT-5 -.075 x SBMFBT-5

• 200# carcass

• 10 bushels corn

• 150# SBM

• 5-month wean-finish

5

How is it Calculated

• ISU definition of crush margin

• Prior to placement

– LHF, pig, corn and SBM are variable and

based on basis adjusted futures

– Pig priced at 50% of 5-month out LHF

• At placement

– Pig, corn and SBM are “bought” at cash price

– LHF remains variable

6

Price Series

• ISM hog LM_HG204 Prior Day report

– 5-Day Rolling Average Market Hog: weigthed

by the average base to the base range

• Weaned pig NW_LS255

– Early Weaned Pigs 10 lb Basis: Estimated 50-

54% Lean Value, 750 head or more delivered

• SBM MS_GR850 Iowa SBM mid point

• North Central Iowa Corn

7

What is not Included? • Expense item $/hd

• Vit, min and purchase complete feeds 11.35

• Grind, mix, deliver 3.62

• Animal health or vet/med 4.15

• Labor and administrative 5.67

• Operating interest 2.67

• Utilities 2.57

• Transportation 2.00

• Facility fixed cost 8.45

• Total cost beyond pig, corn, SBM 40.48

8

Other Adjustments

• Non-feed costs

• Your bushels and pounds will differ

• DDGS and less corn and SBM

• Basis differences

• Do your own calculations, but use crush

margin as an indicator

9

ISU Hog Crush Margin Report

10

Wean-Finish Crush Margin ($/head) by Sales Month

Pigs on Feed: Cash Pig, Corn & SBM Price at Placement and

Wednesday Lean Hog Futures Prices

$-

$10

$20

$30

$40

$50

$60

1/7

/09

2/7

/09

3/7

/09

4/7

/09

5/7

/09

6/7

/09

7/7

/09

8/7

/09

9/7

/09

10/7

/09

11/7

/09

12/7

/09

1/7

/10

Jan-10

Feb-10

Mar-10

Apr-10

May-10

11

Wean-Finish Crush Margin ($/head) by Sales Month

Pigs Placed in Next 5 Months: Wednesday Futures Prices for

Lean Hogs, Weaned Pig, Corn and SBM

$-

$10

$20

$30

$40

$50

$60

$70

1/7/

09

1/21

/09

2/4/

09

2/18

/09

3/4/

09

3/18

/09

4/1/

09

4/15

/09

4/29

/09

5/13

/09

5/27

/09

6/10

/09

6/24

/09

7/8/

09

7/22

/09

8/5/

09

8/19

/09

9/2/

09

9/16

/09

9/30

/09

10/1

4/09

10/2

8/09

11/1

1/09

11/2

5/09

12/9

/09

12/2

3/09

1/6/

10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Wean-Finish Crush Margin ($/head) by Sales Month

Pigs Placed 6-11 Months Out: Wednesday Futures Prices for

Lean Hogs, Weaned Pig, Corn and SBM

$-

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

8/5/

09

8/19

/09

9/2/

09

9/16

/09

9/30

/09

10/1

4/09

10/2

8/09

11/1

1/09

11/2

5/09

12/9

/09

12/2

3/09

1/6/

10

Nov-10 Dec-10

Jan-11 Feb-11

Mar-11 Apr-11

12

How to use it?

• If opportunity exists before placement

– Sell 80% of LHF and buy all the SBM and

corn futures needed

– The open 20% matches the pigs to buy

– At placement, buy corn and SBM and offset

their futures contracts. Sell 20% of LHF

– At slaughter offset all LHF

13

Wean-Finish Crush Margin, 1999-

2008 Averages by Selling Month

Sales Average High Low Placement Last

Jan 37.96 55.34 23.21 40.93 42.22

Feb 43.42 60.20 26.99 46.52 48.52

Mar 46.41 63.67 29.56 49.25 52.14

Apr 46.01 63.21 28.64 47.83 47.89

May 53.94 70.70 36.90 57.19 57.43

Jun 57.31 74.30 39.67 57.83 59.96

Jul 56.12 73.79 39.00 59.13 58.37

Aug 54.66 71.31 39.67 56.16 59.03

Sep 50.60 66.36 35.10 50.69 51.93

Oct 44.22 58.63 29.68 46.02 44.65

Nov 38.35 54.02 21.74 40.79 37.00

Dec 38.52 55.76 22.49 39.23 39.37

14

Percent of Days '99-08 by Selling Month and Size of Margin

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan

Feb

Mar

Apr

May

Ju

n Ju

l

Aug

Sep

Oct

Nov

Dec

Total

$50+

$40-50

$30-40

<$30

15

Summary

• Crush margin is a way to focus on risky

variables that you can manage

• Keeps the focus on margin rather than

price

• ISU Crush margin is an indicator

calculated each Wednesday

• Always use your own numbers

16

Hog Outlook 2010 and Beyond

The Good, the Bad & the Ugly

John D. Lawrence

Extension Livestock Economist

Iowa State University

17

Percentage Change in Pork Production and

Percentage Change in Price, 2001-2009

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-5% 0% 5% 10% 15%

Production

Price

18

ISM Lean Hog Prices and Futures Based Forecast

Jan 27, 2009 Futures Forecast of 2010

$40

$50

$60

$70

$80

$90

J F M A M J J A S O N D Avg

2008 2009 2010

2010 Forecast 21% above 2009

19

ISU Estimated Cost and Selling Prices, Farrow to Finish ($/cwt Live)

$-

$10

$20

$30

$40

$50

$60

$70

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

Feed Variable Total Hog Price

Jan 27, 09 Futures prices and historic basis

ProjectedReported

20

Accumulated Returns

Selling one head a month

Dec 2008 = Jan 2006

2010 holds its own

Firms financially sound in

2004 and that survived

disease problems in 2005-07

still have equity

Accumulated Return Relative to Total Cost

per Head Marketed Per Month

$(400)

$(300)

$(200)

$(100)

$-

$100

$200

$300

$400

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

Projected based on

Jan 27 futures

Reported

Equity position at end of

Dec 2008 equal to Jan 2006

Accumulated Return Relative to Total Cost

per Head Marketed Per Month

$(600)

$(400)

$(200)

$-

$200

$400

$600

$800

$1,000

$1,200

Ja

n-0

4

Ju

l-0

4

Ja

n-0

5

Ju

l-0

5

Ja

n-0

6

Ju

l-0

6

Ja

n-0

7

Ju

l-0

7

Ja

n-0

8

Ju

l-0

8

Ja

n-0

9

Ju

l-0

9

Ja

n-1

0

Ju

l-1

0

Ja

n-1

1

Projected

from Jan 27

futures

Reported

21

The Good

Regain 2/3 of equity

lost in 2009

Hog price increase 3%

over Jan 27 Futures each

month for 5 months and

hold at 15% higher.

2010 33% over 2009

ISU Estimated Cost and Selling Prices, Farrow to Finish ($/cwt Live)

$-

$10

$20

$30

$40

$50

$60

$70

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

Feed Variable Total Hog Price

Jan 27, 09 Futures prices and historic basis

ProjectedReported

Accumulated Return Relative to Total Cost

per Head Marketed Per Month

$(400)

$(300)

$(200)

$(100)

$-

$100

$200

$300

$400

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

Projected based on

Jan 27 futures

Reported

Equity position at end of

Dec 2008 equal to Jan 2006

22

What Changes for Good?

• Compared to Jan 27 market expectations

– Exports stronger (Dollar, China, Russia)

– Recovery stronger (stimulus, inflation)

– Supplies smaller (bankruptcy idles facilities)

– Packer margins smaller (battle for volume)

– Speculation (hedge against inflation)

23

The Ugly

Equity position continues

to decline throughout 2010

Hog prices decrease 1%

vs. Jan 27 Futures each

month for 5 months and

hold at 5% lower.

2010 15% over 2009

ISU Estimated Cost and Selling Prices, Farrow to Finish ($/cwt Live)

$-

$10

$20

$30

$40

$50

$60

$70

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

Feed Variable Total Hog Price

Jan 27, 09 Futures prices and historic basis

ProjectedReported

Accumulated Return Relative to Total Cost

per Head Marketed Per Month

$(500)

$(400)

$(300)

$(200)

$(100)

$-

$100

$200

$300

$400

Jan-

06

May

-06

Sep

-06

Jan-

07

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

Projected based on

Jan 27 futures

Reported

Equity position at end of

Dec 2008 equal to Jan 2006

24

What Changes for Ugly?

• Compared to Dec 31 market expectations

– Exports weaker (double dip recession)

– Recovery weaker (double dip recession)

– Supplies larger (firms ramp up production)

– Packers close plant(s) on smaller supplies

– Speculators exit market

25

Don’t Forget Cost Side

• Feed cost volatility continues

• Get the Ugly results with 2% higher feed

cost per month than Jan 27 futures for 6

months for a 12% increase.

• Higher interest rates if inflation occurs

26

Pork Summary • Supply is a poor predictor of price

• Demand, i.e., exports are fickle

• Current forecast is for 19% higher prices in

2010 on smaller supplies and higher exports

• Record 1-year price increase over 2009 and

industry would regain 2/3 of equity lost in ’09

• 5% lower prices than expected would be

15% higher prices than ’09 and the equity

drain continues.

27

It is better to be a mile from

Hell headed out than a 100

miles out headed in.

Earl Butz