North American Preview: Market Study Under a Microscope

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A Penton Media Property
April 13, 2007

Table of Contents
Market Study Under a Microscope
Options to Improve Efficiency
Animal Welfare Requirements for Federal Meat Purchases
World Pork Expo Careers

Market Preview
Market Study Under a Microscope
In the Feb. 22 edition of North American Market Preview, I addressed the findings of the recently released Livestock and Meat Marketing Study by USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA). The report has been a topic of widespread discussion since its release, but a number of those discussions have misinterpreted the results.

A perfect example came up in a discussion with University of Missouri agricultural economist Ron Plain earlier this week. Both Ron and I believe it is important enough to warrant attention in this week's column.

One of the findings highlighted in the study's executive summary was this:

". . . the estimated elasticities of industry-derived demand indicate a 1% increase in contract hog quantities causes the spot market price to decrease by 0.88%, and a 1% increase in packer-owned hog quantities causes the spot market price to decrease by 0.28%."

As background, an elasticity is a measure of the responsiveness of one economic variable to a change in another variable. Elasticities are expressed as percentages in order to remove the effect of the units of measurement (i.e. data using pounds has bigger numbers than data using tons).

These measures say that if the number of contracted hogs or packer-owned hogs changes by 1%, the spot market price will move 0.88% and 0.28%, respectively, in the opposite direction.

Some have interpreted that to mean: "If we reduce the proportion of hogs sold under contracts by 1%, we will increase spot market prices by 0.88%." Or, similarly, "If we reduce the proportion of hogs owned by packers by 1%, spot market prices will increase by 0.28%." By that logic, if we just eliminate the 25% or so of hogs owned by packers, we will increase spot market prices by 0.25 x 0.28 = 0.07 or 7%. Better yet, if we just outlaw the contracts used to sell 60-65% of all hogs, we would increase prices by 0.60 x 0.88 = 0.528 or nearly 53%. Wouldn't that be great?

But those numbers are wrong. The research does not address changing the proportion of hogs sold under these arrangements. It used the number of hogs sold through the various methods. So, a change in the number of hogs sold under contracts would affect the total supply of hogs. No wonder the effect is negative -- it is a demand elasticity that measures the change in total quantity on price.

In addition, each elasticity applies only to the amount of hogs sold under those methods. So, a 1% change in the number of hogs sold under marketing contracts is 1% of roughly 60% or 0.6% of the total supply. Similarly, a 1% change in the number of hogs owned by packers amounts to 1% of about 25% = 0.25% of total supply.

GIPSA's data indicated that, for the study period of October 2002 through March 2005, 59% of hogs were sold through contracts, 11% were sold through negotiated trades, and 30% of hogs were packer-owned. Given these shares, the correct way to use the estimated elasticities is:

Contract supplies. A 1% change in the number of hogs sold under contract would amount to a 0.59% change in total supply and that change in supply would be associated with a 0.88% price change in the opposite direction. The price flexibility for total supply would be -0.88/0.59 = -1.49. Meaning that prices move 1.49% for each 1% change in total supply, if the change is sold through contracts.

Spot market hogs. GIPSA found that the price elasticity with respect to spot market supplies was -0.27. A 1% change in the number of spot market hogs would amount to .01 x .11 = .0011 or 0.11% change in total supply. The price flexibility for that change in total supply would be -0.27/0.11 = -2.45. Each 1% change in total supply drives prices 2.45% in the opposite direction, if the change is sold in spot markets.

Packer-owned hogs. The price elasticity with respect to packer-owned pigs was 0.28. A 1% change in the number of packer-owned pigs would amount to 0.01 x 0.30 = 0.3% change in total hog supply. The price flexibility for that change would be -0.28/0.3 = -0.923. That is, each 1% change in the total supply drives prices 0.92% in the opposite direction, if the change is comprised of packer-owned hogs.

Those impacts are dramatically different than the raw numbers. In fact, packer-owned pigs have the smallest impact on spot market prices and spot-market-sold pigs have the largest. If you think about it for a moment, that makes sense. Wouldn't the pigs sold at the price being measured have the biggest impact?

Whether you like these numbers or not, we need to use them according to how they were derived and what they actually mean -- not according to what we want them to mean. In addition, we need to remember that these numbers are only accurate near the level at which they were estimated. Doubling the number of hogs sold under spot markets would not have a -0.27% impact for each 1%. The -0.27 only applies near the number of hogs that represent the 11% market share in the data set.

None of this means this study is perfect. It is not. The huge amount of data and vast variation in the way producers and packers provided data appears to have caused some problems. But let's take time to make sure we are using the numbers correctly and, if need be, take another look at the data and the research methods and improve on them.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com

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Production Preview
Options to Improve Efficiency
Last week Mark Greenwood used this space to discuss the need for pork producers to increase efficiency. As an example, he cited an increase in pigs weaned (and pounds marketed)/sow/year, since the annual cost/sow space is more or less fixed.

Following are some approaches to making the production improvements needed to increase efficiency:

With respect to improving the pounds of pork marketed/sow/year, two general approaches can be considered. The first, and arguably more straightforward approach, is to market pigs at heavier weights. This is feasible, given ample feed, ample finishing time and the genetic potential for late finishing lean carcass growth and an acceptable packer grid.

The second and more complicated approach to system improvement is to increase pounds of pork marketed/sow/year through an increase in the number of pigs marketed/sow/year. This improvement frequently starts at the sow unit by improving the number of pigs weaned/sow/year. This can be accomplished by improving preweaning survivability, increasing litter size, or improving the reproductive efficiency at the individual sow level.

The object of increasing pigs weaned/sow/year can be accomplished through a number of methods, although they do not actually improve the system's net result. Examples include:

Weaning substandard pigs that won't survive the growing period.

Culling the bottom-end sows without replacement, such that herd records improve but the reduction in sow inventory results in fewer pigs weaned for the system.

Creative culling practices that reduce sow non-productive days without improving per-sow efficiency. An example would be removing a sow on paper before she is physically removed from the herd.

Of the three approaches to improving pigs weaned/sow/year, improvement of individual sow efficiency can be the most rewarding. This approach addresses non-productive days in the forms of delayed wean-to-first-service interval and conception and farrowing rates. For a herd averaging nine pigs weaned/litter, a 5% improvement in farrowing rate would be expected to increase pigs weaned/sow/year by more than one pig annually. Likewise, every one-day decrease in wean-to-first-service interval would be expected to improve annual sow output by approximately 0.13 pigs.

The potential to increase litter size varies across herds. Well-implemented genetic programs can help. Gilt acclimation programs (including a minimum number of estrous cycles before the first service and feeding programs) and lactation feeding programs that minimize the loss of body condition while follicles are developing are essential.

For well-managed herds, improving preweaning survivability can be challenging. The crate environment (cleanliness at farrowing, zonal temperatures, space available for the piglets), along with attention to sow milking ability, can make a difference in preweaning mortalities of between 8 and 12%.

No single effort is likely to take a herd from 20 up to 25 pigs/sow/year. Such gains are made through a multifaceted approach that pursues the best practices across the board.

Stephanie Rutten, DVM
University of Minnesota
rutt0011@umn.edu
Editor's Note: For all your agricultural news, markets and commentaries, go to www.farms.com.

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Legislative Preview
Animal Welfare Requirements for Federal Meat Purchases
Congressmen Peter DeFazio (D-OR) and Chris Shays (R-CT) have introduced H.R. 1726, the "Farm Animal Stewardship Purchasing Act," which would require the federal government to purchase meat, dairy and egg products from producers who meet certain animal welfare standards. The bill would require animals to be:

"Provided adequate space to stand, lie down, move his or her head freely, turn around completely, and fully extend all limbs or wings without touching any part of an enclosure or another animal;

"Provided daily access to adequate food and water sufficient to ensure the health and well being of the covered animal without forced feeding or feed withdrawal;

"Provided adequate veterinary care, including prompt treatment or humane euthanasia of a sick or injured covered animal; and

"In the case of a covered animal that is a mammal, the offspring of a dam that was kept in compliance with paragraphs 1 through 3 during the pregnancy yielding such offspring."

In introducing the bill, DeFazio said, "Increasingly, Americans are demanding we curb the most abusive factory farming practices. As a significant buyer of farm animal products, the federal government can and should help lead the way, encouraging better practices within the industry." The legislation would cover meat purchases for federal programs such as school lunch, school breakfast, prisons and military.

Hearings to Address Livestock and Meat Issues -- The House Agriculture Subcommittee on Livestock plans to hold a hearing on the livestock and meat industries on April 17. A portion of the meeting will focus on USDA's "Livestock and Meat Marketing Study," which was released in February. The congressionally mandated study found that alternative marketing arrangements (AMAs) increase the economic efficiency of the cattle, hog and lamb markets, and that these economic benefits are distributed to consumers, as well as to producers and packers who use AMAs. The Senate Agriculture Committee plans to hold a hearing on April 18 to discuss competition issues and the farm bill. We can expect the issues of concentration, vertical integration, packer ban, spot market requirements and arbitration to be discussed.

Livestock Waste Legislation Gains Cosponsors -- The legislation that would clarify that livestock manure is not a Superfund material has gained a number of cosponsors since being introduced in March. The Senate bill (S. 807) now has 17 co-sponsors and the House bill (H.R. 1586) has 85 co-sponsors. This legislation is supported by the National Cattlemen's Beef Association, National Pork Producers Council, National Chicken Council and the American Farm Bureau Federation.

Animal Fighting Legislation to the President -- The Senate passed legislation that would increase federal penalties for transporting animals across state lines for the purpose of staging fights. The legislation would make it a crime to buy or sell animals for fighting and would make it unlawful to use the U.S. Postal Service to promote animal fighting in the United States. The bill (H.R. 137) passed the House in March and now goes to the President for his approval.

USDA Farm Bill Proposal -- Secretary of Agriculture Mike Johanns indicated this week that USDA would be sending the complete legislative language for its 2007 farm bill proposal to Congress over the next 4-6 weeks.

P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.

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Career Center
World Pork Expo Careers

National Hog Farmer and the National Pork Producers Council are excited to announce the 2nd Annual Career Center at this year's World Pork Expo. Career Center will be held June 7 & 8 (9:00 a.m.- 3:00 p.m.) at the Iowa State Fairgrounds in Des Moines, IA. You will have the opportunity to meet representatives from pork production companies to learn about career opportunities they currently have available. There will also be representatives from colleges that offer swine production programs for those interested in pursuing more education.

The May issue of National Hog Farmer will feature the companies who are participating in this Career Center. If you represent a company that would like to participate and/or have questions, please e-mail Lisa Peterson at lisa.peterson@penton.com for more information.

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