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Dale Miller, Editor,
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Market Preview
Facing Three Crop Challenges
Has there ever been a more dynamic time for grain and
livestock markets? I don’t think so. The financial prospects of pork
producers seem to change by the hour – or at least by the day -- and
I’m not sure I can remember when long- and short-term situations
changed so quickly, often in opposite directions! I feel whipsawed at
every turn, and I don’t have nearly as much at stake as most of you.
Let’s consider what has happened recently.
Last week’s discussion of (and surprise at!) a bullish response to
what appeared to be a slightly bearish crop report was just a primer for
what was to come. Corn futures prices are now roughly $1/bu. higher
than they were on Aug. 11, the day prior to the August Crop Production
report. Soybean meal futures prices are roughly $30/ton higher.
Why has this reaction occurred? First, the crop remains immature from
an historical perspective and quite at risk for an early frost. But the
trade analysts knew that going into the report. Perhaps thinking of the
immature crop in terms of a forecasted 155-bu.-per-acre yield instead of
a 148.5-bu.-per-acre yield provided a dose of cold water on this issue.
Still, these early frost concerns are well founded and indeed persist.
Second, it has turned dry in some areas. Rain has been less regular in
many areas and an immature crop needs all the help it can get.
Third – and I think this is the factor that has really come into play
– this report provided a dose of absolutely frigid water concerning
next year’s crop, and what it will have to be to meet all of the
demands that will be placed upon it. The 2009 carryout is now forecast
at 1.133 billion bushels, over 400 million bushels less than this year.
The cost of planting an acre of corn next spring could well be over
$700. That is a lot of money (borrowed?) to put at risk relative to the
cost of planting soybeans.
The Renewable Fuel Standard will require another 1.5 billion gallons of
ethanol, thus diverting another 535 million bushels of corn, regardless
of the price.
There will be about 1 million acres coming out of the CRP (Conservation
Reserve Program) this fall but a) some will be bid back in, b) some will
be acres not suitable for corn and soybean production and c) it will be
too late for much of it to be farmed in 2009 even if the owner wants to
do so.
Expectations of future economic events count in economics and are
critical to the process of discovering prices, rationing supplies, etc.
It is a good thing that the market looks ahead, even when it costs us in
the meantime.
Hog Futures Weaken
While corn and bean prices have rallied, hog futures have softened a bit
even as cash markets have been excellent (Fig. 1).
That makes sense for the deferred futures market as higher current hog
prices and lower prospective grain prices likely caused some producers
to scrap liquidation/reduction plans or at least put them on hold. I do
not think the recent record-high cutout values and hog prices can hold
in the face of seasonally higher slaughter, but higher values now could
well mean higher values through the fall. The average national net
price so far in August has been $84.96. A “normal” seasonal pattern
tells us that December hog prices will be about 18% lower or just below
$70/cwt carcass. But given the abnormality of the seasonal pattern thus
far, just why should we expect a normal seasonal decline this fall?
Sow Prices Befuddle Economist
Little of our logic works. Like this one: Prices for big sows (see Fig. 2)
have doubled in four weeks, are trading in the mid-$50s this week, and
one sow buyer tells me he expects to see sow prices in the $60s next
week. So, producers must have decided to quit selling sows, right?
Wrong. We still slaughtered 68,410 head the week of 8/9, 7.7% larger
than last year. Year-to-date sow slaughter is still up over 9% from
2007 and sow slaughterers report that sows are not in short supply. In
fact, there seems to be more of them available at these higher prices.
Okay, one piece of logic works. The driver on sows is demand, which is
largely due to prices for trimmings and those are most likely being
driven by exports.
Need Weekly Export Report
A big part of why the logic fails is that we cannot see the man behind
the curtain, exports, on anywhere near a real-time basis. We do not
have weekly export reporting like that of the beef industry because the
writers (and I was one of them!) of the 2000 mandatory price reporting
legislation believed that it would provide a strategic advantage to our
competitors if they knew what was going on week to week. The U.S. beef
industry did not have the same worries since, at that time, it was
virtually the only exporter of grain-fed beef.
Times have changed. We are now exporting more than 25% of our
production. Weekly information may provide some advantages to our
competition, but this segment of sales is so important that we should
not continue to learn its details two months after the fact.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
Swine Disease Control Made Easy. Introducing Ingelvac MycoFLEX®.
Call Boehringer Ingelheim at 1-800-325-9167
Production Preview
Underproduction vs. Overproduction
One of the major determinants of the value of sow farm
output is the level of production and the variation of that production.
Underproduction results in downstream underutilization of growing pig
capacity. It also results in more mixing of pigs as other sources of
pigs are often used to fill in the gap created by a low-producing sow
herd. In addition to the on-farm component of underproduction, there is
also seasonal underproduction that results in higher prices available
during the times when most sow farms under perform.
Conversely, overproduction has its own costs. The first is that it is
often closely related to underproduction, where an accumulation of open
sows has occurred, and this accumulation suddenly becomes productive.
Think of seasonal infertility as not only a problem of underproduction,
but there is also a concomitant overproduction that occurs afterwards.
While there is obviously a direct effect on the number of pigs produced,
it appears that the quality of the pigs produced during overproduction
is also compromised.
In many farms, we see a reduction of weaning age of at least two days
when overproduction occurs. This reduction is quite understandable as
the farrowing room manager is trying to fit too many sows through his or
her facilities.
Explanation of the Model
An analytic model on variation in sow farm output was made to monitor
the weekly number of pigs born alive. We made the unit (of measurement)
a week, as it creates a visible and discrete unit and there is little
transport of pigs during the weekend. However, we have found problems
when we define sow farm output by the number of pigs weaned.
The number of pigs weaned can be manipulated by changing the weaning
age, which usually reduces the amount of variation in output. However,
this manipulation is actually one of the costs of variation. Therefore,
instead of weaned pig output, we monitor the number of pigs born alive
in a week. This has a low likelihood of manipulation and allows us to
avoid the “noise” of the manipulation of weaning age.
Figure
1 is an example of the variation in production across 10 identical
sow herds that have an average production of over 1,100 pigs/week.
However, the range of output is very wide. Much of this variation is due
to seasonal infertility and subsequent overproduction, but there are
also other causes, such as disease outbreaks and breakdowns in
production methods – such as Christmas infertility syndrome.
Managing this variation is a three-step process. First, put a price on
the relative value of pigs if they are underproduced or overproduced.
For underproduction, this entails a recognition that money is left on
the table and that poor practices of disease containment can occur.
Though it is subjective, the relative value of pigs based on level of
production needs to be described throughout the whole production system.
The second step is to discuss methods of control for these variables.
You should plan on seasonal infertility and subsequent improvements in
fertility. Extraordinary resources can be put into play during the
summer months to improve reproductive performance. Feed quality, labor
quality and cooling methods must be emphasized.
The third step is to start analyzing the robustness of sows under
different insults. We can blame environmental insults and disease for
much of the problem, but there are real differences among genotypes in
their ability to handle such insults. Selection for maximum performance
may, in fact, reduce the ability to respond to adverse conditions.
I often compare a sow unit to a feedmill. Both are expected to provide a
high-quality product on a consistent basis. Overproduction should not be
rewarded, but underproduction should not be tolerated. Empty feed drops
are, of course, intolerable. But empty barns may create similar economic
problems.
John Deen and Sukumaran S Anil
Editor’s Note: John Deen, DVM, PhD, is an associate
professor at the University of Minnesota, and Sukumaran Anil, DVM, PhD,
is a research asssociate at the University of Minnesota. For more
information on benchmarking, go to: www.farms.com
Legislative Preview
Farm Program Payments for Small
Farms
Twenty-five senators have written Secretary of
Agriculture Ed Schafer concerning the implementation of the farm bill
provision that eliminates producers from receiving direct,
countercyclical, or ACRES (Average Crop Revenue Election) payments on
farms with 10 acres or less. The letter is the result of USDA
indicating it would not approve requests for farm combination
reconstitutions of farms that have base acres of 10 or less, if the
request was received after the enactment of the farm bill on May 22,
2008. The letter points out that it was the clear intent of Congress to
allow for the aggregation of farms. Senator Chuck Grassley (R-IA) said,
“The Department of Agriculture can’t just make up its own rules when
implementing a law that is clearly written. The department needs to
follow the law and implement it as Congress intended.” Senator Tom
Harkin (D-IA), chairman of the Senate Agriculture Committee, said,
“Now USDA is disallowing consolidation that simplifies its
administrative task and instead is focused on a punitive policy
approach. It does not make sense from a policy or practical
perspective.”
Ethanol Tariff & WTO — Senator Chuck Grassley (R-IA), in a
letter to U.S. Trade Representative (USTR) Ambassador Susan Schwab,
indicated that the ethanol import tariff is “explicitly permitted”
under World Trade Organization (WTO) rules. The letter was in response
to questions raised by Senator Dianne Feinstein (D-CA) about whether the
import tariff violates WTO rules. Senator Grassley said, “Besides the
fact that the ethanol tariff is perfectly in line with WTO obligations,
it is also in line with our domestic energy policy, which focuses on
using homegrown ethanol to help rural communities across the country
rather than sending more dollars to the Middle East or Brazil. Brazil
has yet to even take advantage of exporting ethanol duty-free to the
United States through the Caribbean Basin Initiative. Until Brazil
takes full advantage of its ability to export ethanol duty-free, I
don’t see why we should give Brazilian ethanol more generous
treatment.”
Food Safety Bill Introduced — Senators Dick Durbin (D-IL), Judd
Gregg (R-NH), and Richard Burr (R-NC) have introduced bipartisan food
safety legislation, “The FDA Food Safety Modernization Act,” that
would improve the way the Food and Drug Administration (FDA) protects
the safety of the food supply. Senator Durbin said, “Over the last
year we’ve seen major recalls of peanut butter and jalapeno peppers
spiked with salmonella, spinach laced with E.coli, and chili loaded with
botulism. It’s clear these are not isolated incidents and are the
results of a food safety system that is outdated, underfunded and
overwhelmed. Today’s bipartisan bill will close many of the gaping
holes in FDA’s food safety authorities and help to ensure the food on
our store shelves is safe.” The legislation requirements
include:- Domestic food facilities required to write hazard
analysis critical control point (HACCP) plans;
- FDA would set commodity-specific standards for fresh produce;
- High-risk imports to be certified as meeting U.S. standards; and
- FDA to set up an accreditation system for third-party inspectors of
food facilities.
More frequent inspections, with specific timelines
for high-risk facilities would be conducted. And, along with mandatory
recall authority, FDA could suspend a food facility’s registration if
there is a reasonable probability a food would cause serious adverse
health consequences.
BSE Case Again in Canada — The Canadian Food Inspection Agency
(CFIA) has confirmed another case of bovine spongiform encephalopathy
(BSE) in a 6-year-old beef cow in Alberta. This is the 15th case of BSE
in Canada and the third case this year.
P. Scott Shearer
Vice President
Bockorny Group
Washington, DC
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respiratory disease (SRD) in all phases of production. For use by or on
the order of a licensed veterinarian. Swine intended for human
consumption must not be slaughtered within 5 days of receiving a single
injection dose.
Click on the Baytril 100 logo for more information.
Pork Industry Calendar
Aug. 26, 2008: Hog Margin Maker Risk
Management Workshop, Henry County Extension Office at Mt. Pleasant, IA;
contact: (319) 385-8026.
Sept. 4, 2008: Midwest Swine Nutrition Conference, Indiana Farm
Bureau Building, Indianapolis, IN; contact: Tip Cline at Purdue
University, tcline@purdue.edu; Gilbert Hollis at the University of
Illinois, hollisg@uiuc.edu;
Merlin Lindemann at the University of Kentucky, mdlindl@uky.edu; Gretchen Hill at
Michigan State University, hillgre@msu.edu; or Don Mahan at The
Ohio State University, mahan.3@osu.edu.
Click
here to get National Hog Farmer's complete pork
industry calendar.
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