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Dale Miller, Editor,
National Hog Farmer
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Market Preview
Evaluating Lower
Market Weights
When low hog prices come, it never takes long for
someone to call for lower market weights in order to reduce pork
supplies and push prices back upward. It is a logical response that, if
it worked, would have the desired outcome. The problem is that it
hardly ever works. There were some good reasons, some of which still
apply, and some of which may no longer apply. Let's consider the weight
issue and how it plays out.
Hog weights have been on a more-or-less constant uptrend since the
1950s. Figure 1 shows monthly data for average hog carcass weights
since 1986, and this long-term uptrend is clearly visible. The only
clear exceptions to this uptrend occurred in the mid-1990s, in 2006 and
in early 2007. All of those were caused by high feed costs. The
question now is whether the most recent period will be merely another
temporary slowing of the trend or mark an actual change in this
long-term trend.
Factors Favor Heavier Hogs
There are good reasons why hogs have gotten heavier. First and
foremost, the genetic potential of today's pigs is to deposit less fat
than their ancestors at virtually all weights. This characteristic
means that pigs can be taken to heavier end-weights without producing
extra fat. So, more pounds of high-value, saleable product can be
produced from each pig. Producers' and packers' fixed costs (plant and
equipment depreciation, interest, taxes, repairs, etc.) and quasi-fixed
costs (labor being the largest) can be spread over larger levels of
output, thus driving total profitability.
Note that I call labor a quasi-fixed cost. It is technically a variable
cost in that it goes away if production ceases. Labor, though, behaves
more like a fixed cost in the short run because firms cannot just lay
off labor and hire back equally skilled workers when economic conditions
improve.
The proportion of costs represented by variable-cost items has fallen
over time due to higher investments in confinement facilities and the
labor to man them. This lower variable-cost level means that prices
have to fall farther for average variable costs to not be covered -- the
point in economic theory that says output should be reduced.
Finally, producers appear to treat feed costs as the only component of
marginal costs -- ie., the additional cost of the last unit of output.
The cost of feed needed to put on the last pound of gain has almost
always been lower than the value of that pound, making the
profit-maximizing decision easy: "Keep feeding them."
This behavior slowed in late 2006 and early in 2007 (Figure 2) as
producers dealt with significantly higher feed costs. They seemed to
adjust to those costs, though, and market weights again began to run 1
and 2 lbs. higher than in 2006 during the second half of 2007. That
trend has changed again with weights equal to or 1 lb. lower than
year-earlier levels in the past six weeks.
Renewed Call for Lighter Hogs
Feed ingredient cost increases since last fall have again precipitated
calls for lighter hogs, and reducing weights with finish diet costs well
above $200/ton is probably a good decision. But there is a problem: It
couldn't be done, at least not until recently.
Consider Figure 3, the same weekly hog slaughter graph I showed last
week but with a slaughter capacity for 5.5 days/week added. Could any
more hogs have been slaughtered from October through January? Well,
packers could have added even more hours, but that rarely happens and,
when it does, packers usually run into severe absenteeism problems. So
the answer is probably not.
But what would have to happen to slaughter for the industry to pull
market weights back by 2 lbs.? The pigs to be slaughtered on Monday are
already out there. And there are more out there for the next day and
the next day and the next . . . well, you get the picture. So, to pull
weights down by one day's growth (about 2 lbs.), we would have to make
one day's worth of slaughter simply vanish. That cannot be done when
slaughter runs are near capacity levels.
The good news is that it can happen now. Total slaughter has been below
the 5.5 day/week capacity since the last week of January and, at current
levels, we could process about 100,000 to 150,000 more hogs per week if
the economics dictated doing so. The bad news is that at 100,000 to
150,000 more pigs/week, it will take three to four weeks to make that
one day's worth of slaughter disappear.
Help Yourself
It is a slow process. I urge producers to do what is best on your farm.
Today's feed and cash hog prices suggest that lighter weights might be
optimal. But do what is best for you and let the market translate that
into a broader impact. Any reductions should help hog prices and move
us a bit closer to profits.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
Correction
Financial Preview column published in North
American Preview on Friday, Feb. 29, 2008, under the subhead:
"Impact of Higher Prices on Demand," Mark Greenwood wrote: "I went
to a local, large supermarket in Spain and looked at boneless pork loin
in the meat case. The cost of this product was 6.95 Euros per kilogram,
which equates to over $23 per lb. To convert this, take 6.95 x 2.2
kilograms/lb. = 15.29 Euros/lb. x $1.51 exchange rate."
In correcting the error, Greenwood explains the cost in the supermarket
was actually 15.29 Euros/kilogram, which equates to 6.95 Euros/lb.
(15.29 divided by 2.2 lb./kg. = 6.95). With the current exchange rate of
$1.51/Euro, the cost per pound for the boneless pork loin in U.S.
dollars is $10.50.
Greenwood adds: "I had several people send an email and question my math
and I thank them for their corrections. My mother, who was a teacher,
would be lecturing me today if she were alive. I need to double-check my
math. I apologize for any confusion this has caused. I would also like
to thank the many European swine producers whom I met. They were very
accommodating and very willing to exchange information. I learned a lot
about their industry. The pork industry is not easy anywhere in the
world today!"
Click
here for the most recent articles from National Hog Farmer on
Environmental Stewardship, Water Quality, Credits, Recycling, DDGS, and
the importance of "going green" in agriculture.
Ingelvac CircoFLEX® vaccine makes it easier to protect pigs from
PCV2 as early as 3 weeks of age or older . It starts early and stays
late.
Call Boehringer Ingelheim at 1-800-325-9167.
Swine Health Preview
Respiratory Diseases
Lead in 2007
More than 16,500 swine tissue samples were submitted and
analyzed by the Iowa State University Veterinary Diagnostic Laboratory
(ISU VDL) in 2007 (Figure 1). When the samples are broken down by the
body system affected, it comes as no surprise that the greatest number
of diagnostic requests focus on respiratory disease (Figure 1).
Disease agents such as porcine reproductive and respiratory syndrome
(PRRS) virus or porcine circovirus type 2 (PCV2) can be included in
several of the categories, and when not clearly associated with a single
category, are lumped as "systemic." Septicemia captures bacterial agents
(e.g. Hemophilus parasuis, Streptococcus suis, etc) that affect multiple
body systems.
The distribution of pathogenic agents most commonly associated with
respiratory disease is represented in Figure 2. Respiratory disease
severity is never improved by the presence of PRRS virus, and mixed
infections are more frequent than this chart indicates. Because mixed
infections are so common, it is useful to remember that the strategy to
treat a respiratory disease outbreak is often different than the
strategy to prevent an outbreak of respiratory disease.
Enteric diseases accounted for 13% of swine submissions to ISU VDL in
2007 (Figure 3). Note the high percentage of "idiopathic" cases.
Idiopathic is the term applied when no cause is detected, usually
because samples are inadequate.
Samples from acutely affected, non-medicated pigs increase the odds of
diagnosis. A veterinarian should be knowledgeable of the best testing
strategy for the problem at hand. That test strategy often involves
sacrifice of acutely affected, non-medicated pigs to confirm that the
agents detected are actually responsible for the disease process
observed.
Diagnosis of the cause of abortions by submission of fetuses, only, is
often unrewarding. No cause for the abortion is found in more than 65%
of cases where only fetuses are submitted (Figure 4). The success of
identifying the cause of abortion is greatly improved by submitting and
testing samples from carefully selected sows, fetuses and prudent use of
serology.
Figure 5 shows the number of cases of PRRS virus, swine influenza virus,
Mycoplasmal pneumonia and porcine circovirus-associated disease (PCVAD)
for the last five years. There clearly is a seasonal distribution, with
the highest number of cases of each agent consistently detected in late
fall and early winter.
Cases of PCVAD have decreased fairly dramatically since the widespread
introduction of PCV2 vaccine. PCVAD did not seasonally increase in 2007.
On the other hand, PRRS virus, in particular, as well as SIV and
mycoplasma, did show increases in the number of cases in late 2007. The
interaction between these agents is not clear. Better insight is
expected with newer information technologies and improving data quality
that is increasingly available.
Click to view graphs.
Kent Schwartz, DVM
Iowa State University Veterinary Diagnostic Laboratory
kschwart@iastate.edu
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Legislative Preview
Administration's
Farm Bill Requirements
The Bush Administration sent to the House and Senate
Agriculture Committees its "Parameters of a Successful Farm Bill." The
parameters outline the offsets the administration would be willing to
accept, and the reforms that are needed to complete the farm bill. The
administration indicated it would be willing to consider spending up to
$10 billion over baseline. The administration said, "Any agreement must
also eliminate budget gimmicks, including, but not limited to, shifting
payments outside the budget-scoring window, unrealistically terminating
new programs and benefits in individual years, or requiring directed
scoring." The reforms outlined for Congress were:
Payment limitations: The current Adjusted Gross Income (AGI)
limitation must be lowered and include a hard cap at no more than
$500,000. The administration originally proposed an AGI cap of
$200,000.
Commodity support programs: Loan rates, target prices and MILC
(milk income loss contract) payment rates should not be increased above
current law. The final agreement must also eliminate new subsidy
programs and exclude commodity storage payments.
Beneficial interest: The marketing loan program must be
reformed, by eliminating provisions that allow producers to lock in
subsidy levels, only to hold and later sell the crop at higher market
prices.
Revenue-based countercyclical program: The current price-based
countercyclical program should be replaced with a revenue-based program
that better targets farm support, includes a revenue guarantee cap and
does not duplicate crop insurance assistance.
Dairy support program: The U.S. Department of Agriculture
(USDA) must continue to have the authority to adjust dairy component
prices ("tilt") to limit build-up of Commodity Credit Corporation (CCC)
dairy stocks.
Sugar support program: The final agreement must eliminate the
sugar-to-ethanol program, as well as the requirement that allotments not
be less than 85% of the estimated quantity of sugar for domestic human
consumption. Under the proposed sugar-to-ethanol program, the USDA
would not be permitted to dispose of excess sugar through uses other
than ethanol production, even if those uses would reduce taxpayer costs.
Crop insurance: Crop insurance companies should not be
permitted to collude during the renegotiation of the standard
reinsurance agreement.
Elimination of planting restrictions: Fruit and vegetable
planting restrictions should be lifted to eliminate any question that
direct payments are "green box" in light of recent World Trade
Organization (WTO) rulings.
Food aid flexibility: Any final agreement must include the
administration's proposal authorizing up to 25% of P.L. 480 Title II
food aid assistance for local purchase. In addition, any requirement
restricting emergency food aid must be eliminated. This restriction
will cut off U.S. food aid to up to eight million people, significantly
undermining the ability of the United States to save lives in emergency
situations.
Miscellaneous provisions: The administration strongly opposes a
number of miscellaneous provisions including, but not limited to, fees
related to previously negotiated leases for OCS, expansion of the
Davis-Bacon Act, proposals to restrict states' ability to competitively
source food stamp functions and alterations to current sanctions and
restrictions related to Cuba.
Committee subpoenas Hallmark/Westland -- The House Energy and
Commerce Oversight and Investigations Subcommittee voted to subpoena
Steven Mendell, president of Hallmark/Westland Meat Company, to testify
at a food safety hearing next week. Mendell had been invited to testify
last week but did not respond to the committee's request.
Federal reserve chairman & ethanol imports -- Federal Reserve
Chairman Ben Bernanke told the Senate Banking Committee that there
should be a reduction in the import tariff on Brazilian ethanol. He
said, "As you know, I favor open trade and I think allowing Brazilian
ethanol, for example, would reduce costs in the United States."
Glauber -- USDA chief economist -- Secretary of Agriculture Ed
Schafer has named Joe Glauber as USDA chief economist. Glauber has
served as the deputy chief economist for 15 years. This is considered
to be a good appointment by the agricultural community.
P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.
 Hermitage NGT
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Talk with our team of specialists in genetics, reproductive physiology,
nutrition, veterinary medicine, pig production management and A.I. to
design a program to allow you to take advantage of these exciting
genetics.
www.hermitagengt.com
Pork Industry Calendar
March 8-11, 2008: The 39th Annual Meeting of the
American Association of Swine Veterinarians, Sheraton San Diego Hotel &
Marina, San Diego, CA; contact: (515) 465-5255 or aasv@aasv.org.
March 18, 2008: The Ohio Swine Health Symposium, Der Dutchman, Plain
City, Oh; contact: Ohio State University Extension/Putnam County by
phone (419) 523-6294 or fax (419) 523-3192.
Click
here to get National Hog Farmer's complete pork
industry calendar.
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You asked for more pounds of pork marketed per sow. You asked for a
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Take another look at our new Camborough family, we think you will like
what you see--after all, it is just what you asked for.
www.pic.com/usa
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