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Use Terms Revisited
- Smithfield
Plans to Buy U.S. Hogs Exclusively
- Current Issue:
Maximizing Manure's Value
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Market Preview
USDA Forecasts
Grain Stocks Up, Prices Down
USDA’s October Crop Production and World Agricultural
Supply and Demand Estimates, released Friday morning, reported higher
corn yield and production estimates, and slightly lower soybean yields
but, due to a projected increase in harvested soybean acres, higher
soybean production. Both of those estimates – plus, no doubt, some
concern about the impact of current macroeconomic issues – resulted in
significant reductions of USDA’s price forecasts for 2008-2009. See
Table 1 for the key numbers from the report as well as pre-report
estimates published by DowJones.
Corn supplies were increased due to an upward adjustment of 49 million
bushels in beginning inventories (based on September’s Grain Stocks
report), and an estimated yield of 154 bushels per acre, 1.7 bushels
higher than the September estimate and 2.9 bushels per acre higher than
last year.
Corn Harvest Far Off Pace
Anecdotal evidence indicates very good corn yields in areas which have
begun harvested. But Monday’s Crop Progress report indicates that
harvest, at just 14% of acres, is FAR behind both last year (39%) and
the average of the past five years (30%). Further, the western Corn
Belt that accounts for a huge portion of the crop, and saw the most
difficult planting conditions, is farther behind than other areas.
The yields that I have heard came from Illinois and Indiana, and I know
that the crops in Illinois could hardly have looked better at any time
during this growing season – so I would expect excellent yields from
those acres. USDA reported only 3% of Iowa acres harvested as of last
Sunday, and my driving over the past week would confirm that. And the
number of green leaves I saw in cornfields would also confirm USDA’s
estimate that only 66% of Iowa corn acres were mature last Sunday. This
harvest is going to take awhile.
USDA Cuts Ethanol Use
USDA also reduced projected ethanol usage and other food, seed and
industrial usage, but raised feed usage by 150 million bushels. That
increase makes sense in light of the September Hogs and Pigs Report.
The HUGE 8-11% reductions of broiler egg sets seen in recent weeks will
reduce feed needs some but USDA, in my opinion, still had it too low in
September so the increase is, I think, a proper change. It may still
not be enough but it is an improvement.
Corn Carryover Gets Boost
The net effect was to increase projected carryover by 136 million
bushels to 1.154 million bushels. But that is still 29% lower than last
year and makes the 2009 crop very, very critical. In spite of lower
carryover, USDA’s price forecasts were reduced by $0.80/bushel to
reflect lower futures prices. The weekly chart for corn futures and the
daily chart for December futures appear in Figures 1 and 2,
respectively. The weekly chart has now covered a gap at $4.19, but has
left two gaps during this leg downward with the highest being at $6.08.
That will serve as a technical objective after this market makes a
bottom.
Huge Feed-Buying Opportunity Exists
The daily chart all show some signs of bottoming after this huge
sell-off. I think the price decline has been driven by fear of a global
demand decline and the liquidation of long positions by many funds and
speculators. I also think this is a HUGE buying opportunity! Ethanol
plants can still pay $5 and more for corn and OPEC announced yesterday
that they were considering an oil output reduction aimed at stemming the
decline in oil prices. How many readers ever thought they would get the
chance to buy corn and soybean meal at a level that would allow
production costs in the low $70s/cwt carcass weight through 2009? I
doubt there are many provided they answer honestly! Don’t miss this
chance to manage costs.
Broilers’ Decline is Pork’s Gain
Some help may be on the way from the broiler business. Figure 3 shows
an updated version of my weekly broiler egg set chart and features the
two largest year-over-year declines on record. The 11.5% decline for
the week of Oct. 4 is far and away the biggest ever, and suggests much
smaller chick placements in November and lower production as early as
late December. Broiler companies cannot place a chick without setting
an egg. That reduction of supply is critical for pork due to the close
competitive relationship that has developed between the two meats over
the past few years. For better or worse, we are an “Other White
Meat.” This could be one of those better times.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
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Production Preview
Changes in Cost
and Revenue Scales
In a simple economic model of current swine production
farms, the objective is to maximize the difference between revenues and
costs. This can be expanded to emphasize throughput by focusing on the
number of pounds sold multiplied by the difference between the costs per
pound and the revenue per pound.
Obviously, costs have increased markedly, particularly feed and facility
costs. This has resulted in an increased emphasis on cost control,
through improvements in efficiencies as well as the search for
alternative feedstuffs.
It is almost universally accepted that though there may be some
moderation in costs of production, the return to profitability will be
achieved through an increase in the market price for pigs. Thus, not
only will future production be characterized by increased costs of
production, but also increased revenues. It is my thesis that the swine
industry is much better equipped to address the effects of high feed
costs than capitalize on the opportunities with higher pig prices.
Let’s break up the changes in costs and revenues by external, design
and implementation effects. External changes, the price of corn, for
instance, are large but impossible to manipulate. These external changes
can be a force to modify the designs for production, such as the
formulation of feeds or the designs of feeders. Failure to achieve
planned outcomes, such as timely delivery of feed or survival of pigs,
also affects the bottom line. The variation in the latter category can
often exceed design effects, and yet are often not addressed. Moreover,
failures to implement correctly will have even greater effects as the
value of pigs increase. I would argue that the changes in scale of costs
and revenues result in an emphasis not only on costs and revenues, but
also throughput.
Let’s reexamine the formula for profitability:
Profit = # pounds (Revenue/pounds – Costs/# pounds)
The variable – “pounds” – shows up multiple times in this
formula and has multiple effects. The other effects of throughput are
recognized when we admit that we do not have many true variable costs
when the unit of production is pounds of pig or pork.
Feed is often portrayed as a true variable cost, but this is far from
true. For instance, a deviation from planned output due to mortality not
only has an effect on the number of pounds sold, it has a direct effect
on the costs per pound sold, as the remaining marketed pigs must carry
more feed costs. Likewise, the number of culls and lightweights affects
the revenue per pound sold as these are discounted.
Thus, we find that as throughput for a fixed production stream
decreases, we see the effects in the” costs per pound sold” and the
“revenue per pound sold.” As we look at the implementation problems
in a system, with fixed design objectives and externally determined
costs and revenues, throughput is the major factor. This is illustrated
in Figure 1, where we see that it makes up 71% of the variation of
profitability for a group when analyzed across 200 closeouts for 2007.
Throughput management is very important, but it will be magnified by
changes in revenue. As pigs become more valuable, we will see an even
larger proportion of the profitability addressed by throughput. Figure 2
takes the same dataset as in Figure 1, but it increases the base revenue
by 25%. The proportion of the variation of profitability due to
throughput is then increased from 71% to 82%.
This signals new opportunities and new threats and it places pig
production under a new economic model. As the revenue side increases,
failure to maintain populations and failure to maximize their value will
cause real problems. The challenge will be to maintain and maximize
these populations where possible. It will also entail reevaluating the
quality of pigs entering the production stream with more aggressive
segregation of those with high likelihoods of failure.
Click to view graphs.
John Deen, DVM, PhD
The Swine Veterinary Group, University of Minnesota
deenx003@umn.edu
Editor’s Note: John Deen is associate professor at the University
of Minnesota – St. Paul.
Legislative Preview
Bailout Package and
Renewable Fuels
The $700 billion bailout package, "Emergency
Stabilization Act of 2008," includes a number of renewable fuels
provisions. These include extending the production tax credit for wind
energy for one year, through Dec. 31, 2009. The biodiesel tax credit is
extended through 2009, and the alternative fueling credit for ethanol
blended gasoline (E-85) infrastructure is extended through 2010.
Reconsider Ethanol Tariffs — The U.S. Chamber of Commerce
released a new report, "Blueprint for Securing America’s Energy
Future", which calls for "free-flowing trade" for renewable fuels and
says the import tariff on ethanol is an impediment. The report says,
"Eventually, free trade of biofuels should be the goal and we should be
prepared to reconsider the tariff on imported ethanol as global demand
and markets progress." The report also criticizes the blender’s tax
credit for ethanol.
National Biofuels Action Plan — Secretary of Agriculture Ed
Schafer and Secretary of Energy Sam Bodman recently released the
National Biofuels Action Plan (NBAP), an interagency plan detailing the
efforts of federal agencies to accelerate the development of a
sustainable biofuels industry. Secretary Schafer said, "This National
Biofuels Action Plan supports the drive for biofuels growth to supply
energy that is clean, affordable and always renewable." The plan
outlines interagency actions and accelerated, federally supported
research efforts in these areas: sustainability, feedstock production,
feedstock logistics, conversion science and technology, distribution
infrastructure, blending, environment, health and safety.
BSE Costs U.S. $11 Billion in Lost Trade — The International
Trade Commission (ITC) estimates that trade restrictions linked to
bovine spongiform encephalopathy (BSE) cost U.S. producers and the beef
industry nearly $11 billion in lost exports between 2004 and 2007. The
report says Japan and Korea account for nearly $9.5 billion in lost
exports. Senator Max Baucus (D-MT), chairman of the Senate Finance
Committee, who requested the report, said, "it is clear that USDA and
the U.S. Trade Representative must redouble their efforts to fully open
markets in Japan, China and the rest of the world to safe, delicious
U.S. beef. Removing these barriers must be a top priority."
Antitrust Recommendations & the Next Administration — The
American Antitrust Institute (AAI) has released a report that makes
recommendations for legislative and enforcement priorities for the next
administration. The major recommendations for agriculture, "Fighting
Food Inflation through Competition," include:
- Increased antitrust enforcement of merger and conduct rules
including:
-
Applying stricter standards to mergers in input markets;
- Challenging anticompetitive, post-sale restraints in the sales of
seed;
- Developing agricultural market guidelines for assessing buyer
mergers;
- Challenging buyer mergers whenever they are likely to result in the
exercise of buyer power; and
- Challenging collusive conduct by buyers that affects public market
prices.
- Employ and augment USDA authority to regulate market conduct to
facilitate fair, efficient and open competition by:
- Adopting regulations under the Packers and Stockyards Act
(PSA) to control abusive buying practices;
- Adopting regulations under the Agricultural Marketing Agreement Act
of 1937 (AMAA) to control abuse of market orders; and
- Seeking expansion of the PSA to cover all agricultural commodities
and clarify its standards.
E-Verify Continues — The continuing resolution that funds
most federal agencies extends the E-Verify program until March 6, 2009.
This voluntary program is used by the meat industry to verify the
legality of employees.
FY ’09 Continuing Resolution — President George W. Bush has
signed into law a continuing resolution that will fund USDA and most
federal agencies until March 6, 2009. Early next year, Congress will
consider either funding the appropriation bills for each department for
the remainder of the fiscal year or pass another continuing resolution.
P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.
Pork Industry Calendar
Oct. 29, 2008: Healthy Hogs Seminar,
Sampson Community College, Clinton, NC; contact: Morgan Morrow, North
Carolina State University at morgan_morrow@ncsu.edu.
Nov. 6-7, 2008: Iowa State University Swine Disease Conference
for Swine Practitioners, Scheman Building, Ames, IA; contact:
conference coordinator Julie Kieffer at kiefferj@iastate.edu.
Click
here to get National Hog Farmer's complete pork
industry calendar.
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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.
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