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Market Preview
Pork Economics 101
We’re going back to Econ 101 again this week. Figures
1 and 2 accompany the following discussion.
Higher demand is a great thing! It allows everyone to be happy.
Consumers are happy because they are the ones who initiate higher
demand. They decide how to spend their limited resources to maximize
their utility or well-being. If they did not want to buy more product
or pay higher prices, neither would happen.
Of course, that is not true of every consumer. Some may not want to pay
more, but they are forced to do so by those that will. U.S. consumers
may not like this summer’s higher prices, but robust export demand has
set the course.
We have seen hog demand rise this summer, driven primarily by higher
export demand for pork and pork variety meats. The increase in demand
has caused prices to rise even though supplies have been significantly
larger than one year ago. Figure 1 represents these changes by the
shifts of demand from D to D’ and of supply from S to S’. The
equilibrium quantity rises to Q’ and price rises to P’.
The position of the supply function in these P-Q diagrams is determined
by a good’s variable costs of production. If they rise, then price
must rise in order to cause producers to produce even the same amount of
a good. The flip side is that fewer units will be produced at any given
price level. That means that supply shifts up and to the left when costs
rise – such as the shift from S to S’ in Figure 2.
So what happens if supply shifts up and to the left, but the quantity of
output remains the same? In the short run, output remains Q and the
price received remains P, but the cost of producing output Q is C=P* and
per unit profit is P-C, which is obviously negative. Does that sound
familiar?
There are only two ways to rectify this situation – increase demand or
reduce output. A demand shift to D’ would push prices upward to P*=C
and output could remain Q. Consumers would again be happy since they
make the decisions that determine demand. Producers would again be
happy since they are not losing money. In fact, at any point on their
supply curve, producers earn a “normal” rate of return on invested
capital since the opportunity cost of investing that capital elsewhere
is built into a firm’s costs. I’ll ask you to just trust me on that
one for now.
The more likely way to rectify this loss situation, though, is to reduce
output from Q to Q’ in order to drive price to P’, a level which
equilibrates the quantity demanded from demand D and the quantity
supplies from supply S’. Consumers are once again happy and producers
are once again earning normal rates of return on invested capital, but
they are producing less and, quite likely, there are fewer producers.
Not everyone is happy with that outcome.
Looking Ahead
It appears now that average hog production costs through the end of 2009
will be about $80-$83/cwt., carcass. The average for Chicago Mercantile
Exchange (CME) Group Lean Hogs futures contracts over that same period
as of Monday, Sept. 15 was $78.35, implying that average net cash hog
prices will be $75-$77. At those levels, per head losses will average
$6-$16 through the end of 2009.
So, can we wait for demand to catch up or must we cut back? Given the
strength of demand this year, and the strengthening U.S. dollar,
“demanding” our way out of this appears unlikely. And the reduction
of the U.S. sow herd has been small thus far. U.S. sow slaughter of
U.S. sows is 11% higher, year-to-date. U.S. beef cow slaughter is 13%
higher. No data are available on the slaughter rate for broiler-type
hens, but the size of that flock went below year-ago levels in June for
the first time since February 2007 and stood 1.5% lower than last year
as of July 30.
I still think output has to be significantly reduced if profits are to
return to the pork industry. The average national net price for this
year is going to be $66-$70/cwt., carcass. Reaching $82/cwt., carcass,
would require a 20% increase in prices and using a price flexibility of
2:1 to 3:1 would mean production will have to fall by 7-10%. Since the
least productive sows will be removed, the U.S.-Canadian sow herd must
decline by a larger percentage than that. The U.S. isn’t there yet
and will not get there in 2009, but given present cost prospects, that
must still be the objective if profits are to return.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
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Production Preview
Optimizing
Pigs/Litter
We hear claims of 30 pigs/sow/per year and the number
seems to have a certain reverence. But is this benchmark really what
producers should be striving for? Based on research reviewed by swine
reproductive specialist George Foxcroft at the Swine Research and
Technology Centre, University of Alberta, Edmonton, the answer may be
“no.”
It is already well-established that the components of litter size, such
as ovulation rate, embryonic survival and uterine capacity are
responsive to genetic selection. However, increased selection for number
of pigs born has led to the indirect negative effects of intrauterine
crowding, reprogramming of fetal development, less efficient post-natal
growth performance and adverse effects on carcass quality at slaughter,
states Foxcroft.
The effects of prenatal programming on postnatal performance are not
limited to effects on muscle development and growth. In a preconference
workshop at the 2006 American Association of Swine Veterinarians, J.C.
Harding reported that the organs most notably affected by prenatal
programming in stillborn pigs with low birth weight were the heart,
liver and spleen, with obvious implications for post-natal health
outcomes, generally.
“Unfortunately, although selection for improved prolificacy has
resulted in an increase of litter size at birth in most breeding
populations, this has been associated with increased variation in
average litter birth weight, as well as an overall decrease in average
birth weight of the litter,” notes Foxcroft.
“A better appreciation of the characteristics of prolific damlines is
clearly needed,” Foxcroft continues. “This information, and an
increasing focus on the need to maximize total net revenues per sow in
terms of the value of saleable pork products relative to the input costs
involved per kilogram or per pound of pork sold, should drive the
management of appropriate terminal damlines in the future. Ultimately,
selection of sows with increased uterine capacity offers the best
opportunity for increasing the number of pigs born per litter without
compromising the post-natal growth performance of these pigs.”
Foxcroft believes that innovative approaches to addressing the problems,
as well as the opportunities presented by prenatal programming of
postnatal performance, will likely be the benchmark of the most
profitable pork production systems in the next decade.
JoAnn Alumbaugh
Farms.com
joann.alumbaugh@farms.com
Editor’s Note: The information for this column was gathered from a
presentation by Dr. Foxcroft at the 2008 Banff Pork Seminar. www.banffpork.ca
Legislative Preview
COOL Not Over
The National Farmers Union, R-CALF and the U.S.
Cattlemen’s Association have written Secretary of Agriculture Ed
Schafer to express their disappointment in USDA’s interim final rule
to implement mandatory country-of-origin labeling (COOL) as it relates
to the labeling of multiple countries of origin products. Tom Buis,
president of National Farmers Union, said, “The law clearly states
that products born, raised and slaughtered in the United States are to
be labeled as a product of the United States. Despite this clear
language, USDA’s rules will allow packers to label exclusively
American products with those from other countries. USDA has created a
loophole big enough to drive a truck through, violating the spirit,
letter and intent of the law and deceiving consumers who have
consistently shown support for buying U.S. products. This is truth in
labeling.” COOL is to go into effect on Sept. 30.
House Energy Bill Allows More Drilling — The House of
Representatives passed comprehensive energy legislation that allows for
expanded oil and gas development in the Outer Continental Shelf (OCS).
The bill allows leasing for oil and gas between 50 and 100 miles, in
federal waters offshore only, if states “opt-in” to allow leasing
off their coastlines. It maintains current prohibition against oil and
gas leasing in an area of the Eastern Gulf of Mexico until 2022. House
Speaker Nancy Pelosi (D-CA) said, “(The legislation) will honor our
responsibility to make America energy independent, to free us from our
dependence on foreign oil, a strong national security issue; to protect
consumers, to lower prices and to protect the taxpayer; and third, to
invest in renewable energy resources which will take us into the future.
(The) fourth part of that, it will create good paying jobs here in
America.” However, the Republicans said the legislation needs to
allow for a more expansive drilling program and more funding for nuclear
power. The White House said it would veto the bill. The Senate is
expected to consider its energy legislation next week.
Energy Tax Proposal — Senators Max Baucus (D-MT) and Chuck
Grassley (R-IA) have introduced bipartisan energy tax legislation that
seeks to reduce America’s dependence on foreign oil and create energy
jobs. Senator Baucus said, “This bill has the right tax policy to
create thousands of jobs, jump-start alternative energy solutions and
finally move America away from our dependence on foreign oil.” Key
provisions of the bill include:
- Long-term extensions of wind and solar energy tax credits.
- Consumer credit of up to $7,500 for plug-in electric vehicles.
- New credit for capture and storage of carbon dioxide.
- Extension of tax incentives for energy efficiency, including
buildings, appliances and smart meters.
- Long-term extensions of credits for alternative transportation
fuels.
- $2.5 billion in new credits for clean coal facilities.
- New tax incentive for smart meters, which provide real-time
feedback on electricity use.
- Extension of biodiesel production tax credit for three years
(through Dec. 31, 2011)
- The Volumetric Ethanol Excise Tax Credit (VEETC) is extended
through 2011
The Senate is expected to consider this legislation yet this month.
Speculation in the Futures Market — The Commodity Futures
Trading Commission (CFTC) has been under Congressional pressure to
investigate speculation in the futures market. CFTC completed a report
on the activities of swap dealers and commodity index traders and made
the following recommendations:
- Remove swap dealer from commercial category and create new
swap dealer classification for reporting purposes.
- Develop and publish a new periodic supplemental report on
over-the-counter (OTC) swap dealer activity.
- Create a new CFTC Office of Data Collection with enhanced
procedures and staffing.
- Develop “long form” reporting for certain large traders to
more accurately assess type of trading activity.
- Review whether to eliminate bona fide hedge exemptions for swap
dealers and create new limited risk management exemptions.
CFTC Commissioner Bart Chilton dissented with the commission’s report
and recommendations stating, “I do not believe the commission’s
recommendations go far enough, and I have significant concerns relating
to the underlying analysis on which the recommendations are based.”
Commissioner Chilton believes that Congress should provide CFTC with
specific authority to obtain data regarding over-the-counter
transactions that may impact exchange-traded markets. He also would
like Congress to give CFTC authority to address “market disturbances
or violations of the Commodity Exchange Act, based on the data received
pursuant regarding over-the-counter transactions.”
Small Farms and Farm Bill — Congressmen Bob Etheridge (D-NC)
and Jerry Moran (R-KS) have introduced legislation that clarifies the
2008 farm bill language that ends some subsidies for farmers with 10
acres or less. The 2008 farm bill allows small farmers to aggregate
their acres so they will have the minimum base of 10 acres to be
eligible for support programs. USDA has indicated that it would not
allow aggregation of acres. Congressmen Etheridge and Moran said,
“The USDA’s interpretation of the 10-acre-base provision in the farm
bill would prevent thousands of small farmers from receiving the
payments they are owed, putting them in jeopardy of going out of
business. The farm bill was never intended to prevent small farmers
from aggregating their land.” States that are most affected by this
provision would be Illinois, Indiana, Kentucky, Michigan, Minnesota,
North Carolina, Ohio, Pennsylvania, Virginia and Wisconsin.
P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.
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injection dose.
Click on the Baytril 100 logo for more information.
Pork Industry Calendar
Sept. 20-23, 2008: Leman Swine
Conference, RiverCentre Conference Facility, St. Paul, MN; contact: vop@umn.edu or www.cvm.umn.edu/outreach/events.
Oct. 1, 2008: Kansas State University (KSU)
Agricultural Lenders Conference, Southwest Research and Extension
Center, Garden City, KS; contact: Rich Llewlyn, KSU Department of
Agricultural Economics at rvl@ksu.edu
or 785-532-1504 or at http://www.agmanager.info.
Click
here to get National Hog Farmer's complete pork
industry calendar.
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