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Dale Miller, Editor,
National Hog Farmer
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Market Preview
A Fine Financial
Mess
I do not even pretend to understand everything about
what is going on with U.S. financial institutions and the proposed
bailout or rescue or support or whatever you want to call it by the
federal government. What I think I understand is this: Mounting
defaults on mortgages cast huge doubts on the value of many
mortgage-based debt packages. Those doubts caused institutions to quit
buying the packages, meaning that dollars are no longer moving and no
values can be determined. That has caused the entire system to grind to
a virtual halt and that means that dollars are not available in the
credit market.
Much of that is above us mere mortals - for now! If the situation
continues, though, the halt of trades on Wall Street and in
international financial markets will mean no credit for national
manufacturers and, eventually, main street businesses. There is still
time to keep this from getting that far, but the time period is indeed
finite.
Robert Dieli, a friend of mine and the owner of Mr. Model Online, a
macro-economic forecasting firm and website, tells me that there is an
appropriate role for the federal government to play in this crisis and
that is the role of a market maker - one who steps in and begins the
transaction process at some price level. The market may move either way
from that point, but someone has to step in and begin the process of
assigning value to these questionable assets. They are not all
worthless, but you can't sort through them efficiently without a
starting place. Bob, like me, is pretty much a free market economist
who dislikes any unnecessary government involvement. So, since he
normally agrees with my perfectly reasonable biases, I tend to listen to
him and what he says makes sense. I don't like our tax money being used
that way, but I don't know that there is much choice at this point.
Talk to Your Lender
What does it mean for pork producers? Financing could get tight. So,
an industry facing 10-12 months of losses in the next 15 might find
additional capital hard to come by. Do you have a plan in place? Will
it survive your lender not being able to access sufficient capital? I
don't want to sound doomsday, but you need to be talking to your lender
about what is possible over the next few months.
This situation could be even more limiting to the grain sector. U.S.
corn and soybean producers are looking at unprecedented up-front costs
to plant next year's crop. Large capital requirements and limited
capital availability do not mix. At best, they mean the cost of capital
will rise, making breakeven costs even higher. At worst, they could
mean some acres do not get planted.
Last spring, I heard of an active secondary market in land leases in
some areas. Some lease holders could not access sufficient capital to
plant a crop, so they sold the leases to others who could. That
scenario could play out in spades in 2009, especially at record-high
lease rates.
Mark Greenwood of AgStar Financial Services has pointed out that one
reasonable strategy for pork producers to handle high feed costs is to
backward integrate into corn and soybean production. Everything that
goes around comes around, right? If you have the labor and machinery to
do that or can access them through custom farming arrangements, a
secondary lease market may provide such an opportunity - provided you
can access the capital necessary. Now is the time to explore the
possibility and make plans if you are interested.
Will Demand Hold?
Hog prices have stabilized over the past couple of weeks. Some believe
that will be the case for the rest of this year, but I am not in that
camp. Robust demand can only go so far and if Friday and Saturday
slaughter this week are equal to those of last week, the total will be
near 2.35 million head. That's another record for the respective week
and the third time ever that a September week has seen over 2.3 million.
And all three of those weeks have been this year. Unless demand is
truly exceptional, it will be very difficult to hold these price levels
as 2.4 or even 2.5 million hogs show up at U.S. plants each week from
October through December.
Expectations for the Pig Crop Report
The results of DowJones survey of hog market analysts' asking for their
expectations for today's quarterly Hogs and Pigs Report appear in Figure
1. Analysts expect the breeding herd to show a larger, but by no means
robust, decline relative to last year. They also expect the market herd
to remain significantly larger than last year, even though the Sept. 1
inventory will be far closer than in the last two quarters. That, of
course, is primarily due to comparing to very large numbers one year
ago.
These numbers indicate that analysts expect market hog supplies to get
much closer to year-ago levels come mid-November (i.e. the 60-119-lb.
inventory up only 1.9%). But they also predict that farrowings may only
decline 4% relative to last year. Combine that with recent quarters' 1%
growth in litter size and the numbers suggest March-August 2009
slaughter just 3% smaller than this year. That would be a very anemic
reduction in terms of price impacts and forecasted costs near $80/cwt.,
carcass.
The report will be released at 2:00 p.m. CDT today. Watch your inbox for
a summary of the actual report.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com
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as 10 days. And with its small dosage - 35 grams tiamulin/ton - and less
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controlling ileitis.
Click
on the Denagard logo to learn more.
Financial Preview
Unprecedented times
As I reflect on the events that continue to crop up in
the pork industry, in agriculture in general, and in the financial
markets, I often catch myself shaking my head. As a nation, we are
facing unprecedented turmoil in the financial sector at a time when
demand for credit in agriculture will undoubtedly increase due to
dramatically escalating input costs. Despite the turmoil, Farm Credit
System institutions continue to provide a steady supply of credit to
farmers, ranchers, their cooperatives and others in rural America.
In the hog sector, we have seen cost of production rise by over $50/head
from a year and a half ago. We have breakeven costs on corn over
$850/acre in southern Minnesota for next year, compared to $600/acre
this fall.
The ever-increasing costs of production in the agricultural sector have
far-reaching implications. Just because costs are up, that does not mean
commodity prices will be high. You will need to manage your risk through
this changing time period. And, part of the equation includes the need
for capital by all of agriculture to fund the increased cost of
production.
The events in the financial markets this past week may put a strain on
getting access to capital as we move forward. The Farm Credit System,
the largest funding source for American agriculture, gets a lot of its
funding from the bond market. The Farm Credit System has a very high
bond rating and is considered a very good investment. That's the good
news. The bad news is there is so much demand for capital in the
agricultural sector that it is hard to keep up.
Capital will be available, but in order to get it, rates will be higher
and fees will be charged because of the high demand. Producers will be
required to have better financial information in order to access this
capital. The dynamics of the financial markets and the high demand for
capital has changed the access to capital for the near future.
Leman Swine Conference Recap - Brett Stuart, from Global
Agritrends, and I addressed the conference, focusing on global trends in
the pork complex and the opportunities and challenges that the U.S. pork
sector will face in the future. I will summarize a couple of the topics
concerning global pork production briefly:
World Overview and the China Factor - The world sow herd and
associated pork production grew at a rapid pace from 1960 to 2006, as
Chart 1 shows. However, 2007 and 2008 (forecast) show a strong
trend reversal with sow/pork declines, globally. The biggest factor has
been Chinese disease losses and production declines. In mid-2007,
Chinese blue ear disease ravished the countryside, killing over 20
million hogs. The winter brought harsh blizzards into key pork regions
of China, further stressing animal health. Then, the earthquakes in
Sichuan province this year further exaggerated losses.
Keep in mind that 56% of the earth's hogs live in China.
Chart 2 compares countries in terms of pork production.
U.S. pork production is really small when compared to China's. China has
46 million sows and 400-500 million pigs on the ground, compared to the
six million sows and 63 million head U.S. inventory. The production
issues that Chinese pork producers have faced from early 2007 to now
have decreased their production by about 40 million pigs. That is nearly
40% of our entire production for the year.
Clearly, there are reasons why the Chinese are buying so much U.S. pork.
Currently, they are on a rapid expansion plan, so the growth we've seen
from China in the export market may be coming to an end.
I also talked about how the U.S. pork industry needs to be competitive
with long-term plans to work on developing people, science and
technology, if we are to remain competitive in the global marketplace.
The importance of these three areas must not be underestimated. In my
opinion, the most important of these is people. We must continue to
identify and develop people who have a passion for our industry.
Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com
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Legislative Preview
COOL Debate Continues
Thirty senators have written Secretary of Agriculture Ed
Schafer stating their concerns with how USDA is going to implement
mandatory country-of-origin labeling (COOL). The main issue is how much
U.S. product will be labeled as mixed origin. Their concern is USDA's
interim final rule that would allow product from U.S. animals to be
combined with animals from multiple countries. The senators stated in
the letter, "USDA's interim final rule appears to allow product from
animals exclusively born, raised and slaughtered in the United States to
instead be combined with the other labeling category, which is intended
for product that is from animals from multiple countries; that is, U.S.
product would be labeled jointly with other countries. It is not the
intent of Congress that all U.S. product or such product from large
segments of the industry be combined with the multiple countries of
origin category, nor was it dictated by statute. Consumers and
producers are expecting to see exclusively U.S.-origin product labeled
as such." The letter was originated by Senators Tim Johnson (D-SD) and
Mike Enzi (R-WY).
Antimicrobial Use and Animal Health Issues - The House
Agriculture Subcommittee on Livestock, Dairy and Poultry held a hearing
to review advances in animal health, particularly the use of
antimicrobials in the livestock industry. Congressman Leonard Boswell
(D-IA), chairman of the subcommittee, said, "It is clear from today's
hearing and the testimony of producers and veterinarians in the field,
that antimicrobial use decreases mortality of animals, decreases
disease, reduces cost of food and increases food safety. Healthy
animals bring us healthy food, and science plays a huge role in that."
At the hearing, the National Pork Producers Council urged Congress to
not restrict the use of antibiotics in pork production, stating that
antibiotics are a necessary tool to protect animal and public health.
Others testifying included the Animal Health Institute, National
Cattlemen's Beef Association, National Milk Producers Association,
National Turkey Federation and the American Veterinary Medical
Association. A number of bills have been introduced in Congress that
would prohibit the use in livestock of certain antibiotics. This
legislation is expected to be reintroduced next year.
House Passes Bill to Curb Energy Futures Speculation - The
House of Representatives passed bipartisan legislation to increase the
transparency, oversight, and anti-manipulation authority over commodity
futures and options markets. The legislation (H.R. 6604) strengthens
trader position limits on oil and other futures markets as a way to
prevent potential price distortions caused by excessive speculative
trading. The legislation would:
- Require foreign boards of trade to share trading data and
adopt speculative position limits on contracts that trade U.S.
commodities similar to U.S.-regulated exchanges.
- Require the Commodity Futures Trading Commission (CFTC) to set
trading limits for all agricultural and energy commodities in order to
prevent excessive speculation.
- Limit eligibility for hedge exemptions to bona fide hedgers.
- Codify CFTC recommendations to improve transparency in dark markets
by disaggregating index fund and other data in energy and agricultural
markets as well as requiring detailed reporting from index traders and
swap dealers.
- Call for a minimum of 100 fulltime CFTC employees to enforce
manipulation and prevent fraud. Despite record trading volume in the
futures and options markets, CFTC staffing is at its lowest level since
the agency was created in 1974.
- Authorize CFTC to take action if it finds disruption in
over-the-counter markets for energy and gas.
- Require the CFTC to study the effectiveness of establishing
position limits in over-the-counter markets.
USDA Reserves Animal ID Numbers for U.S. Livestock - USDA's
Animal and Plant Health Inspection Service (APHIS) is reserving the use
of animal identification numbers with the 840 prefix to only animals
born in the United States. According to Bruce Knight, Under Secretary
for Marketing and Regulatory Affairs, "The ability to quickly locate an
animal's origin during an animal disease investigation is absolutely
essential. The more quickly we can determine the source and extent of
the outbreak, the more effectively we can contain it. The use of animal
identification numbers with the 840 prefix on U.S.-born animals provides
animal health officials with key information about the animal's origin
immediately."
Small Farms and the Farm Bill - The House of Representatives
passed legislation to suspend the entire 10 acres provision of the farm
bill for the 2008 and 2009 crop years. The provision required producers
to have a minimum of 10-base acres to receive program benefits.
Congress' intent was to allow small farmers to aggregate their acres so
they would have the minimum base of 10 acres to be eligible for support
programs. USDA has indicated that it would not allow aggregation of
acres. Senator Chuck Grassley (R-IA) plans to introduce similar
legislation in the Senate.
Trans-Pacific Partners and U.S. FTA Negotiations - The United
States, Brunei, Chile, New Zealand and Singapore announced the launch of
negotiations for the United States to join the comprehensive
Trans-Pacific Strategic Economic Partnership Agreement (known as P-4).
The Trans-Pacific agreement went into effect in late 2006 between
Brunei, Chile, New Zealand and Singapore. There is a difference of
opinion among U.S. agriculture on the importance of these negotiations.
The National Pork Producers Council said, "This is an important step
toward maintaining and expanding U.S. pork exports to the Asia-Pacific
region." The National Milk Producers Federation wants full exclusion of
New Zealand's dairy products under the agreement.
Acting Under Secretary for Food Safety Named - Beth Johnson has
been named USDA Acting Under Secretary of Agriculture for Food Safety.
She currently serves as Chief Assistant to Chuck Conner, Deputy
Secretary of Agriculture. She is a registered dietitian and was on
staff of the Senate Agriculture Committee in the 1990s.
Congress Trying to Leave Town - At press time, Congress had a
number of items to finalize before leaving for its October recess in
preparation for the Nov. 4 elections. The main issue facing the
Congress and the administration is the Wall Street bailout package. The
administration is warning that if Congress does not act, it will have a
devastating effect on the economy. Other issues Congress is trying to
finish include a continuing resolution, tax extenders and a stimulus
package.
P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.
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Pork Industry Calendar
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.
Sept. 30-Oct. 2, 2008: PorkExpo
Brazil 2008 & IV International Forum on Swine Production, the biggest
event on swine production of the world is already being organized and
promises to break records of participants and exhibitors. The event,
which has consolidated itself in the market as a perfect place to do
business and learn knowledge in this edition will have more area of fair
offering over 5.000 square meters of exhibition area, where over 100
businesses will exhibit products and services for the swine production.
The organizing commission expect over 12 thousand people visit the fair.
The scientific program, strong point of the former editions, will
offer a unique opportunity to share experience and for this purpose it
will have a group composed by the main technicians of the world swine
production. They will be 42 lecturers internationally renowned,
distributed in 3 Technical Seminars of Specialization, Magisterial
Lectures and Graduation practice courses, presentation of scientific
papers and like in the former editions, over 2.500 participants from
over 40 countries are expected to compose a unique audience in terms of
Brazil's forum.
In addition to seminars and lectures AnimalWorld is preparing an
extended gastronomic and entertainment program with events that value
swine production and encourage the consumption of pork, such as: Pork
Festival, Incentive Program for the Consumption of Pork, Musical Show
and PorkArt.
The PorkExpo Brazil 2008 & IV International Forum on Swine Production
comes to its third edition as the biggest event of the Swine Production
in the world as it has the largest public specific to the sector and
bears the historic record of participants in a congress. Allied to the
opportunity of a direct contact with swine producers, students and
technicians, PorkExpo offers for the businesses in the fields of
nutrition, sanitation, genetics and equipment space for the release of
new products, and a complete mailing of the participants for the
exhibitor with the best bottom-line by m² of fair.
Click
here to get National Hog Farmer's complete pork
industry calendar.
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