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November 22, 2006



Table of Contents
Pork Storage Rise No Surprise
Corn Price and Breakevens
USDA Oversight
Swine Production Opportunities

Market Preview
Pork Storage Rise No Surprise
First and foremost -- Happy Thanksgiving from Steve, Carolyn and the Meyer family. We have so much to be thankful for -- good health, wonderful family, rewarding work, a great church and most of all, a God who meets our every need! We wish you and yours a great day on Thursday! Count your many blessings. It always takes me longer than I think or deserve.

USDA's November Cold Storage report, released Tuesday, really contained no surprises or shocking changes in meat inventories. Total pork in cold storage was 4.5% higher than one year ago and 5.9% higher than last month (see Figure 1). While 466.7 million pounds of pork is not a small issue, and these stocks are above the longer-term average, I don't see them as terribly burdensome, especially given the large decline (11%) in chicken inventories.

The largest category of pork in this month's report was "Other" which, at 112 million pounds, was the largest since the early 1990s. That category also was up 28% from last year and accounted for 14 million of the total 20-million-pound increase from October 2005.

Ham inventories were the second-largest category of pork stocks at 101.3 million pounds. That is 4.7% higher than last year and 2.6% higher than last month. However, as can be seen in Figure 2, October's ham stocks were still nearly 20 million pounds lower than the average of 2000 through 2004. These lower stock levels are a testament to improved export trade with Mexico. Ham stocks will drop quickly over the next two months as packers and processors move hams into holiday trade.

Belly inventories were 9% larger than last year, and 63% larger than last month, but remain relatively low at 16 million pounds. The month-to-month increase is not too surprising either since the seasonal low in belly stocks almost always occurs in September.

Chicken Still Stiff Competitor
As was mentioned earlier, chicken inventories were 11% lower than last year -- thank heavens! Breast meat inventories were 13% lower, but there is still nearly 130 million pounds of breast meat in freezers. Stocks of thigh meat and paws (i.e. feet) were also substantially larger than one year ago, indicating some difficulties for exports. On the other hand, stocks of leg quarters (another big export item) were only half as large this year.

Chicken part prices are still very soft relative to one year ago (see the Competing Meats table). Boneless/skinless breasts at less than $1.00/lb. and leg quarters under $0.40/lb. are formidable competition at the retail meat counter. Egg sets and placements, though, are still running below year-earlier levels, so it appears that chicken companies are certainly trying to rein in supplies and drive prices upward.

Feed Costs Threaten Profit Streak
Hog prices continue to struggle though today's national negotiated base price did gain $1.40 to reach $58.86. With higher feed costs now coming into play on breakevens, extending the string of profitable months on the Iowa State University Estimated Costs and Returns series is going to be very close.

Slaughter Data Right on Target
Figure 3 shows slaughter vs. one year ago and the level predicted by the September Hogs and Pigs Report. While large slaughter runs may be putting some pressure on prices, we certainly cannot say the runs were unexpected. In fact, since Sept. 1, actual federally inspected slaughter has exceeded the levels predicted by the USDA report by just 0.32%. I don't recall any actual data being closer than that to the expected levels.

These data suggest that our largest slaughter week is now behind us, but I would never bet against the week after Thanksgiving or the week before Christmas. This year's lower slaughter weights, though, suggest that producers are quite current, so I think it is very likely that the peak is in.

Happy Thanksgiving!




Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com



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Financial Preview
Corn Price and Breakevens
It appears we will be talking about the price of corn and how it will affect breakeven prices for a while. Currently, in southern Minnesota, we have local corn prices at $3.09/bu. (Nov. 16). In North Carolina, corn prices are approaching $3.80/bu.

Below is a feed cost sensitivity worksheet that shows the price of corn changing in 25-cent/bu. increments and the impacts these changes have on costs of production for weaned pigs and wean-to-finish pigs, on a per-pig basis. Many producers are now buying weaned pigs using a futures component or a flat rate. I predict some of these buying arrangements will have to be tweaked as corn prices and the cost of producing weaned pigs increases. The same trends hold true for cost of production on the wean-to-finish side.









A $1/bu. increase in the price of corn will increase the cost of production by $2.01/head weaned and over $4/live cwt. for market hogs. Higher interest costs account for a portion of the increase, representing a higher cost of holding the inventory prior to sale. Producers with historically high production costs will struggle to retain profits unless they can add value to their product with premium revenue streams.

Greater emphasis will be placed on feed conversions and diet formulations. If you are building diets with corn priced at $3.10/bu., each 0.10 change in feed efficiency affects costs by approximately $2.20/pig ($0.81/cwt.) if you are selling your pigs at 270 lb. Higher feed costs will separate the efficient producers from the non-efficient. It could also put more pressure on the contract growers and producers who use contract production.

With margins being squeezed, managing feed costs will reward good growers. Those who cannot maximize feed efficiency will struggle to maintain their contracts.

Arizona Sow Stall Initiative
The pork industry should be concerned about ballot initiatives aimed at banning gestation stalls in other states. Voters in Arizona recently passed Proposition 204 by a margin of 61.5% to 38.5%. The measure prohibits the use of stalls for pregnant pigs. The ban takes effect at the end of 2012.

The National Pork Producers Council supported the Campaign for Arizona Farmers and Ranchers as they opposed the proposition. Efforts to get the initiative on the November ballot were funded by animal rights organizations, including the Humane Society of the United States and Farm Sanctuary. If you think that these groups will stop with the Arizona victory -- guess again. If this trend to ban gestation stalls continues, the U.S. industry faces significant competitive challenges on a global basis.

Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com



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Legislative Preview
USDA Oversight
Congressman Collin Peterson (D-MN), new chairman of the House Agriculture Committee, has indicated that next year he will be holding oversight hearings on USDA management decisions. One of the first hearings will be concerning USDA's national animal identification (ID) plan. According to press reports, Peterson stated: "Bush administration officials have screwed this up so bad that I am now against what they are doing." Peterson will also investigate the administration's stricter regulations of financial transactions on agricultural exports to Cuba. He will ask the administration to appear before the committee to explain its policy. These new regulations have diminished U.S. agricultural exports to Cuba.

USDA Announces FMD Allocations -- USDA announced fiscal year 2006 allocations for the Foreign Market Development (FMD) program. The $34.5 billion program focuses on reducing market impediments, improving the processing capabilities of importers, modifying restrictive regulatory codes and standards in foreign markets, and identifying new markets or uses for U.S. products. The program was established in 1954. Cooperators receiving funding include: American Seed Trade Association, American Sheep Industry, American Soybean Association, Cotton Council International, U.S. Dairy Export Council, U.S. Grains Council, U.S. Meat Export Federation, U.S. Wheat Associates, USA Poultry and Egg Export Council and USA Rice Federation.

House Republican Leadership -- The House Republican Caucus elected Congressman John Boehner (R-OH) as minority leader, Congressman Roy Blunt (R-MO) as minority whip, and Congressman Adam Putnam (R-FL) as Republican conference chairman. Speaker Dennis Hastert (R-IL) announced after the election that he would not continue in leadership.

110th Congress Agenda -- Speaker-elect Nancy Pelosi (D-CA) has outlined the first items of business for the House of Representatives in the 110th Congress. Items identified included increasing the minimum wage, implementing tougher ethics and disclosure rules for the House of Representatives, passage of the 9-11 commission's recommendations, cutting interest rates on student loans, and allowing Medicare to negotiate drug prices for seniors, similar to the Department of Veteran Affairs' program. The 110th Congress will convene on Jan. 4, 2007.

P. Scott Shearer
Vice President
Bockorny Petrizzo, Inc.
Washington, D.C.



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