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December 1, 2006



Table of Contents
Futures Rally Offers Opportunity
Achieve Quality Through Six Sigma
"Naturally Raised" Livestock Standards
"Eye On Energy" Conference

Market Preview
Futures Rally Offers Opportunity
After a big rally during October and some retracement during November, Chicago Mercantile Exchange (CME) Lean Hog futures have shown some signs of life recently with the deferred contract holding very near contract life highs. The average value of CME Lean Hogs futures from December 2006 to December 2008 is just over $68.15/cwt. carcass (or about $51/cwt. live). Those prices are significantly higher than price levels for next year based on the September Hogs and Pigs report data, so we must conclude that the futures markets are factoring in something else.

Whatever your opinion about the value of futures markets to pork producers, I believe they are an accurate gauge of "market" sentiment at any point in time, where the market is very broadly defined to include anyone who is willing to bet actual money on what the price of hogs may be. The key, in my opinion, is that there are no barriers to entry to the futures markets and, thus, they are the perfect melting pot for all views of the market. They tend to incorporate publicly available information very quickly and efficiently, but they also reflect non-public information. Many analysts share this opinion.

One possible explanation for the recent strength of hog prices is that CME Lean Hogs futures are incorporating the higher price of corn into pork output. I think they are getting a little too quick in that judgment simply because of the time lag involved in pork production. If I'm correct, then the futures markets may be providing opportunities now that will be better than cash markets next year. Regardless, $68/cwt. carcass and $51/cwt. live are good hog prices even with higher costs!

Adjusting to Higher Feed Costs
The entire meat sector, however, is already showing signs of responding to higher feed costs. Figure 1 shows historical, current and projected levels of my hog feed index (corn and soybean meal to make a 16% crude protein diet) as of Nov. 30. Those projected levels continue to increase and are now very close to reaching the rarified levels of 1995-96. The difference is, they will not go away as quickly as before since this is driven by corn demand, not short corn supply.

About the only encouraging thing I can see in those forecast levels is that the futures markets are now factoring in a corn acreage increase next year. Note the slight dip in prices for late 2007 that were not evident in the previous forecast lines.

The size of the acreage increase will be critical. I have seen forecasts anywhere from 5 to 8.5 million more corn acres next year. Some private discussions set the increase as high as 10 million acres. The livestock sector will need every one of those acres even if yields are very good.

How has this affected the various species? It's difficult to separate out the effect of higher feed costs, but a quick look at Figures 2 through 4 shows that all of the meat species are cutting back. Sow slaughter remains quite high given the level of profits, but gilt slaughter percentages from the University of Missouri have been at or above 50% for the last four weeks. That strengthens the argument that the breeding herd is being reduced and ties that reduction more directly to feed costs.

Beef cow slaughter (Figure 3) has been high relative to last year since June when forage conditions in the southern plains began to deteriorate badly. The recent spike in numbers is really not unusual from a seasonal standpoint, but the real test may be in the remainder of this year. Will beef cow slaughter drop seasonally or stay high due to calf prices as much as $30/cwt. lower and yearling prices $15 to $20/cwt. lower?

Finally, broiler egg sets have been declining relative to last year for some time, due to very low chicken prices. Some private sources are now saying that higher feed prices will keep those reductions in place longer. That's certainly good news for the pork industry.

The quickest response that anyone can make to higher feed prices is an adjustment of slaughter weights and those are moderating in all three species. Hog weights have been 1-2 lb. under year-ago levels in five of the last seven weeks, and even with year-ago in the other two weeks. Broiler weights have been over 3% lower than below year-ago levels for the last three weeks. Steer and heifer weights have not gone below 2005 levels, but they have gone from 15 lb. or so higher in August to only 6 lb. higher for the week of Nov. 11.




Click to view graphs.

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



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Production Preview
Achieve Quality Through Six Sigma
When a company announces its intentions to implement "Six Sigma," Wall Street responds with an increased value in the company's stock. But what is Six Sigma and why is it considered a positive step?

Over the coming weeks, we will discuss Six Sigma, focusing on what it is and how it could be implemented in our industry.

Six Sigma is best described as a metric, a method and a philosophy.

In metric terms, Six Sigma refers to six standard deviations. In statistical notation, the Greek letter sigma is used to denote a standard deviation. The standard deviation is a measure used to describe how much the group's individual values differ from the group's average value.

If we recall the concept of the bell-shaped curve -- also referred to as a normal distribution -- the average and most common value is the center (See Figure 1). Approximately two-thirds of the values fall within one standard deviation above or below the population average, and 99.7% of the values fall within three standard deviations above or below the average. Furthermore, 99.9999998% of points are expected to fall within six standard deviations above or below the mean.



























In method terms, Six Sigma refers to a disciplined, systematic approach to improvement. These stages, which we will explore in future columns include - Define, Measure, Analyze, Improve and Control (also referred to as "DMAIC").

In terms of philosophy, Six Sigma refers to a concerted effort to achieve quality through the use of measurement and fact-based decision-making.

Any time our industry tries to adopt a quality program from the manufacturing world, we are challenged by the biological nature of pig production. When we see distribution curves, we naturally think of the pigs. And, much as we would like to reduce the variation in a population of pigs, we also recognize that only a portion of this variation is within our control.

However, pig production has many other supportive functions that are, to a much greater extent, truly within our control. These functions include things such as employee retention/employee turnover, feed deliveries and inventory management.

As we discuss Six Sigma and its potential for application in the swine industry, we will need to think in terms of the bigger picture. That is -- all of the processes that contribute to the production of a marketable pig.

The swine industry has been exposed to many of the quality movements that have passed through the business and manufacturing communities -- Total Quality Management (TQM), Statistical Process Control (SPC) and ISO 9000, to name a few. While these movements have largely come and gone, some of their more readily applicable concepts remain. From this standpoint, Six Sigma may be no different. It has valuable lessons for our industry, and the value we derive from the program will be dependent on our ability to apply it effectively.

Stephanie Rutten, DVM
University of Minnesota
rutt0011@umn.edu
Editor's Note: If you are having problems printing the figure, please adjust your printer page setup. For all your agricultural news, markets and commentaries, go to www.farms.com.



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Legislative Preview
"Naturally Raised" Livestock Standards
USDA is considering the development of a voluntary standard to address livestock production practices associated with the term "naturally raised." USDA's Agricultural Marketing Service (AMS) will conduct three listening sessions to allow public input on a voluntary marketing claim standard for "Naturally Raised Livestock." Livestock would include pork, beef, lamb, bison, etc. The sessions will be held: Dec. 11 at the Jefferson Auditorium-USDA South Building, Washington, DC; Jan. 17 at the Hyatt Regency Tech Center, Denver, CO; and, Jan. 18 at the Seattle Marriott SeaTac Airport, Seattle, WA. More information is available at www.ams.usda.gov/lsg/.

U.S.-Colombia Free Trade Agreement -- Representatives of the United States and Colombia have signed the United States-Colombia Trade Promotion Agreement (CTPA). The comprehensive agreement will eliminate tariffs and other barriers to trade in goods and services. U.S. agricultural products that will benefit from improved market access include pork, beef, corn, poultry, rice, fruits and vegetables, processed products and dairy products. According to the U.S. Trade Representative (USTR), U.S. farm exports that will receive immediate duty-free treatment include high-quality beef, cotton, wheat, soybeans, soybean meal, key fruits and vegetables including apples, pears, peaches, and cherries; and many processed food products including frozen french fries and cookies. The United States and Colombia have worked to resolve sanitary and phytosanitary barriers, including food safety inspection procedures for beef, pork and poultry.

Korea Rejects U.S. Beef Shipment -- South Korea rejected the first shipment of U.S. beef because a bone chip was discovered in the nearly 9-ton shipment of boneless beef. The shipment, according to Korean officials, will either be destroyed or returned. The shipment was from Creekstone Farms Premium Beef, Arkansas City, KS. Korea's zero tolerance on bone chips has been a major concern to the U.S. industry and continues to be an issue of contention between the United States and Korea.

Canadian Cattle Imports -- USDA has sent to the Office of Management and Budget (OMB) a proposed rule to allow for the importation of Canadian cattle over 30 months of age. After OMB's review, the proposed rule will have a 60-day public comment period. USDA would like to finalize the rule during the second quarter of 2007.

Congress Returns for Lame Duck Session -- Congress returns next week for a lame-duck session to try and finalize a number of issues, including appropriations bills, Vietnam PNTR, tax extenders, etc. before the new 110th Congress begins on Jan. 4. A key issue for agriculture will be consideration of a disaster aid package. House Republican leadership continues to raise objections.

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



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Upcoming Conferences
"Eye On Energy" Conference
Spiraling energy costs are forcing farmers to take a hard look at every agronomic practice on their operations, especially tillage. You can learn about how conservation tillage can be a perfect fit to help control input costs at the 2007 Conservation Tillage Conference and Expo Jan. 30-31, 2007. The theme of this year's conference is "Eye On Energy" and will be held at the Ramkota Hotel and Conference Center in Sioux Falls, SD.

University experts as well as conservation-focused farmers will look at ways that conservation practices can help stretch energy dollars. The conference provides tillage information for beginners as well as veteran no-till, strip-till, ridge-till and mulch-till growers. The program offers four information tracks:

Track I: Learn The Basics: Tillage 101
Track II: Keep Corn On Corn Profitable
Track III: Manage Your Energy Costs
Track IV: Match New Technology To Tillage

To register, visit www.tillageconference.com or call 800-722-5334, ext. 14698. The conference is brought to you by The Corn And Soybean Digest and Farm Industry News.



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Boehringer Ingelheim is awarding $75,000 annually to fund three research proposals to help solve PRRS. Submit yours by January 1, 2007. Visit www.prrsresearch.com





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Dale Miller, Editor, National Hog Farmer

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