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December 8, 2006




Table of Contents
People Drive Economics
Examining Six Sigma Processes
Congress Set to Leave Town
"Eye On Energy" Conference

Market Preview
People Drive Economics
I was asked recently to make a presentation to an industry group on "The Economics of Today's Pork Industry," and it set me to thinking about what I normally do for this column as well as other work. While I do have degrees in agricultural economics, and I do use economic theory and research techniques in my work and my writings, it struck me that the "economics of today's pork industry" is really a very different topic.

Market and price analysis certainly uses economics. I and other analysts consider demand, supply, price transmission, elasticities, etc. in much of what we do. But in most cases we deal with the "results" end of economics simply because the "results" of economics are what matters to our clients. From time to time it may be profitable, however, to deal with economics in more of an "input" or "motivator" point of view.

In its most general form, economics is defined as:
"The social science that deals with the allocation of scarce resources among alternative uses."

The definition contains three key dimensions.
  1. Economics is a social science. Now I know that the real shock value of that statement for many of you is that economics is a science at all, and we don't have the space for that discussion in full. I mean, just because we don't wear lab coats and have test tubes and . . . sorry, we economists get real testy on this point. No, the more important aspect I think is the word "social." Regardless of those stereotypic jokes about economists' personalities or lack thereof, economics is really about people. It deals with the tastes, preferences, needs and means of consumers, and the decisions that people make in supplying goods and services through firms. Everything that we see -- supply, demand, prices, etc. -- flows from the motives and actions of people.

  2. Resources are scarce. That doesn't mean that there aren't enough right now, but it does imply that the supply of everything is finite. That finite point may be so far from where we are right now that it doesn't matter (i.e. there is a lot of nitrogen in the air!), but it is still finite. It also doesn't mean that what is scarce today will remain so. Human ingenuity is a marvelous tool for making more of what we really need. Malthaus, an 18th century economist, observed how rabbit populations eventually declined due to food shortages, and postulated that the world would soon run out of food and other essential items and thus put a limit on population. He underestimated the power of the human mind to invent things and methods to get more out of a finite set of resources. This comes to mind frequently these days as we discuss energy -- if people are indeed left free to use their ingenuity.

  3. Economics involves allocation. One of the forms of efficiency that economics accomplishes is allocative efficiency -- deciding how much of something to use in the production of something else which then may be allocated across uses as well. By definition, allocation is a discriminatory process unless supplies are large. One use or person will get an item, while another will not, and economics says that the use or person that can assign the higher value is the winner. That's a pretty important concept right now when we think about corn.
Economics Not a Perfect Science
The real question is whether "economics" are allowed to fully function in each of these three roles. History has shown us that markets work. Allowed to function freely, they will generate price signals that tell firms to produce more or less and consumers to consume more or less. They will also result in least-cost production, innovation and, in the case of an item that is no longer needed, obsolescence and failure.

But they don't always work perfectly. Pollution is a cost to society but, if not regulated, may impose no cost on the polluting firm, and thus, not be covered by the price of the firm's output. Litter and trash are costs of consumption but may not be factored into the consumption decision unless we impose a cost to littering. Governments deal with such "externalities" by making the rules by which economics must play, and by discouraging some activities (prohibitions, regulations, taxes, etc.) and encouraging others (subsidies, tax incentives, etc.).

Think of these as you contemplate today's economic climate for livestock and meat. What are the people (both here and abroad) saying in terms of demand and supply? What resources are scarce? Can we make more and, if so, how? What is the highest and best use of those scarce resources? How is government influencing this allocation? For whom is it good or bad? Is it the best we can do?

We're not going to all agree on the answers to those questions, but we can likely learn more collectively than individually, unless, of course, we're more like rabbits.




Click to view graphs.

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



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Production Preview
Examining Six Sigma Processes
Last week, we introduced the quality improvement program, "Six Sigma." This week, we'll expand on that theme as we discuss processes.

We should begin with a definition -- a process is a series of activities performed in order to achieve a desired outcome(s). Examples of a number of processes in the pig industry include: semen-ordering processes, breeding processes, weaning processes, transportation processes, marketing processes, feed-ordering processes and feed delivery processes.

Breaking down the feed-ordering process, for example, we may find the following activities:
  1. Estimate current feed tank inventory.

  2. Estimate the amount of feed that will be used from the tank before the next feed delivery.

  3. Determine the tank-holding capacity for the coming delivery by subtracting the current feed inventory (Step 1) from the total tank capacity, and adding the estimate for pre-delivery usage (Step 3).

  4. Estimate the amount of feed that will be needed between the next delivery and the following delivery.

  5. Determine ration type and quantity needed according to feed budget (to total the amount in Step 4).

  6. Adjust feed ration type and quantity to delivery truck compartment size.

  7. Fax order to the feedmill one weekday before the desired delivery date.
By considering a process as its component parts, we can begin to appreciate the potential error entry points.

Revisiting the feed-ordering process, if the farm does not have a reliable method to estimate either feed tank inventory or future feed usage, then they are prone to having tanks run out of feed (and pigs without feed), or deliveries that overflow the tanks (with feed spills and wastage). Inability to follow the feed budget may result in the under- or over-feeding of rations. And unreliable feed usage estimates during a groups' marketing window can result in the next turn of pigs eating the last phase ration during the first week they are placed, or large amounts of feed may have to be moved from one tank to another.

If we consider outcomes as the end results of processes, then we can ask two important questions -- (1) Is the process capable? and (2) Is the process in control?
If a process is capable, then it has the potential to generate an outcome within an acceptable range. If a process is in control, then its outcome is predictable within a given range.

Again, to revisit our feed-ordering example, we can ask the two questions: (1) Is the feed-ordering process capable? and (2) Is the feed-ordering process in control?

If the current feed-ordering process is capable, then it would result in feed deliveries that do not result in pigs running out of feed, and do not result in feed wastage. If the current feed-ordering process is in control, then the feed tank inventory at the time of delivery would be within a predictable range.

When a process is not capable, then in control or not, it will not be able to produce the desired results with any consistency. Manufacturing industries use process capability studies and statistical process control as diagnostic measures of processes.

It can be easy to overlook the role of the process in problems. When the desired outcome is not consistently achieved, we have a tendency to look for special causes of variation (i.e., one-time events). But it may, in fact, be that the undesired result is predictable and it is the process itself that is to blame.

Stephanie Rutten, DVM
University of Minnesota
rutt0011@umn.edu
Editor's Note:For all your agricultural news, markets and commentaries, go to www.farms.com.



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Legislative Preview
Congress Set to Leave Town
The 109th Congress is expected to finish by the end of the week. This Congress will be leaving a number of unfinished items for the 110th Congress. Only two of 12 appropriations bills were completed. The remaining appropriation bills, including agriculture, were placed in a continuing resolution that will fund the government until mid February. The new Congress will convene on Jan. 4, 2007.

Disaster Assistance Fails in Senate -- The Senate failed to pass a $4.9 billion disaster assistance package this week during consideration of the fiscal year 2007 agricultural appropriations bill. Senators Tom Coburn (R-OK) and Judd Gregg (R-NH) objected and raised budget concerns. The administration continues to oppose the proposal. The statement of administration policy said, "If the president is presented with a bill that his senior advisors believe would result in total 2007 appropriations exceeding the $873 billion top line, the president's senior advisors would recommend he veto the bill."

President Signs Animal Terrorism Act -- President Bush has signed the "Animal Enterprise Terrorism Act." This legislation increases penalties for criminal acts against animal enterprises (commercial, academic, laboratories, animal shelter, pet store, breeder or furrier). It revises criminal prohibitions against damaging or interfering with the operations of an animal enterprise to include "intentional damage or loss to any real or personal property and intentional threats of death or serious bodily injury against individuals." The bill was sponsored by Sen. Jim Inhofe (R-OK) and Congressman Tom Petri (R-WI).

Korea Rejects Two More Beef Shipments -- South Korea rejected two additional shipments of U.S. beef because of bone chips. Secretary of Agriculture Mike Johanns said, "Today, South Korean officials have sent the message that their market is not commercially viable for U.S. beef. South Korea is attempting to claim its border is open to U.S. beef while refusing to allow trade to take place. This is unacceptable and certainly not the way trading partners should work with one another."

Roberts Sends Beef Letter to Korea -- Senator Pat Roberts (R-KS) sent a letter to the South Korean ambassador asking for "immediate resumption of beef trade based on sound science in accordance with international standards." Senator Roberts wrote, "This rejection seems to be based on nothing more than a continued effort by South Korea to build false barriers to trade between our two countries. This is not how two allies, with many mutual interests, should conduct business." Roberts went on to write, "Continued barriers to resuming this trade, and unfair actions that are not based on science, will lead me to seriously question South Korea's commitment to any other trade and foreign policy agreements with the United States."

U.S. Ag Exports to Reach $77 Billion -- USDA has announced that agricultural exports for fiscal year 2007 are expected to reach a record $77 billion. This is $8.3 billion higher than during fiscal year 2006. Canada, Mexico and Japan continue to be the top three export markets for U.S. agriculture. China is expected to become the fourth-largest market for the United States, primarily due to increased soybean sales. Exports of livestock products are expected to reach $14.2 billion. Agricultural imports are expected to reach a record $69 billion.

Agriculture Supports USDA Nominee -- Seventy-six agricultural organizations sent a letter to the Senate supporting the nomination of Mark Keenum for USDA Under Secretary for Farm and Foreign Agricultural Services. The letter was coordinated by the American Farm Bureau Federation, American Soybean Association, National Cotton Council and National Farmers Union. The organizations urged the Senate to move quickly on the nomination, so Keenum could be at USDA in "the development of the Bush administration's position in the next farm bill."

P. Scott Shearer
Vice President
Bockorny Group
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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