North American Preview: New Profit Streak Set

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A Prism Business Media Property
December 22, 2006

Table of Contents
New Profit Streak Set
Swift Saga
Congress' Unfinished Business

Market Preview
New Profit Streak Set
Year's end is always a good time to review the key happenings of the past and contemplate important things for the future. Two words come to mind when I do that regarding the U.S. pork industry - profits and costs.

This past year has been a pleasant surprise from the profitability standpoint. It is not often that the pork industry can string together three profitable years. In fact, it has not happened since the 1970s, when pig production was still adjusting to the new grain price paradigm ushered in by sales of grain to Russia. The record for consecutive profitable months on the Iowa State University (ISU) Estimated Costs and Returns series was set in 1976 through 1979 at 33.

That record has now officially fallen (see Figure 1). November's estimated profit of $8.19/head made 34 straight profitable months. The closest that the estimate came to zero during that run was last January when it fell to just $2.11. The largest monthly profit during the string was $44.84/head in November of 2004. It is almost inconceivable that the highest profit month could be in November, but that is exactly how it happened when meat and pork demand were so hot.

Can the streak continue? The answer, in my best economist's judgment, is a resounding "maybe!" The ISU series uses a weighted average of monthly feed costs for each month's sales. As we move forward, the feed costs for each month will include more and more high-dollar corn. It appears that December may remain profitable, but without a good price rally in January and February, one or both of those months could go into the red.

I think higher corn and soybean meal prices will drive average breakeven costs into the $62-$64/cwt. carcass range in 2007. Today's Chicago Mercantile Exchange (CME) Lean Hogs futures prices tell us there is a chance that hog prices from April through year-end could stay above that level, but it is going to be very, very close. Should any problems develop with the 2007 corn crop, the possibility of prices staying higher than production costs will be practically zero.

Which brings us to word number two -- "costs."

There is no doubt that costs will be higher in the future and that they will stay higher indefinitely, in my opinion. Figure 2 shows my feed cost index. The important feature to note is that past feed cost increases were short-lived. We have always been one corn crop away from ample corn supplies and lower prices.

Such is not the case this time. This is not a supply-driven increase in prices. The fact that this rally is being driven by higher demand for corn and that the demand will get stronger yet means that this shift will be permanent as long as oil prices stay high (say $50/barrel or higher) and the federal ethanol subsidy stays in place.

I only wish I had realized how sensitive corn prices would be to the wheat situation this past fall. A normal seasonal pattern would have meant that many feedmill bins would have been full of relatively low-priced corn. The counter-seasonal rally means that, unfortunately, many of you did not get that corn bought, and that actual hog production costs will increase more rapidly than normal.

Smart Buying
What can you do? Smart buying will still pay dividends. You may not ever get a chance to buy $2.00 or $2.25/bu. corn, but you will have chances to buy it in the bottom part of its new range. The same will hold true for soybean meal. Both could still provide you a competitive advantage.

In addition, higher feed costs will make feed efficiency and tight management even more critical to success. I know that you didn't get to where you are by being sloppy but let's face it, good times almost always cause us to get a little lax about the things that are a real pain to do.

Corn at $3.50 and higher will compensate you for your renewed efforts. Refocusing your attention on diet formulations, feed systems, feeder adjustments, ventilation, etc. could be the difference between profits and losses in 2007.

In Gratitude
Thanks again for your attention to these ramblings each week. It is such an honor to have you devote a few of your precious minutes to reading this column and contemplating a few of my ideas. I don't take that lightly, since my moments are precious as well.

And, of course, this is a season of precious minutes. Ones spent with family and friends and ones spent contemplating and celebrating the coming of the Savior of the world. Make all of them count this year and please accept the Meyer family's wishes for a Merry and Blessed Christmas and a great 2007.

Click to view graphs.

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

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Financial Preview
Swift Saga
The economic impact of the raid by U.S. Immigration & Customs Enforcement (ICE) officials on the six Swift plants is being felt throughout the industry. There are several points about the raid that are worthy of further discussion:

The cash hog market. From last Monday to this Wednesday, the cash hog market has dropped about $15/head. The first day, we saw an almost immediate drop of nearly $4/head. For every $1 drop in carcass cwt. prices there is a loss to the live side of the pork industry of over $800,000. Here's the easy calculation: Normal daily slaughter and processing has been at least 400,000/day. A $1 drop on a 200-lb. carcass ($2/cwt.) therefore equates to an $800,000 cost/day. If prices have dropped $10/head and we have harvested at least two million head the last seven working days, we have seen lost revenue on the live side of $20 million. Granted, we did not drop $15/head right away, but the economic impact to the pork industry has been real and substantial.

Who wins? If it weren't for the new Triumph Foods plant in St. Joseph, MO, we would have had a processing situation similar to 1998 (although for a shorter period of time). The cash markets would have been devastated for that time period and the losses would have been greater. There's talk of a second Triumph plant and people are questioning whether we need the extra capacity. But the real question that I think needs to be raised by the industry is this: Do we need newer, more efficient processing plants with better technology that can reduce our dependence on labor? Labor in the swine industry will be harder and harder to get on both the live and processing sides.

From the consumer side, there are two points to consider: First, food safety is a top priority. Can newer plants with better technology help? Secondly, as consumer trends push us toward more further processing and more convenient products, new technologies will be needed. Perhaps our inefficient plants need to be retrofitted to help with further processing of pork products in the future. I am not an expert in this field, but I think it is important to consider some of these issues as we go forward.

Animal welfare concern -- The last issue to consider about the Swift plant raid is what would have happened if the raid had taken place in July instead of December? I believe we could have lost several thousand animals.

The immigration issue is a political hot potato and there is no easy solution. We need to communicate with the people who are making these decisions and help find solutions.

Happy Holidays
In closing, I would like to wish all of you and your families a blessed holiday season. We live in the greatest country in the world and we have many things to be thankful for. Make sure you take time during this holiday season to appreciate all the great gifts that we have.

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Legislative Preview
Congress' Unfinished Business
Congress left a number of issues important to agriculture for the 110th Congress to deal with. Those include:

Manure clarification -- Congress failed to pass legislation clarifying that manure is not a hazardous substance or pollutant under Superfund laws. A number of agricultural organizations are concerned that unless there is clarification of this issue, manure as fertilizer could be prohibited.

Dust and soot -- Senator Chuck Grassley's (R-IA) legislation to prohibit the Environmental Protection Agency (EPA) from enforcing Clean Air Act rules on agriculture for dust and soot was not adopted.

Lock & Dam Update -- Congress failed to complete the conference committee on legislation concerning the Water Resources Development Act (WRDA), which would have modernized the over 60-year-old locks and dams on the Mississippi and Illinois Rivers. This is a priority of the National Corn Growers Association, American Soybean Association, Midwest Area Rivers Coalition (MARC 2000), and American Farm Bureau Federation. This is a critical issue to keep American agriculture competitive in the world market.

Livestock Issues & Farm Bill -- Senator Chuck Grassley (R-IA) announced his plans to press for more competition in agriculture during the farm bill debate next year. He plans to introduce several pieces of legislation early next year that will outline his plans for the farm bill, including:

Ban on packer ownership of livestock. This would prevent meat packers from assuming complete control of the meat supply by preventing packers from owning livestock.

Limit on mandatory arbitration agreements. This would be similar to previous legislation Grassley introduced, which amended the Packers and Stockyards Act to prohibit mandatory arbitration clauses from being included in contracts between livestock producers and packers.

Review of agribusiness mergers. This would change the way the Justice Department reviews agribusiness mergers. It would also enhance the Agriculture Department's ability to address anti-competitive activity in the industry.

Senator Grassley said, "Concentration is one of the most important issues in agriculture today. Vertical integration leaves the independent producer with even fewer choices of who to buy from and sell to. And, it hurts the ability of farmers to get a fair price for their products."

Panama FTA Complete -- The United States and Panama completed the free trade agreement (FTA) negotiations. According to USDA, the agreement provides that more than half of all current U.S. farm exports to Panama will become duty-free immediately, including high quality beef, mechanically deboned chicken, turkey, pork variety meats, whey, soybeans, crude vegetable oils, cotton, wheat, barley, most fresh fruits, almonds, walnuts and many processed foods such as soups, chocolate confectionary, distilled spirits, wines and pet food. U.S. agriculture will also benefit from expanded market access through tariff-rate quotas on pork, chicken leg quarters, dairy products, corn, rice, refined corn oil, dried beans, frozen French fries and tomato products. Tariffs on most remaining U.S. farm products will be phased out within 15 years. Also, Panama is revising its sanitary and phytosanitary regulations recognizing the equivalence of the U.S. food safety inspection system for meat, poultry and processed food products. Secretary of Agriculture Mike Johanns said, "Expanding access to the Panamanian market and increasing our two-way trade will strengthen our economic ties and promote increased stability in the Western Hemisphere."

Republicans Named to Senate Ag Committee -- Senators John Thune (R-SD) and Lindsey Graham (R-SC) are the two new Republican members of the Senate Agriculture Committee for the 110th Congress. Republican senators who will continue to serve on the committee include: Saxby Chambliss (R-GA), ranking member; Richard Lugar (R-IN); Thad Cochran (R-MS); Mitch McConnell (R-KY); Pat Roberts (R-KS); Norm Coleman (R-MN); Mike Crapo (R-ID); and Chuck Grassley (R-IA).

P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.

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

Merry Christmas

from the staff of

National Hog Farmer.

NPPC -- the leading advocate for pork producers

* Backed successful repeal of anti-trade Byrd Amendment
* Obtained favorable treatment for pork in U.S. -- Peru trade pact
* Negotiated legal protections for producers in air consent agreements

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