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January 5, 2007




Table of Contents
Understanding "Supply"
Six Sigma's Measure and Analyze Phases
Democrats Take Control
Mark Your Calendars For "Eye On Energy" Conference

Market Preview
Understanding "Supply"
First things first -- Happy New Year! Here's wishing you all a healthful and fulfilling year.

It certainly appears that 2007 will have some bumps for those of us in the livestock sectors. In perspective, that's nearly always true, so it's important to make sure we take good care of the really important things in life -- faith, family, friends and country.

The Real Issue
As you know -- from my columns and the size of the checks you've been writing -- feed costs will be a key issue for the coming year. December's Hogs & Pigs Report indicates that those costs are already being factored into business decisions. But the real issue, in economic terms, will be supply.

The term "supply" is almost universally misused when we talk about hogs. Don't be offended by that -- I misuse the term all of the time, too.

The daily market reporter tells us that the supply of hogs was good enough today to easily meet packer needs. Market analysts, such as I, say that 2007 hog supply will be larger than 2006. Truth is -- we are actually talking about the "quantity of hogs supplied," not hog supply.

There is a difference and it is important.

Recall from a previous discussion of pork demand that "demand" is the quantities of pork that consumers are willing and able to buy at alternative prices. Similarly, hog supply is defined as "the quantity of hogs that producers are willing and able to produce at alternative prices."

Therefore, hog supply can be represented by the "S" line in Figure 1. It is an entire set of prices -- quantity relationships that describe how you as producers will respond to different prices.

Your cost structure determines how you will respond to a given price. If you have lower costs, you will still be willing and able to supply hogs at lower prices and vice versa. This means that the line (S) is, in fact, a relationship between quantity and the cost of raising that one additional pig or pound.

Higher feed costs have shifted the short-run supply function for all producers upward -- as to S' in Figure 1. The problem is that you cannot reduce quantity immediately. If you could, output would fall to Q', price would rise, and everyone would be back at their breakeven cost. Since you cannot, losses (at least relative to where the market would have been) will be incurred for as long as it takes to reduce supply to Q'.

So, according to the Hogs & Pigs Report, the supply of hogs in 2007 will be slightly larger than in 2006, according to our common usage of the term "supply". However, the hog supply from the perspective of economics will be lower next year because producers will be willing to sell fewer hogs at any given price level. It's difficult to view S' as lower than S, but that is the case since S' reflects a lower quantity at each price.

The bottom line of this esoteric, possibly academic, discussion is this: Supply is more than quantity. It includes costs, as well. And, it is through higher costs that we will see supply shift and impact prices in the future.

Canadian Footnote
Any of you who use our weekly data table should take note that the "current week" data from Canada is for the week that ended Dec. 16. It appears that the Statistics Canada folks have a very good holiday leave policy.




Click to view graphs.

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



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Production Preview
Six Sigma's Measure and Analyze Phases
In keeping with the Six Sigma theme we've been writing about in recent North American Preview columns, we'll focus on "measure" and "analyze," the next two steps of the Define-Measure-Analyze-Improve-Control sequence.

In the define phase, a specific problem is identified along with a team of individuals who will be working to find a solution. For the measure phase, data will be collected about the problem and the process. The primary objective of this phase is to obtain an accurate representation of what is actually occurring.

There are two components to successful data collection, whether part of a Six Sigma project or not. First, the data needs to be both accurate and reliable. That is, the data needs to reflect what actually occurs as well as being consistently recorded so that data collected at different points in time can be interpreted in the same way.

The second component -- the data needs to be usable. That is, it needs to be relevant to the process and the problem.
While these characteristics would seem logical, their importance cannot be overstated. Collecting data costs money. When it comes to data analysis, the popular saying: "garbage in, garbage out" applies.

On-Farm Example
Let's consider a high health sow farm that sends weaned pigs to a designated nursery. Several shareholders who purchase and finish feeder pigs from the nursery own both facilities.

The manager of the nursery has been expressing ongoing concern about a decline in weaned pig quality that he believes has affected the nursery's overall performance. Graphs of historical data confirm that group mortality and the proportion of pigs identified as "substandard" have increased during the last year.

An opportunity cost is assigned, and it is determined that this project should be pursued using Six Sigma.

Utilizing the define phase, the customer is identified as the nursery. To address the problem, a team is formed with members representing the sow farm, nursery, transportation and owner interests. "Quality of weaned piglets" is translated into pigs that weigh 8 lb. or more at weaning, are between 15 and 27 days of age, and have no other signs of wounds, illness or injury.

Having agreed on the definition of quality, the team can now begin data collection. Measurements will be taken at both the sow unit and the nursery.

In order to measure true piglet age and the sow effect, the team determines that piglets will need to be tattooed with a litter identification (ID). Practices for recording piglet fostering will be clarified and verified to ensure consistency.

At the nursery, pigs will be categorized as meeting or failing-to-meet the quality criteria. Litter IDs will be collected from pigs failing to meet the quality criteria and the pigs will be classified by reason (i.e., lightweight, too young, too old, swollen joint or leg, limp, open wound, inguinal hernia, other).

The team will consult a statistician to determine how many weeks of production to measure, thereby avoiding any unnecessary costs.

After collecting data in the measure phase, it's time for the analyze phase. In this phase, the team comes together and identifies the problem's potential causes. This can include mapping out the entire process, step-by-step, or making cause-and-effect diagrams. The data collected in the previous step are plotted in graphs to identify and rule out potential relationships.

Using our weaned pig example, in the analyze phase it's time to ask the pointed questions:
  • What proportion of the pigs are failing to meet the quality criteria and why?

  • Are the reasons consistent week-to-week?

  • Are the quality issues related to transportation (i.e., loading, shipment, unloading)?

  • Do the reasons relate to the sows that farrowed and nursed the litters? If so, how?

The importance of the measure and analyze phases must not be overlooked because they allow for fact-based decision making. If we are unable to describe a problem in numbers, then we are prone to subjective and biased conclusions and we are likely to find ourselves chasing shadows.

The value in any structured approach to improvement, whether Six Sigma or others, comes through the discipline required to thoroughly examine the situation at hand.

Next week we will conclude our discussion of Six Sigma, focusing on the "improve" and "control" phases.

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



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Legislative Preview
Democrats Take Control
The 110th Congress was sworn in with Democrats in control of both the Senate and the House of Representatives. Nancy Pelosi (D-CA) made history by becoming the first woman Speaker of the House of Representatives. Other House leaders include Congressman Steny Hoyer (D-MD), Majority Leader; John Boehner (R-OH), Minority Leader; and Roy Blunt (R-MO), Minority Whip. Senate leadership includes Harry Reid (D-NV), Majority Leader; Dick Durbin (D-IL), Majority Whip; Mitch McConnell (R-KY), Minority Leader; and Trent Lott (R-MS), Minority Whip. The House Democratic leadership has announced that several measures will be considered in January, including tightening ethics rules for members, raising the minimum wage, allowing more research on stem cells, implementing of various recommendations of the Sept. 11 commission and port security, ending subsidies for big oil and investing in renewable energy, and cutting interest rates on student loans.

Senators Concerned About Ag Funding -- Senators Norm Coleman (R-MN) and Blanche Lincoln (D-AR) plan to send a letter to President Bush urging him to "refrain from proposing harmful cuts" to agriculture when preparing the administration's FY '08 budget. The letter states, "Instead, we urge you to propose a robust, new investment in renewable fuels that will add to the budget savings already realized or forecast under current farm policy, and make room for the administration to propose additional funding in order to meet new priorities and policy objectives, including many identified by the administration, without making harmful cuts to existing priorities." The administration will present its budget to Congress the first week of February.

FDA Approves Cloned Meat and Milk -- The Food and Drug Administration (FDA) released its draft risk assessment indicating that milk and meat from cloned animals is safe to eat. Stephen F. Sundlof, FDA's director of the Center for Veterinary Medicine, said, "Based on FDA's analysis of hundreds of peer-reviewed publications and other studies on the health and food composition of clones and their offspring, the draft risk assessment has determined that meat and milk from clones and their offspring are as safe as food we eat every day." FDA is seeking comments on the draft risk assessment until April 2, 2007.

Concerns About Cloning -- The American Meat Institute (AMI) said, "As confident as we are in the science of cloning, we also recognize that consumers may have concerns with the notion of consuming meat and milk from cloned animals. We value our customers' confidence and we take their concerns seriously. We believe that the Food & Drug Administration (FDA) should be cautious about allowing meat and milk from cloned animals to be introduced into the marketplace if most consumers are unwilling to accept the technology. We urge the government not simply to affirm its safety in the policy arena, but to assist consumers in understanding what cloning is, and what it is not, so that overall consumer confidence in the food supply is maintained." Food & Water Watch, a consumer rights group said, "The Food and Drug Administration's decision to allow the sale of meat and milk from cloned animals is yet another example of the agency's willingness to disregard safety in the face of industry pressure. If meat and milk from cloned animals do reach the marketplace, Congress should instruct FDA to require labeling so consumers have the information they need if they wish to avoid eating this poorly understood new technology."

Hearings and Tariffs -- Senator Byron Dorgan (D-ND) plans to hold hearings on South Korea's continuing rejection of U.S. beef. Dorgan also plans to push for tariffs on Korean products if the country "persists in using baseless excuses" to block U.S. beef imports. Dorgan said, "When I talk to ranchers in North Dakota, they ask me why America should continue to accept imports of South Korean automobiles, electronics and other goods if our beef exports are not accepted. I have no good answer for them."

Congressional Seat Shifts Possible -- Reapportionment is not due until after the 2010 census. However, analysis of the 2006 population estimates indicates that the West and South would continue to gain congressional seats and the Northeast and Midwest would lose Congressional seats. If the 2006 population trends continue through 2010, Arizona, Florida, Georgia, Nevada and Utah would each gain one congressional seat and Texas would gain two. States losing one seat include Iowa, Louisiana, Massachusetts, Missouri, New York, Ohio and Pennsylvania.

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



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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

Upcoming Conferences
Mark Your Calendars For "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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