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January 12, 2007

Table of Contents
Livestock No Longer Drives Corn Price
Six Sigma: The Final Steps
Pork Producers Face Ethanol Challenge
Assistant Nursery Territory Manager

Market Preview
Livestock No Longer Drives Corn Price
There continues to be widespread discussion about the impact that ethanol production will have on livestock sectors, in general, and the pork sector, in particular. It is an important debate for our business as I believe the pork and poultry sectors are going to catch the brunt of the fallout from higher corn prices.

Iowa State University Economist Dermot Hayes has done some interesting work on the potential impact of current ethanol policy and the shifts that have occurred in energy markets. The basic idea is quite simple: The value of corn is now determined not by its usage as livestock feed, but by its usage as an energy source. Therefore, the price of corn will be:
  • Ethanol yield (2.8 to 3.0 gal./bu.) times 67% of the price of gasoline, plus

  • Ethanol yield (2.8 to 3.0 gal./bu.) times $0.51 (the blenders' tax credit paid to users of ethanol), plus

  • The value of 17 lb. of dried distiller's grains with solubles (DDGS), plus

  • The value of any carbon dioxide that the plant captures and sells, minus

  • The per-bushel operating cost of the ethanol plant.
Using some reasonable values for all of these items, Dr. Hayes concludes that ethanol plants can pay $4.05/bu. for corn.

If corn is worth $4.05/bu. to make ethanol, then ethanol production will continue to expand until it drives the price of corn to that level. It's just a matter of how long it will take to reach that level. Further, those who produce ethanol will force everyone else to pay $4.05/bu. for corn if they want to use it.

Do not conclude that corn will automatically climb to $4.05/bu. It all depends on oil prices, DDGS prices, operating costs, etc. It takes much lower oil prices, much lower DDGS prices, or much higher operating costs to pull corn prices back into the $2 to $3 range.

Corn and Oil Prices Now Linked
Corn prices fell by about 30¢/bu. from Jan. 1 to Jan. 9. It is no accident that nearby crude oil futures fell at the same time. In fact, the nearby seven crude oil futures contracts are now all below $60/barrel and the February contract is in the low $50s. Corn reversed on Thursday in anticipation of Friday's USDA Crop Report, but look for many more instances of correlated changes in oil and corn prices in the future. They are now linked.

Several sources report that the annual usage rate for the ethanol industry will be roughly 4 billion bu./year by Jan. 1, 2008. That would be about twice the current annual usage rate and would mean that ethanol would use about a third of even a very good 2007 corn crop.

How will this play out for pork producers? I don't know right now.

I don't think it will be a disaster this year, unless we have a poor corn crop. "Poor" would be less than 11 billion bushels or so. Hog prices should be high enough to keep producers in the black in 2007, on average, based on current Chicago Mercantile Exchange (CME) Lean Hogs futures prices. That means that some high-cost producers will be losing money. Further, some pork producers who own crop ground may decide that the added income they earn from hogs is not worth the extra work.

About the only thing we know for sure is that this is going to be very interesting.

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.


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Production Preview
Six Sigma: The Final Steps
Continuing our discussion of Six Sigma, let's consider the last two steps of the Define-Measure-Analyze-Improve-Control (DMAIC) program. You'll remember from recent columns, Six Sigma is a highly structured program used to achieve improvement.

In the define phase, the problem is described and a team assembled to address it. During the measure and analyze phases, data is collected and the problem's root cause(s) is identified. But now come the big challenges -- improve and control.

Brainstorming is the primary tool of the improve phase. By utilizing the creativity of team members, including those who work closest to the problem, potential solutions are proposed. Benchmarking -- seeking the procedures of highly successful organizations and considering their applicability -- can also be used to create potential solutions.

Potential solutions are then prioritized (which changes will contribute the most benefit), cost-benefit analysis is undertaken, the stakeholders are identified (who needs to "buy-into" potential solutions), and, finally, the likelihood of failure must be addressed (would failure make the situation worse).

After addressing these concerns, the team develops a pilot study to test the solution's effectiveness on a small scale. Here again, a statistician should be consulted to make sure the pilot study is conducted long enough to verify that improvements actually occurred.

When the solution has been found to be effective, the project enters the control phase. Understandably, sustained, long-term improvement can be the greatest challenge. To help ensure success, the team must develop a way to monitor ongoing results and a response plan should be formulated should a change be observed.

When the project is complete, the conclusions are documented and the solution is handed over to the "process owner." In so doing, the person who directly oversees daily activities therefore "owns" the solution.

The formality of DMAIC may seem like overkill, but Six Sigma is not intended for use in addressing problems where the answers are already known. Nor is it intended for use in the absence of leadership support. After all, how better to discourage an enthusiastic project team than to withdraw support when it's time to test the potential solution?

Potential applications for Six Sigma in the swine industry fall into a variety of categories. There are opportunities with personnel (recruitment, retention, safety), supplies and accounting (billing/reimbursement processes, feed and product inventory management), marketing, and, of course, the pigs themselves.

Regardless of the area in which the problem is pursued, it is important to understand that nothing is free. Performing an investigation to the level required by DMAIC costs time and money. However, successful application generates a good return on investment.

Stephanie Rutten, DVM
University of Minnesota
Editor's Note: For all your agricultural news, markets and commentaries, go to

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Legislative Preview
Pork Producers Face Ethanol Challenge
The National Pork Producers Council (NPPC) and the Iowa Pork Producers Association stated their concerns with the "rapid rise" in ethanol demand before a Senate Agriculture Committee hearing on rural America's role in enhancing national energy security. The concerns include diminishing corn stocks, rising corn prices, and the use of distiller's grain in swine diets. They cited a study by the Center for Agricultural and Rural Development (CARD) at Iowa State University that said, "Current crude oil prices and government policies allow the ethanol industry to pay up to $4.05/bu. for corn." According to NPPC, former USDA grain economist William Tierney predicts that the "annual usage rate will be more than 10 billion bushels by the end of 2009, if all of the ethanol plants currently under construction or planned come on line." The 2006 corn crop is estimated to be 10.7 billion bushels.

Permanent Ethanol Tax -- Congressmen Earl Pomeroy (D-ND) and Kenny Hulshof (R-MO) have introduced the "Renewable Fuels and Energy Independence Promotion Act," which would make permanent the biodiesel and ethanol tax incentive and the small agri-biodiesel producer and small ethanol producer credits. Congressman Pomeroy said, "We must do everything we can to encourage the production of renewable fuels as our nation strives for energy independence. Making this tax credit for biodiesel and ethanol permanent is a critical component of that effort." The biodiesel tax credit expires in 2008 and the ethanol tax credit expires in 2010.

Energy Legislation -- Two key bills regarding renewable fuels were introduced in the Senate on the first day of session:
  • The Bio Fuels Security Act by Senators Tom Harkin (D-IA), Dick Lugar (R-IN) Barack Obama (D-IL), Joe Biden (D-DE), and Byron Dorgan (D-ND). This legislation would increase the Renewable Fuels Standard (RFS) to 60 billion gallons of ethanol and biodiesel by 2030. The current RFS is 7.5 billion gallons by 2012. The bill would require large oil companies to install E85 pumps at their stations, resulting in approximately 50% of all major brand gasoline stations having E85 pumps available within a decade, nationwide.

  • The American Fuels Act by Senators Barack Obama (D-IL), Dick Lugar (R-IN), and Tom Harkin (D-IA) would increase the production of cellulosic biomass ethanol to 250 million gallons by 2012, require 2 billion gallons of alternative diesel fuels to be mixed into the 40-billion-gallon annual national diesel pool by 2015, provide automakers with tax incentives to produce additional Flexible Fuel Vehicles (FFVs), and provide a short-term 35¢/gal. tax credit for E-85 fuel.
Earlier COOL -- Congressman Denny Rehberg (R-MT) has introduced H.R. 357, which would implement mandatory country-of-origin labeling (COOL) on Sept. 30, 2007 -- one year earlier than current law. This issue will be considered during the debate of the 2007 farm bill.

Permanent Disaster Assistance -- Senator Byron Dorgan (D-ND) has introduced legislation that would establish a permanent disaster assistance program under the farm bill. The bill would provide for a crop and quality loss program with a 35% loss threshold to be eligible and a payment rate of 65%. In addition, the legislation would require that producers who receive crop/quality loss payments participate in the crop insurance program for the next two years, it would provide for a Livestock Assistance Program to compensate ranchers for feed losses and a Livestock Indemnity Program to compensate ranchers for losses. Dorgan said, "We need to strengthen our farm safety net so our producers don't have to worry that a weather-related disaster will prevent them from staying on the farm from one year to the next." Congressman Collin Peterson (D-MN), chairman of the House Agriculture Committee, has been advocating a permanent disaster program and has indicated it will be addressed during the 2007 farm bill debate. Joining Dorgan as cosponsors of the legislation are Senators John Thune (R-SD), Mary Landrieu (D-LA), and Kent Conrad (D-ND).

Canadian Cattle Rule -- USDA has published a proposed rule to allow for the importation of Canadian cattle and beef over 30 months of age. The American Meat Institute said, "Full restoration of cattle and beef trade with Canada is scientifically justified and appropriate under international animal health guidelines." The proposal will allow the importation of:
  • Live cattle and other bovines for any use born on or after March 1, 1999, the date determined by the Animal and Plant Health Inspection Service (APHIS) to be the date of effective enforcement of the ruminant-to-ruminant feed ban in Canada;

  • Blood and blood products derived from bovines, collected under certain conditions; and

  • Casings and part of the small intestine derived from bovines.
The proposed rule is available at The public may comment on the proposed rule until March 12.

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

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Help Wanted
Assistant Nursery Territory Manager
Oklahoma. Murphy-Brown, LLC a progressive swine company in Laverne, Oklahoma is seeking an Assistant Nursery Territory Manager. Qualified applicants must have a minimum of 4 years of nursery experience, excellent communication and computer skills. Bilingual-Spanish/English preferred. Murphy-Brown, LLC offers an excellent compensation and benefit package including medical, dental & vision insurance, 401K, pension plan, Gain Share Bonus & more! Call 580-921-1569 ext 239 or email EOEM\F\D\V

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Dale Miller, Editor, National Hog Farmer

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