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|February 9, 2007|
Table of Contents
History Hints at Market Opportunity
Porcine Circovirus Type-2 in Asia
USDA Presents FY '08 Budget
History Hints at Market Opportunity
I've used an admonition from President Harry Truman before - and I'll likely use it again - "Study your history!"
It appears that such a time is upon us again as we look at the hog market and the prices being offered by Lean Hogs futures contracts. Figure 1 shows historical weekly prices on the nearby Lean Hogs futures contract back to when Lean Hogs futures were introduced in 1997.
February Lean Hogs futures closed Thursday at $65.175. The remainder of the 2007 contracts, except for December, closed above that level, and the contracts for May through July were all above $73.80 (a live weight equivalent of over $55). They are in the range marked by the red circle in Figure 1. By historical standards, those are very good hog prices. In fact, they are among the top 10% of the prices offered in history.
This week's market action has added a bit of fuel to the "price-some-hogs-now" fire. Figure 2 shows prices for July Lean Hogs since the contract came on the board in June 2006. This chart looks much the same as those for May, June and August with the recent price rally well into the $70 range.
All of these charts indicate that the price rally has run out of gas - at least for the short run. In this July chart, you can clearly see that prices broke below a short-run trend line (the blue line) on Tuesday of this week. July futures prices broke below 5-, 10- and 15-day moving averages this week as well.
Has the Market Turned?
Trend lines and moving averages generally measure the momentum of a market. When the actual price moves below these momentum measures, the message is that the momentum has waned and the market is about to turn or, perhaps, has already turned. Think of it as an airplane in a steep climb - at some point it loses airspeed and has to start down.
Does this mean prices of these contracts have topped? Not necessarily. In fact, there is substantial historical evidence that June Lean Hogs futures peak first in early March and then again in early- to mid-May. Those same data show that the July and August contracts usually peak in early- to mid-May. We still don't have enough historical data for the May contract to draw any conclusions about seasonality.
What does this mean?
The prices being offered today are good ones. They are profitable even with high feed costs and, given the magnitude of the feed cost increase, that is pretty remarkable. This suggests that pricing some hogs is prudent. The principle of diversification, though, suggests that some hogs be left unpriced just in case these long-term historical seasonal patterns hold again this year. Be watching for pricing opportunities in late April and early May for those animals.
The Chicago Mercantile Exchange (CME) offers a very comprehensive review of historical futures prices free of charge. The CME's Moore Research Reports for hogs, cattle, dairy products and lumber can be downloaded at www.cme.com/trading/prd/ag/res/moore3356.html. If you prefer a printed or CD copy, call 800-331-3332 or send an e-mail request to: firstname.lastname@example.org.
Morrell Plant Second Shift Suspended
Yesterday's announcement by Smithfield Foods that it was suspending the second shift and laying off 485 workers at its John Morrell plant in Sioux City, IA, effective Feb. 19 is a bit foreboding. The company cited "unfavorable market conditions" as the reason for its decision.
It is easy to jump to the conclusion that margins must be bad, but the data indicate otherwise. Figure 3 shows my estimates of hog slaughterers' gross margins (i.e. value of the meat and by-products less the value of the hogs). While margins have fallen in the past two weeks, these appear about "normal" for this time of year. What can be said, however, is that pork packers' margins do not usually get much better until the normal seasonal upturn in slaughter occurs in late September. Given that historical perspective and the level of summer Lean Hogs futures prices, it makes some sense to cut back now rather than later -- especially if you think you are going to make that cut sometime this year anyway.
A last interesting point on this subject is the relationship between the labor force reduction and the remaining labor force. Morrell will reduce its slaughter by about 7,000 head/day by cutting 485 employees. It will continue to slaughter 7,000 head/day, but will employ 900 people to get that done. That speaks volumes about the economics of double-shifted plants, doesn't it?
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
NPPC -- the leading advocate for pork producers
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Porcine Circovirus Type-2 in Asia
Last week we discussed measures being taken in Europe for treatment and control of porcine circovirus type-2 (PCV-2). This week we will consider the impact of the disease in Asia as it relates to postweaning multi-systemic wasting syndrome (PMWS).
According to Han Soo Joo, DVM, a member of the Swine Group at the University of Minnesota, severe clinical losses due to PMWS were first observed in the Guangdong province of China in 2001, where swine production is intensive and large pig companies are located.
"Breeding farms first experienced PMWS, and the syndrome spread to the multipliers and commercial farms," notes Joo. "Clinical signs on affected farms were usually observed in grow-finish barns in the initial stage and extended to the nurseries with high mortality. Nursery pigs as young as 3 weeks old were affected during the peak period.
"In South Korea, PMWS or PCV-2 associated diseases have been a major problem throughout the country from about 2001," he continues. "Nursery pig mortality ranging from 10% to 30% was common."
Problems with PMWS related diseases were similar in Thailand, though the disease appears not to have had an impact in the Philippines, where health levels in breeding farms are relatively high, reports Joo.
As in other countries, transmission of the causative agent seems to occur mainly via introduction of replacement gilts from infected breeding farms.
"Careful consideration should be given to semen, since excretion of PCV-2 via semen has been reported," states Joo. "Contaminated feeds can also be a significant source of infection. Of ingredients in the feed, porcine plasma should be considered a risk, and PCV-2 may not be killed during the spray-dry process of the plasma because of its heat resistance. Elimination of the virus from contaminated environments would also be difficult."
Joo stresses the importance of all-in, all-out production, particularly in the nursery phase, to control the disease and reduce virus transmission. In addition, extensive cleaning and disinfection of nurseries is necessary.
"It is also recommended to use two different disinfectants for nursery cleaning, although certain disinfectants were found to be more effective for PCV-2," says Joo. In addition, he says South Korea has access to nutritional supplements that contain high energy/protein, electrolytes, anti-diarrhea drugs, and substances for better digestibility to lower fever or improve the immune system. "Cooked rice powder has been used as the major energy supplement, and egg yolk antibody to PCV-2 has been produced and added in some products."
While data for evaluating these products under controlled experiments are not yet available, Joo notes that leading veterinarians and producers have made good comments about some of the products.
As reported last week, co-infection with other diseases like porcine reproductive and respiratory syndrome (PRRS) virus, porcine parvovirus and other bacterial pathogens have been found to increase the severity of clinical signs and mortality in PMWS farms.
"To reduce mortality, M. hyopneumonia and/or PRRS vaccine has been strategically used for pigs before weaning," states Joo. However, the disease actually seemed to show increased severity of clinical signs when too many vaccines were administered, he says. Some veterinarians have suggested removing unnecessary vaccines or avoiding vaccination of pigs during the early nursery period.
Joo says that on some Asian farms, an autogenous tissue extract vaccine was developed for the prevention of PMWS. Pigs with early clinical signs were sacrificed and affected tissues (lung, spleen, lymph nodes) were collected, he reports. "Although experimental data using the tissue vaccine are not available, an obvious benefit has been observed on PMWS farms and the farm veterinarian reported the continuous use of tissue vaccine during the last three years," notes Joo.
Farms.com Director of Communications, Farms.com
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USDA Presents FY '08 Budget
President Bush submitted a $2.9 trillion fiscal year 2008 budget request with the goal of eliminating the deficit over five years. Within the president's budget is a request for $89 billion for USDA. Some of the highlights of the proposed budget include:
Secretary of Agriculture Mike Johanns said, "This budget aims to enhance our country's vibrant ag economy, advance renewable energy, protect America's food supply, improve nutrition and health, and conserve our natural resources."
Cattlemen & Ethanol -- The National Cattlemen's Beef Association (NCBA), at their annual meeting last week, adopted a resolution urging Congress to end the ethanol tax credit and the tariff on imported ethanol. This resolution is a reflection of the growing concern among the livestock and meat industries on the effects of increased ethanol production on higher feed prices. The resolution states that NCBA "supports transition to a market-based approach for the production and usage of ethanol produced from livestock feeds and supports the sunsetting of the existing blender tax credit and the ethanol import tariffs as scheduled and not allowing for renewal in their current form." The ethanol blenders tax credit expires in 2010 and the import tariff expires in 2009.
Cloned Meat Legislation -- Senator Barbara Mikulski (D-MD) has introduced legislation to require the Food and Drug Administration (FDA) and USDA to mandate labels for products from cloned animals or their offspring. Senator Mikulski said, "I am strongly opposed to the FDA approving meat and milk products from cloned animals for human consumption. If cloned food is safe, let it onto the market, but give consumers the information they need to avoid these products if they choose to. We need to let Americans -- many of whom find this repugnant -- speak with their dollars and choose the food that they feel confident is safe."
Call for Disaster Assistance -- Over 20 agricultural organizations have called on Congress to approve disaster assistance for U.S. producers as soon as practicable. In a letter to the Senate and House leadership, the organizations said, "We appreciate the supplemental assistance offered to help some of the victims of the 2005 hurricane season. Unfortunately, this assistance was not available to all farmers and ranchers who suffered devastating losses due to hurricanes and none of this assistance was available to producers in other areas of the nation." Those signing the letter included American Farm Bureau Federation, American Sheep Industry Association, American Soybean Association, Farm Credit Council, National Association of Wheat Growers, National Cotton Council, National Council of Farmer Cooperatives, National Farmers Union, National Sunflower Association and USA Rice Federation.
TPA Renewal -- The National Pork Producers Council (NPPC) is urging Congress to renew Trade Promotion Authority (TPA). This law gives U.S. presidents authority to negotiate trade agreements. NPPC said, "It's essential that the United States continue to negotiate trade deals which have been extremely beneficial to pork producers. It would be difficult to find a sector of the economy that has benefited more than the pork industry from trade agreements." TPA gives trading partners confidence that the agreements they negotiate with the United States will not be amended by Congress. U.S. exports to countries that have free trade agreements (FTA) with the United States account for only 7% of the non-U.S. global economy. However, these FTA countries represent 42% of U.S. exports. TPA expires on June 30.
Hold on Canadian Cattle Rule -- Senators Mike Enzi (R-WY), Byron Dorgan (D-ND), Jeff Bingaman (D-NM), and John Thune (R-SD) have asked Secretary of Agriculture Mike Johanns to withdraw USDA's proposed rule to allow for the importation of Canadian cattle born after March 1, 1999 and beef from animals over 30 months. The senators said, "Consumers in foreign countries should not be the only ones receiving assurances from the U.S. government about the origin of their beef. Surely, American consumers deserve the same assurances from USDA that overseas consumers receive. If you will not withdraw your proposal to expand Canadian beef imports, then at the very least it should be postponed until USDA can fully implement mandatory country-of-origin labeling (COOL) as directed in the 2002 Farm Bill. Before American beef is commingled with beef from a country that discovered five cases of bovine spongiform encephalopathy (BSE) last year, American consumers should be given basic tools with which to distinguish American beef from Canadian."
P. Scott Shearer
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