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March 2, 2007

Table of Contents
Livestock Records Series Revamped
Identify the Target
CRP Ethanol Concerns

Market Preview
Livestock Records Series Revamped
Iowa State University's (ISU) Estimated Costs and Returns to various livestock feeding enterprises have been a valuable source of cost and profit data for many, many years. Started in the 1960s by the late Dr. Gene Futtrell, the estimates provide consistent comparisons that over the short run capture the changing impact of major input and output prices. The challenge has always been keeping the estimates "representative" of current technology and incorporating accurate values for fixed costs, labor, non-feed variable costs, etc.

The series' current author, Dr. John Lawrence, and his staff recently completed a major overhaul of the estimates and the changes had a significant impact. This business has changed dramatically since the last set of assumptions was created. Consider that the assumptions for the farrow-to-finish series were for a 150-sow, single-site operation. While there are still some of those types of operations around, they are definitely not the norm and represent a very small portion of the industry.

The new series is based on a 1,200-head sow herd with modern buildings and equipment and modern facilities for pigs weaned at 17 days of age and then placed in grow-finish buildings for 165 days. Litter size has been increased to nine pigs weaned and market weights have been increased to 270 lb. For farrow-to-feeder pig operations, weaned pigs spend six weeks in a nursery and are then sold as 50-lb. feeders. Feed efficiencies and diets have also been updated and operating and overhead costs have all been adjusted to more modern levels. An example of the drastic change: The old series used a wage rate of $7/hour, while the new series uses $22/hour, benefits included.

A detailed description of the new assumptions, and a comparison of costs and returns since 2001 can be found at:

Dramatic Changes in Returns
Figure 1 is drawn from this report and demonstrates the huge differences in profitability that these changes make. The average return on the old assumptions over the 2001-2006 period was $9.22/head. The average return using the new assumptions is $27.12/head. So while the old series told us that hog production has been profitable, it appears that the true numbers for modern operations are far more impressive. Any further questions about why we have seen such dramatic changes in operation size and structure?

Impact of Feed Prices on Returns
Dr. Lawrence used the new assumptions for both hog and cattle enterprises to address another burning question: What will be the impact of increasing feed prices on costs and returns? The results of that work appear in Figure 2. Note that the ISU researchers only computed the feed and total cost numbers in this table. I computed the percentage change data.

Feed and Total Costs were estimated for each of four enterprises using five corn and soybean cost scenarios. Three of those are self-explanatory. The one labeled "Wisner Forecast . . . " is the latest corn and soybean meal forecast from ISU Extension Grain Marketing Specialist Dr. Robert Wisner. The one labeled "CARD Ethanol . . . " contains the corn and soybean meal price forecasts from the November 2006 study of ethanol's potential impact on grain prices done by ISU's Center for Agricultural and Rural Development (CARD).

Both of those scenarios result in costs even higher than those that have been observed in January 2007, and costs that are roughly equivalent to those of 1996 -- the last time we dealt with expensive grain in the United. States. The difference is that this high-cost episode appears destined to last much longer than did that of 1996, thus meaning that cost increases eventually must be passed along to consumers.

The other telling figures from this table are the relative sizes of the increases for hog and cattle enterprises. While feed costs actually increase more as a percentage of 2001-2006 for the cattle enterprises, total costs increase substantially less than do those for hog enterprises. The reason, of course, is that a portion of the higher feed costs are deducted from the price of feeder cattle.

Hog production costs increase 13-23% under the two "forecast" scenarios while fed cattle costs increase by 6-11%. The reason is that the cattle-feeding industry uses far less soybean meal and can more effectively use dried distiller's grains with solubles (DDGS). The difference in these percentages underscores one of my biggest concerns about the impact of subsidized and protected ethanol production: It provides a competitive advantage to beef that will be very difficult to overcome.

Click to view graphs.

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


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Production Preview
Identify the Target
The "target" is a tool commonly used by farms to establish objectives. Ideally, that target represents an attainable goal as opposed to some long-range aspiration. And while it is not uncommon to set our sites on a single number, we generally are willing to accept anything - plus or minus - within a range of that number.

When targets are set to represent a system's specifications, i.e., what it needs to achieve, then it is fair to assume that deviations from the target are at a loss to the system. For example, if the target market weight is 280 lb., then pigs marketed above or below that weight represent an additional cost to the system. Simply stated, it costs more to produce pigs that do not meet the target weight. The same efficiencies of space, feed and transportation will not be achieved. Similarly, packer premiums decrease as weights and carcass characteristics deviate from the desired target.

Likewise, for a system designed to handle a certain number of pigs, deviations from that number come at a cost (real or opportunity) to the system. If the system over-produces pigs, then growth performance will be compromised by overcrowding. Alternately, if the system under-produces pigs, then its facilities will not be efficiently utilized.

The approach of having an acceptable range around a target is sometimes referred to as the "goal-post" view. That is, as long as the production falls within the acceptable range around the target, there is no additional cost to the system. An alternative approach (developed by Genichi Taguchi) is to perceive deviations from the target with a loss function (see Figure 1). A loss function assumes that the cost of a deviation from target increases as the size of the deviation the increases.

To further explore this concept, we'll consider two finisher distributions. For this scenario, the objective is to market pigs at 280 lb. with an acceptable window of 20 lb. above or below (i.e., 260-300 lb.). Group 1 meets the objectives of marketing all pigs within the acceptable window. Group 2 pigs, however, range from 248-314 lb., with 1.3% falling outside the acceptable window (see Figure 2). However, when the two distributions are evaluated using a loss function, the cost of missing the target in Group 1 is more than three times that of Group 2 - even though all of Group 1 falls into the acceptable window.

Although it may be a more comfortable approach, assuming a "goal-post" view of targets comes with a price. When the target truly reflects the optimal scenario for an operation, efforts should be made to achieve the target.

Click to view graphs.

Stephanie Rutten, DVM
University of Minnesota
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Legislative Preview
CRP Ethanol Concerns
A group of grain users wrote Secretary of Agriculture Mike Johanns stating their concern that the Administration's farm bill proposal did not allow producers the "option to opt out" of the Conservation Reserve Program (CRP). The groups said, "Without additional acreage being made available to the marketplace to plant those crops most needed by all grain users in the market, not only will U.S. livestock, poultry and food sectors be less competitive, but the president's renewable fuels goals outlined in the State of the Union Address and the Fiscal Year 2008 budget would be in jeopardy."

The administration's farm bill proposal would allow for harvesting of CRP land for biomass. The group stated their concerns that cellulosic ethanol is in the future and will not help with current economic conditions concerning corn. They said, "But we are disappointed to note that the only 'flexibility' announced by the administration for the use of CRP land was for the harvesting of biomass from these 27 million acres. Realistically, this biomass harvest from CRP land does absolutely nothing to relieve potential economic pressures in corn (and other grain) markets in coming years, unless and until cellulosic ethanol becomes technically and economically feasible, and cost-competitive with corn-based ethanol production." Those signing the letter included: American Beverage Association, American Meat Institute, American Feed Industry Association, National Cattlemen's Beef Association, National Chicken Council, National Grain and Feed Association, National Pork Producers Council and North American Millers Association.

Halt USDA's Proposed Canadian Beef Rule -- At a hearing of the Senate Subcommittee on Interstate Commerce, Trade and Tourism, Sen. Byron Dorgan (D-ND) stated his opposition to USDA's proposed rule to allow importation of Canadian beef and cattle under 30 months of age. Dorgan said, "I'm concerned that the USDA appears to be moving forward so quickly with their plan to expand Canadian beef imports, especially in light of the most recent discovery of a Canadian cow infected with BSE (bovine spongiform encephalopathy). I feel bad that the Canadians are having problems, but the fact is we need to take care of our own ranching industry first. The USDA seems to want to run a cattle drive right across the border, but I'm going to keep pushing to make sure this decision is based on sound science, not politics."

Rescind China PNTR -- Senators Byron Dorgan (D-ND), Lindsey Graham (R-SC) and Sherrod Brown (D-OH) have introduced legislation to rescind Permanent Normal Trade Relations (PNTR) for China. The legislation would subject China to an annual review of Most Favored Nation (MFN) trade status. Senator Dorgan said, "Since 2001, the first year China operated with PNTR status, our trade deficit with China ballooned from $83 billion a year to well over $232.5 billion in 2006. It's not difficult to see why. China has engaged in systematic labor abuses, intellectual property theft and piracy, currency manipulation and unfair barriers against U.S. exports. If PNTR status means a country is playing by the rules in international trade, it is absurd to continue to apply that status to China. Congress can - and must - send a clear message that China needs to stop cheating and start trading fairly. Rescinding its PNTR status sends that message." This legislation is not expected to move forward this year. President Bill Clinton advocated PNTR legislation, which became law in 2000.

DOE Announces Cellulosic Grants -- The U.S. Department of Energy (DOE) announced that DOE will invest up to $385 million for six biorefinery projects over the next four years. The biorefineries are expected to produce more than 130 million gallons of cellulosic ethanol per year. Secretary of Energy Samuel Bodman said, "These biorefineries will play a critical role in helping to bring cellulosic ethanol to market, and teaching us how we can produce it in a more cost-effective manner." Companies awarded grants were: Abengoa Bioenergy Biomass of Kansas, LLC of Chesterfield, MO; ALICO, Inc. of LaBelle, FL; BlueFire Ethanol, Inc. of Irvine, CA; Broin Companies of Sioux Falls, SD; Iogen Biorefinery Partners, of Arlington, VA and Range Fuels of Broomfield, CO.

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

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