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March 9, 2007



Table of Contents
Hog-Corn Ratio Revisited
The Real Value of Cull Sows
25% of Packer's Daily Kill from Spot Market

Market Preview
Hog-Corn Ratio Revisited
As we contemplate the impact of high corn prices on the U.S. hog sector, it behooves us to revisit an old friend - the hog-corn price ratio.

This ratio, computed simply as the price of hogs per hundred pounds live weight divided by the price of corn per bushel, has long been an indicator of pork producers' profitability and, thus, a predictor of output 12 to 24 months hence. It was quite dependable in the days when a key decision was whether to sell grain or "walk it off the farm" in the form of hogs or fed cattle. As the livestock industry has changed, there has been a lot of speculation that the ratio simply isn't as useful as it once was.

Figure 1 shows the hog-corn ratio (computed using Iowa-Minnesota live hog prices and Omaha cash corn) and an eight-week average of year-over-year percentage change in pork production. The eight-week average is used to smooth the data a bit and make the graph much easier to read and use.

We can see the lead-lag relationship of these two measures quite clearly in the early years of this graph. A high hog-corn ratio in late 1990 led to a production surge in mid- to late-1992. The resulting low hog-corn ratio of 1992 led to a production cutback in late 1993.

An obvious exception to this relationship occurred in 1995 through 1998, when very low hog-corn ratio levels of 1995-96 appeared to lead to the surge in production that drove prices to record lows in 1998.

The presence of several confounding factors underscores the fact that no "rule of thumb" should be used blindly.

First, the low hog-corn price ratios of 1995 and 1996 were caused by record high corn prices driven by short supplies and high worldwide utilization. Hog prices were very good in 1996 and it appears that pork producers were not swayed by the low hog-corn ratio because they knew it was temporary. They apparently responded more to price signals than to profit signals in this instance -- perhaps a harbinger of things to come.

Second, the technological shift from small, single-site hog farms to much larger, multiple-site operations was in full swing in the mid-'90s. The rate at which this technology was adopted was hastened by a "hurry-up" mentality regarding both market share and regulations. Many producers believed that they had to act fast to stake out a place in this rapidly changing industry and to build farms before regulations became onerous and limiting.

Since 2000, the hog-corn ratio has reached record high levels and challenged the record low by dropping below 8 in September 2002. And yet, the year-over-year change in production has never been lower than -2.4% in September 2001 and never higher than +6.8% in July 2004. That is much smaller than the -10 to +15 range of years past.

And now we find ourselves with a ratio of 12 -- well below the 18 to 20 range that has traditionally indicated a shift from expansion to reduction or vice versa. What will be producers' responses?

I think we must first consider where the ratio might be over the course of 2007. Current futures prices show ratios of 16.4 to 18.3 for the rest of 2007. Those levels have historically signaled slow and small output reductions. The last time we saw ratios in this range was in 2003. Those led to very small cutbacks in only a few weeks in 2004 and 2005. Corn comprises only about 35% of total costs today and therefore corn costs are simply not the output driver they once were.

On the other hand, these ratios in the 16 to 18 ranges mean more to producers than the last low ones driven by high corn prices in 1995-96, because these corn prices are not supply driven. Lean hog futures are near record highs and yet we only have a hog-corn ratio of 16 to 18? How promising can that be?




Click to view graphs.

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



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Production Preview
The Real Value of Cull Sows
Death loss and culling are realities for every sow unit. However, it can be difficult to quantify the cost of prematurely removing a sow from the breeding herd.

The simplest description of the cost of a premature cull is the difference between the cost of the replacement female and the salvage value of the culled.

This approach misses out on a few important realities, however. First, the most productive parities for sows tend to be the middle parities (Parity 3-5). When sows are removed prematurely, the benefits associated with age are lost.

Second, and arguably easier to overlook, is the role of the Parity 1 female on offspring performance. On average, piglets born to first parity litters have lower birth weights than those born to older sows. Additionally, piglets weaned from Parity 1 litters are at higher risk for mortality or being underweight at the end of the nursery phase. Simply stated, a herd operating at an accelerated replacement rate produces more at-risk piglets.

Recently, a dairyman shared his perspective on the valuation of a cow. Although the economics between cows and sows differ markedly, the cow-value approach merits some discussion.

To assess the cost of premature culling from a cow-value perspective, the herdsman assumes that every cow entering the herd is expected to have average production and an average lifespan. Her value at the time of entry is her purchase price and her value at the time of exit is a salvage value, adjusted for mortality. If each lactation were assumed to be of equal value, then the loss in value that occurs at each parity would be the difference between purchase and salvage values divided by the average number of lactations.

Returning to pigs, let's consider the cost of premature culling using a simple model for sow value. We'll use the following assumptions:
  • The average cost of a replacement female delivered to the herd is $225.

  • The average salvage value of a cull sow is $100.

  • The average parity at removal is 4.

  • The herd's mortality rate is 8%; adjusting for annual mortality, the end value for the average sow would be $92.
Using these simple assumptions, entry level minus adjusted cull value is $133 ($225 - $92); we could then extrapolate that the average sow value/litter is $33.25 ($133/4 parities). The average Parity 1 sow is valued at $191.75 ($225 - $33.25); the Parity 2 sow is valued at $158.50; the Parity 3 sow is valued at $125.25; and, the Parity 4 sow value is that of adjusted salvage.

One could argue that use of a sow-value-type model does not change the financial realities of sow herd removal and replacement. However, the perspective may change at the barn level if we begin to appreciate individual sows as having a value greater than merely that of salvage.

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



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Legislative Preview
25% of Packer's Daily Kill from Spot Market
Senators Chuck Grassley (R-IA) and Russ Feingold (D-WI) have introduced the "Transparency for Independent Livestock Producers Act." This legislation would require that 25% of a packer's daily kill come from the spot market. Senator Grassley said, "We know what's going on. When the price is high, the packers kill their own livestock and when the price is low the packers fill their slots with cheap livestock. This essentially cuts out the independent producer. Our legislation would help give livestock producers a fair shake at the farm gate."

NPPC Calls for End of Ethanol Subsidies -- The growing concern of pork producers over the rapid expansion of the ethanol industry and the effects on the pork industry was addressed at the National Pork Producers Council's (NPPC) annual meeting last week. Producer delegates adopted the following resolutions:
  • Support allowing the 51¢/gal. ethanol blender's tax credit and the 54¢/gal. tariff on imported ethanol to expire. The blender's credit is set to expire Dec. 31, 2010; the import tariff Dec. 31, 2008.

  • Support development of a countercyclical blender's credit system based on the price of oil - should the blender's credit be extended.

  • Support the increased use of bio-diesel as a renewable fuel source.

  • Will seek and support incentives for capturing and digesting methane from swine farms as an alternative energy source.

  • Urge the federal government to appropriate funds for research on the use of biofuels co-products for swine feed rations and for research on swine utilization of dried distiller's grains with solubles (DDGS) and their impact on meat quality and animal health.

  • Support the findings of a Center for Agricultural and Rural Development (CARD) study on the impact of corn-based ethanol production on the livestock industry and asks that they be considered during formulation of the 2007 Farm Bill.

  • Support the incremental early release - without penalty - by USDA of Conservation Reserve Program acres back into crop production.

Earlier COOL -- Senator Craig Thomas (R-WY) and Congressman Denny Rehberg (R-MT) have introduced legislation that would move the implementation date for mandatory Country of Origin Labeling (COOL) to Sept. 30, 2007. Current law requires implementation on Sept. 30, 2008.

Seafood COOL Disappoints -- The Food Marketing Institute (FMI) in a statement indicated that mandatory country of origin labeling (COOL) for seafood is failing to deliver the benefits as promised. According to FMI, COOL has not increased sales of U.S. seafood and the supermarket industry's cost to comply with the law is up to "10 times higher" than USDA's estimate. FMI said, "Proponents of mandatory COOL are nonetheless urging Congress to implement the law for producer, meat and peanuts sooner than Sept. 30, 2008. This move would be extremely unwise given the industry's two and one-half years of experience labeling seafood under this law."

U.S.-Mexico Ag Trade Forum Reestablished -- USDA and Mexican officials have signed a Memorandum of Understanding to reestablish the U.S.-Mexico Consultative Committee on Agriculture (CCA). This committee will be used as a forum for important trade issues related to market access, sanitary and phytosanitary measures, biotechnology and animal and plant health. Secretary of Agriculture Mike Johanns said, "The CCA has proven to be an important venue for addressing and resolving issues that arise between our countries. It provides a mechanism to work out problems before they become larger, more formal disputes. This renewed CCA will help maintain the close working relationships that have developed between our leaders and trade facilitators."

Record Ag Exports -- USDA is estimating that agricultural exports will reach a record $78 billion for fiscal year 2007. Secretary of Agriculture Mike Johanns explained, "Two-thirds of this increase is due to the grain and oilseed sectors. Several trends are driving the rise in export value and keeping U.S. competitiveness strong, such as demand for corn due to increased ethanol production, reduced competition for wheat, and only moderate growth in South American oilseed production." Livestock and poultry product exports are expected to increase $1.2 billion.

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



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National Hog Farmer and the National Pork Producers Council are excited to announce the 2nd Annual Career Center at this year's World Pork Expo. Career Center will be held June 7 & 8 (9:00 a.m.- 3:00 p.m.) at the Iowa State Fairgrounds in Des Moines, IA. You will have the opportunity to meet representatives from pork production companies to learn about career opportunities they currently have available. There will also be representatives from colleges that offer swine production programs for those interested in pursuing more education.

The May issue of National Hog Farmer will feature the companies who are participating in this Career Center. If you represent a company that would like to participate and/or have questions, please e-mail Lisa Peterson at lisa.peterson@penton.com for more information.

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