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March 16, 2007



Table of Contents
Pork Exports More Robust Than Ever
A Little Improvement Can Be Significant
High Feed Costs & Livestock
Help Wanted: QA Veterinarian

Market Preview
Pork Exports More Robust Than Ever
The performance of the U.S. pork industry in terms of pork exports got off to a blistering start for 2007. January pork exports were up 20.8% from one year ago. Shipments to Japan were record large at over 105 million pounds carcass weight equivalent, an increase of nearly 43% from last year! And Japan was not the only market that saw robust growth in January. Shipments to Russia, South Korea and Hong Kong/China grew by 44%, 35% and 72%, respectively, from their January 2006 levels.

The only real disappointment in January was our business with Mexico, which declined by 12.5% from last January. Mexico is our second-largest customer for muscle meats and in total value, but I don't see this decline as a problem at this time. Mexico appears to be a price-sensitive market. Cutout values were about 5% higher, on average, during January of this year, so that might be the reason for the slow start. We will get a good test of that theory when the February data are released in April, as February cutout values were more that 14% higher than last year.

I know I have over-used the word "remarkable" when talking about the industry's export performance, but it is really a most appropriate descriptor. The past three years have seen year-over-year increases of 27%, 22% and 12%; 2006 exports, representing nearly 15% of our total carcass-weight pork production, were 75% larger than 2003, for example. That means the pork from nearly one in every six pigs slaughtered by U.S. packers is shipped to another country. Further, 91.4% of those pigs are born in the United States and 97.4% of them are fed here.

Exports Boost Value
Just what does this mean in terms of dollars and cents? Professor Glenn Grimes at the University of Missouri has answered that question for many years with the data shown in Figure 2. These are the results of asking the question: "What would hog prices have been if production had remained the same and we had not seen a gain in our net export position?"

Many of you will see an apparent problem in that question and say: "Wait a minute, had we not been increasing exports, production would have not stayed the same!" You are absolutely correct. But one of the benefits of increasing exports is the simple fact that they allow for growth. With the U.S. population growing by less than 1% annually, that is an important aspect of the U.S. industry's focus on exports; 96% of the world's people live in some other country. That's a big market. We need to provide opportunities for U.S. pork producers and those who depend on them.

Note that in Professor Grimes' table, I have boldfaced the years that our net export position increased. It is those years that provide a positive impact on hog prices. Years in which our net exports fall actually result in negative price pressure. Also, note that prior to 1995 an "increase in net export position" was, in fact, a decrease in net import position. The U.S. was the world's largest importer of pork in 1987, the first year shown in the table. For the past three years, we have been the world's largest exporter. Remarkable. (There's that word again.)

So, would hog prices have been $43.99/head lower last year had we not increased our net exports by nearly 5% of total production? That is the sum of the gains of the past three years. The answer is "yes," if we had produced the same amount of hogs. That is unlikely, had prices been lower, but it brings us back to exports providing profits and growth opportunities. Both are important.

What's Ahead with Feed Prices?
I don't believe the U.S. industry will be hurt badly with respect to exports as long as the U.S. corn sector can remain an exporter. U.S. grain prices will be lower than world prices as long as we export, even though the magnitude of that advantage for grain buyers has fallen as basis relationships have changed. Should corn exports ever cease, though, interior U.S. prices will go above world prices and our cost advantage will vanish. Then our entire meat export position becomes vulnerable.

Will that happen? It depends on how many of our crop acres we are willing to plant to corn and the job that seed companies, input suppliers and corn producers do in increasing average yields. And it depends upon time. All of those factors will eventually respond to increase the amount of corn available in the United States, but getting through the next 2-3 years may still be very painful for U.S. hog producers.




Click to view graphs.

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



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Production Preview
A Little Improvement Can Be Significant
Opportunity cost concepts and their use can be valuable in recognizing opportunities left on the table in a typical production and marketing situation.

Most farms do not describe their ideal outcome, then measure against it. John Deen, DVM, at the University of Minnesota, introduced the concept of managing by specification vs. managing by the averages.

In managing by specification, we must define the specifications we are naming as first and second quality, for example, and measure against our actual outcomes to see how the many processes utilized in producing market animals have performed. In a typical system, the building closeout information might be used to judge the adequacy of performance by looking at the average outcome for feed efficiency, days to market, percent mortality, etc.

Very few systems first specify the outcome they want to achieve in a finishing process. Even fewer are able to measure the outcome to use as a comparison and an improvement tool. Measurement is relegated to average outcome of the group.

If you specify the outcome goal as simply 270-290 lb. (live weight) animals delivered to the packer within a 110-125 day window (nursery through finishing), most kill sheets do not allow you to fully understand your outcome since most do not provide individual animal outcomes.

I recently examined the sale of 5,000 market hogs using data that allowed me to see individual carcass outcomes.

The average weight of these sequentially marketed animals was 278 lb., with a standard deviation of 23.5 lb. The target most farms would examine is the average weight, even though we know the optimal profit outcome encompasses a lot more than weight. However, looking at weight alone, we know that packers discourage lightweight and heavyweight animals. Usually, they also measure some carcass quality characteristics to arrive at the final price.

Let's assume, for purposes of illustration, that your ideal outcome in the finishing process is a 270-280-lb. animal free of any quality downgrades, such as trim loss.

Using actual data on the 5,000 head examining weight alone, 12% (about 600) of the animals, which averaged 278 lb., were actually marketed in the target range of 270-280 lb. Looking at concentric rings of the target, we find that 39% (about 1,950) of the animals were marketed between 265-290 lb. Widening further, we see 71% (about 3,550) of the animals landed between 250-300 lb. If we assume that animals outside of this range were discounted because of weight, we have 1,450 animals subjected to various levels of sort loss. This is not an unusual situation for many farms.

We assume the sort loss function for this packer is: below 240 lb. (-15%), between 240-250 lb. (-5%), above 290 lb, but less than 301 lb. (-10%) and above 301 lb. (-15%). If we assume a base market price of $50/cwt. (live), and the sort loss scheme above, the average price received on 5,000 head (without considering quality variables like lean and muscling etc.) is $47.86/cwt. for a total revenue opportunity loss of $29,756 -- roughly $5.95/head, on average.

If the finishing manager is able to reduce the standard deviation a mere 5 lb. (from 23.5 lb. to 18 lb.), we can calculate the value of narrowing our outcome to specification. Using simulation techniques and drawing 5,000 animals from a normal distribution of a 278-lb. average, with an 18-lb. standard deviation, the revenue loss can be reduced to $21,406 for an average base price of $48.46. This example shows the obvious value left on the table.

Dr. Dennis DiPietre
Editor's Note: DiPietre is an independent consultant from Columbia, MO. For additional agricultural news, markets and commentaries, go to www.farms.com.



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Legislative Preview
High Feed Costs & Livestock
The House Agriculture Subcommittee on Livestock, Dairy and Poultry recently held a hearing to review the impact of feed costs on the livestock industry. USDA testified that by 2006, an estimated 5 billion gallons of ethanol were produced using about 20% of the 2006 corn harvest. By 2010-2011, approximately 4 billion bushels of corn will be used to produce 11.5 billion gallons of ethanol, using 30% of U.S. corn production. This latter projection assumes additional corn acres, higher per acre yields, and increased efficiency of ethanol production. The National Pork Producers Council (NPPC) cited their growing concerns about corn availability. NPPC said, "U.S. pork producers support the development and use of alternative and renewable fuels as a way to reduce America's dependence on foreign oil, but we continue to have the jitters over the rapid expansion of the corn-based ethanol industry and the unintended consequences it is having on the U.S. livestock industry. We have concerns about the availability of corn to feed our pigs." Some suggestions at the hearing included: increase federal investment in dried distiller's grain research that could help producers adjust feeding regimens to include the byproduct of ethanol production; allowing the U.S. ethanol tariff to expire as scheduled on Dec. 31, 2008 to allow for additional imported ethanol; and, promote alternative energy-sourced form cellulosic materials, methane or renewable diesel.

Manure is Not Hazardous -- Senators Pete Domenici (R-NM) and Blanche Lincoln (D-AR) and Congressmen Ralph Hall (R-TX) and Collin Peterson (D-MN) have introduced legislation, the "Agricultural Protection and Prosperity Act of 2007," to clarify that livestock manure is not classified as a hazardous waste under Superfund laws. Senator Lincoln said, "Farmers and ranchers have always been responsible stewards of the land and make great strides to preserve a healthy environment for food production, as well as for their families and communities. There is a growing understanding in this country, however, that without the clarification provided by our legislation, requirements and liability under CERCLA (Comprehensive Environmental Response, Compensation and Liability Act) could be unfairly applied to America's farmers and ranchers both large and small."

CRP Acres -- USDA announced that between 2007-2010, 4.6 million acres will exit the Conservation Reserve Program (CRP). This is the result of the recent opportunity for CRP participants to re-enroll or extend their contracts. Approximately 1.4 million acres exiting the program are located in major corn-producing states.

CAFO Tax Credits -- Congressman Adrian Smith (R-NE) has introduced legislation (H.R. 1217) that would provide owners of Concentrated Animal Feeding Operations (CAFOs) with tax incentives for complying with new environmental regulations. Congressman Smith said, "This legislation will provide some tax relief to producers who are working to keep the environment clean."

OIE Risk Recommendation -- The World Organization for Animal Health's (OIE) Scientific Commission has endorsed the recommendation of an OIE expert panel that the United States be classified as "controlled risk" for bovine spongiform encephalopathy (BSE). Dr. Ron DeHaven, USDA administrator for Animal and Plant Health Inspection Service (APHIS), said, "The controlled risk classification recognizes that OIE-recommended, science-based mitigation measures are in place to effectively manage any possible risk of BSE in the cattle population. This recommendation provides strong support that U.S. regulatory controls are effective and that U.S cattle and products from cattle of all ages can be safely traded in accordance with international guidelines, due to our interlocking safeguards." OIE's General Assembly will vote on the recommendation in May.

User Fees -- Over 35 producer and industry groups have written Congress expressing their opposition to the administration's proposal to implement user fees for meat, poultry, and egg products inspection programs. The groups said, "The food safety tax proposal would also put meat, poultry and egg products at a competitive disadvantage in the domestic and international marketplace, compared with other food and imported products not subject to such a tax. Farmers, producers and processors in the meat, poultry and egg sector continuously face rising production costs and unpredictable export markets."

Ethanol Pipeline Study -- Senators Tom Harkin (D-IA) and Dick Lugar (R-IN) have introduced legislation that would require the U.S. Department of Energy to study the feasibility of transporting ethanol by pipeline from the Midwest to the East and West coasts. Harkin said, "The most promising liquid fuel alternative to conventional gasoline today is ethanol. We must do all that we can to reduce our dependence on oil using sources that will boost the rural economy and improve environmental quality. As we promote these ideas, however, we have to take into account the full range of infrastructure issues that broader ethanol use entails. The rapid growth of ethanol production and use necessitates the very near-term study of transporting ethanol by pipeline."

Budget Resolution & Agriculture -- The Senate Budget Committee began work this week on the budget resolution. Senator Kent Conrad (D-ND), chairman of the committee, is proposing $15 billion in new agricultural spending over five years, if offset. With numerous requests for additional farm bill spending for specialty crops, conservation and environmental programs, cellulosic research, energy, permanent disaster aid program, food and nutrition, etc., it will be very difficult for the House and Senate Agriculture Committees to determine what offsets will be used to be able to access the proposed $15 billion in new spending.

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



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Help Wanted
Help Wanted: QA Veterinarian


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This position is part of a group of Team Members who are committed to supplying cost competitive, high quality pork by taking care of people, achieving operational and environmental excellence, managing risks and exceeding customer expectations in a workplace that provides for individual dignity and respect. Click here for more information.
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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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