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April 27, 2007



Table of Contents
Thinking Through Packer Concentration
April Ink is Black
Biogas Legislation for Animal Agriculture
World Pork Expo Career Center

Market Preview
Thinking Through Packer Concentration
One of the joys of fatherhood has been the opportunity to coach my children's sports teams. I don't know if they have learned much, but I sure have!

Along with the enjoyment comes a good dose of frustration from time to time. None more than getting a young basketball team to apply "what we taught you in practice" to making good decisions on the fly when opportunities present themselves in a real game.

It goes something like this - we teach player #1 to dribble to point A, then pass the ball to player #2, who is coming off a screen set by player #3. To their credit, the players try to do exactly what we taught them in spite of three defenders standing in front of player #2 while our player #5 suffers from terminal loneliness right under the basket! This is when I or another coach calls a timeout to tell them: "Kids, we appreciate your following instructions so well, but you also have to observe and think!"

Such is also the case with economic matters. Regardless of how well one understands theory or knows the quantitative methods of estimating coefficients and measuring impacts, there is no substitute for simply observing and thinking. The renewed debate over industry structure and market competition brings this to my attention, as there appears to be a dearth of both on several fronts. Some of it is due to ignorance, but much of it appears to be due to ideology.

Concentration, defined as a condition in which only a few companies hold a high aggregate share of a given business, has been a hot issue in agriculture for many years. That's a bit ironic, since agriculture is not unusually concentrated relative to other industries in our economy. Still it's understandable, since agriculture was once the poster child for the economic ideal called perfect competition that involves many buyers and sellers and homogenous products.

Packer Concentration
The four-firm concentration ratio (i.e. the sum of the market shares held by the largest four firms, called CR4) for pork packing has risen in recent years, jumping from its 1996 to 2002 range of 54-57, to roughly 64 in 2003, when Smithfield bought Farmland Foods. CR4 has remained near 63 since that time, but the Premium Standard Farms (PSF) merger would push it to just over 65.

Note, however, that the last big shift in CR4 (from the mid-50s to the low-60s) was in 2003. What has been the profit situation in the pork industry since then? Iowa State University's (ISU) returns estimates for pork production systems turned positive in February 2004 and remained positive through January 2007. Under ISU's new production assumptions, returns are still positive. This is the longest period of profits in the ISU estimates' history and it occurred just after a large jump in packer concentration.

So, just how correlated is packing CR4 and producer profits? This is just one instance -- but the answer is "not very." The lesson here, for people willing to think about it, is that while concentration can lead to problems caused by a limited number of market participants being able to more accurately anticipate and counteract the actions of competitors, it is not the end-all for measuring competition level. The behavior of firms is far more important than their ownership structure.

Smithfield-PSF Merger
As an example, let's consider the case of the Smithfield-PSF merger and its impact on hog markets. Smithfield Foods is buying a company that was never a player in the Midwest hog markets because it bought no hogs to speak of. I say, "to speak of" because I can't say with 100% certainty that they never bought any hogs. If they did, it is safe to say that the number was insignificant.

How will making a company that was never in the midwestern hog market affect the midwestern hog market by its absence?

In addition, PSF's Clinton, NC, plant would join Smithfield. But even that would have no effect on competition for hogs, since a North Carolina market does not determine North Carolina hog prices. Virtually all of their prices are formulated off of the Corn Belt markets.

Theory tells us that North Carolina hog prices should equal the next closest hog-deficit area (most likely Indiana), minus the transportation costs. Eastern seaboard packers must pay only enough for hogs to keep producers from putting them on a truck to the next closest deficit market. Market hog value data from the National Pork Board indicates that to be the case, actually.

I don't see that merging PSF-Clinton into Smithfield Foods will change that regional price relationship at all.

Could the merger affect the level of competition for meat products? It is possible, especially in eastern markets where Smithfield and PSF have competed. But even there the merged company is not immune to competition from Hormel, Tyson, Cargill, Hatfield, Swift, Indiana Packers and all the other national pork marketers, not to mention beef, chicken and turkey.

Impact on Contract Finishing
The one area that I see this merger could have an effect on competition is in the purchase of contract hog growing services in North Carolina and surrounding states. There are growers in those areas that now have one less bidder for the use of their buildings, which, obviously, are not mobile. That could be a problem, especially since some of those growers had made an explicit decision to not work with Smithfield in the past. This aspect of the merger, to me, deserves careful scrutiny. Should the merger be approved, as I expect it will, this area deserves constant monitoring in future years.

Let's be careful not to automatically adopt old adages in judging the merits of change. Our basketball offense was a good one, but it was not nearly as useful as having players pay attention to the facts and making adjustments in a fluid, ongoing game. That sounds like a good approach to, and appropriate description of, today's hog and pork business, doesn't it?




Click to view graphs.

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



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Financial Preview
April Ink is Black
I think (or hope) that most swine producers will be profitable for the month of April. Market prices have improved and corn prices have trended lower. After losing $5-10/head for the first quarter of 2007, the trend appears to have reversed, allowing many producers to make $5-$10/head head this month.

Part of the reason for this price improvement is a reduction in slaughter numbers. I was starting to worry that slaughter numbers wouldn't decline, but it seems after Easter we have found the hole. In past columns, I reported that many systems were struggling with death losses associated with porcine circovirus-associated disease (PCVAD). These pig flows are now starting to hit market weights and we have seen daily slaughter numbers running lower than a month ago and also lower than a year ago. It appears more producers are able to get the vaccine and we are starting to see mortality rates improve. Still, I think it will take a while to see the true impact on the industry.

Going to the Hill -- I am part of the Pork Alliance group that recently spent two days in Washington, DC. Part of our time was spent lobbying members of Congress about issues that affect the pork industry. I have done this before, but each time I come away with a sincere appreciation for the work that the National Pork Producers Council (NPPC) does for the pork industry. The issues facing our industry are real and the NPPC is there speaking on our behalf. They do a tremendous job.

A few issues being sent to the House and Senate that you need to be aware of:
  • Antibiotic ban (Senate Resolution 549 and House Resolution 962) -- This bill would ban the use of antibiotics for livestock.
  • Fatigued hogs (Senate Resolution 394 and House Resolution 661) -- This bill would ban fatigued hogs from the food supply.
  • House Resolution 1726 -- This bill would mandate on-farm food and animal production practices, including a ban on the use of sow stalls.
As pork industry representatives, we all recognize producers' moral obligation to provide for the well-being of animals. All of us must help educate the public and our politicians about the humane and compassionate practices that pork producers use in raising hogs. I am urging all of you to become more politically active in your communities to help educate the public about the tremendous job the U.S. pork industry does. You can no longer sit quietly and expect everything to work out. The U.S. agricultural industry represents less than 2% of our population, but we produce the safest and most economical food supply in the world. We must tell our story. We must show them the facts. Our future depends on it.

Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com



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Legislative Preview
Biogas Legislation for Animal Agriculture
Senators Ben Nelson (D-NE) and Larry Craig (R-ID) have introduced the "Biogas Production Incentives Act of 2007," which could provide renewable energy sources produced from animal wastes. The legislation promotes the development of biogas through tax incentives and guaranteed loans for small businesses. Biogas is a natural gas substitute created by the anaerobic digestion of animal wastes. The legislation proposes:
  • Providing biogas producers with a tax credit of $4.27 for every million British thermal units (mmBtu) of biogas produced;

  • Providing loans, loan guarantees and/or grants for the multi-farm collection and transportation of qualified energy feedstock from smaller livestock operations to a qualified facility, or for the purchase or construction of equipment or facilities for collection and transportation;

  • Creating a counter-cyclical safety net for biogas producers by providing payment from Commodity Credit Corporation funds to qualified biogas producers only when the annual average daily prices of natural gas falls below a certain level.
Senator Nelson said, "The technology to break down animal wastes to create biogas already exists, but it needs encouragement from the federal government to become a commercially-viable alternative to natural gas. This new energy source would benefit rural communities and the environment while lessening our dependence on fossil fuels." Senator Craig added, "Creating another market for a commodity is helpful, but, as we have seen with corn-based ethanol, it can have negative consequences. However, creating a product out of waste is a groundbreaking opportunity to assist our livestock farmers. You create a new market, help control waste, keep our environment clean, and create a new revenue stream for farmers."

AMI Outlines Ethanol Policy on Animal Agriculture -- The American Meat Institute (AMI) has asked Congress and the administration to consider tax incentives and other legislative initiatives to support "energy-based" opportunities for animal agriculture because of the increased demands on corn from the ethanol industry. AMI urged Congress to take action in four areas:
  • Expand research in ethanol byproduct safety, quality, and usability and renewable energy technologies, such as renewable diesel, biogas and cellulosic.

  • Establish equity of incentives for all renewable energy including renewable diesel and methane conversion.

  • Support a working lands conservation program to encourage environmentally friendly feedstuffs production.

  • Expose consumers to more renewable fuels by allowing the ethanol tariff to expire.
NPPC Farm Bill Priorities -- The National Pork Producers Council (NPPC) testified before the Senate Agriculture Committee, outlining its position on various issues concerning the 2007 farm bill. NPPC asked Congress to:
  • "Allow to expire the 51¢/gallon ethanol blender's tax credit and the 54¢ tariff on imported ethanol to help ease corn supply pressures that are growing because of the rapid rise in ethanol production.

  • "Dismantle regulatory hurdles to allow pork producers to incorporate conservation planning into their operations.

  • "Increase Environmental Quality Incentives Program (EQIP) funding allocations to pork producers so that they can raise the level of their environmental performance and address critical conservation and environmental needs on their operations.

  • "Oppose a ban on non-ambulatory or fatigued hogs from entering the food supply.

  • "Oppose a ban on the use in livestock of certain antibiotics.

  • "Oppose a ban on the use of sow stalls on farms that produce food animals that are purchased by the federal government.

  • "Oppose efforts to eliminate or mandate livestock marketing or pricing mechanisms.

  • "Support increases in funding for the Market Access Program and the Foreign Market Development Program to boost pork exports.

  • "Continue funding for government research related to the pork industry, including research on swine genetics, animal vaccines and animal productivity."
Water Resources Bill Passes House -- The House of Representatives passed the Water Resources Development Act (WRDA), which provides $3.5 billion for modernization of the locks and dams on the Upper Mississippi River and the Illinois River. The National Corn Growers Association said, "An upgraded system is urgently needed to ensure U.S. farmers can efficiently move their crops to market and stay competitive in the international marketplace. The bill also would create a new ecosystem restoration program for the Upper Mississippi River Basin that would significantly enhance the natural resources of the region." This legislation has been a priority of U.S. agriculture.

Farm Bill Language to Congress -- Secretary of Agriculture Mike Johanns announced that USDA has sent to Congress its legislative language for the credit and conservation titles of the farm bill. Next week, USDA will send the legislative language for the energy and rural development titles. The information is available on USDA's website www.usda.gov.

U.S. Beef Trade to Japan -- Secretary of Agriculture Mike Johanns announced an agreement has been reached on steps to expand U.S. beef trade with Japan. USDA has approved Japan's request to conduct additional audits of U.S. beef processing plants. According to USDA, once the verification process is complete, Japan will discontinue its requirement of inspecting 100% of the boxes of beef shipped from U.S. plants. Johanns said, "The United States expects Japan, as well as all of our trading partners, to implement import requirements for U.S. beef and beef products as soon as possible that are based on science and consistent with international guidelines, including those of the World Organization for Animal Health (OIE)."

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



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Career Center
World Pork Expo Career Center
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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