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Table of Contents
Making Sense of Demand Data
Ethanol's Impact on Food Prices
World Pork Expo Career Center
Making Sense of Demand Data
The status of meat demand in general, and pork demand in particular, is a bit of a mystery at present. Professor Glenn Grimes of the University of Missouri recently released his first demand index computations for 2007 and the numbers were not at all pretty. The index for consumer-level pork demand is down 1.7% for January through March of this year, while choice beef demand was 0.8% lower and broiler demand was down a whopping 6.4%.
Professor Grimes' indexes measure the percentage change in demand vs. the same period one year ago. The demand indexes use per capita pork disappearance (assumed to be consumption), deflated retail prices and an assumed elasticity of demand to estimate the movement of an entire demand curve. (I have presented Professor Grimes' calculated numbers for demand elasticity of -0.75) These numbers do not represent a change in consumption or a change in price, but the relative changes in both variables.
The problem is that Professor Grimes' data, which are theoretically sound and correctly computed, do not square well with what we have seen at other levels of the meat industry this year.
Hog prices and pork cutout values have been substantially higher than one year ago in spite of production that is up 1.6%, year-to-date (YTD). Beef cutouts and fed cattle prices are higher, too, on production that is 1.4% higher, YTD. Wholesale chicken prices have been much higher, though one reason for that is a reduction of output that has been as large as 4.5% and is still 1.5% lower than in 2006.
The first two definitely imply higher demand for hogs and cattle at the producer level and pork and beef at the wholesale level. The last of those does not rule out higher wholesale chicken demand depending on the relative size of the price and consumption changes.
Another way to look at demand is to look at scatter diagrams that plot price-quantity pairs for specific time periods. Figures 1 through 3 show scatter diagrams for the first quarter of 2007 for pork, beef and broilers at the wholesale level. That is, the diagrams plot the deflated cutout values for beef and pork and deflated composite broiler price for broilers against first quarter production. The important thing about all three is that the 2007 observation is at least no closer to the origin of the graph. That means that wholesale demand is at least as good as last year for beef, slightly better for pork and, interestingly, much better for chicken.
Why the difference with the retail level demand indexes?
First, there are substantial time lags for price transmission. Retailers and foodservice operators will "eat" higher wholesale prices for some time before they mark up retail and menu prices. The reason is simple. Their customers don't like price increases and these business people are not interested in making life more difficult. On the other hand, prices are transmitted to the wholesale very quickly and thus would appear in these quarterly graphs.
Second (and you have heard me whine about this before), the retail price data are not very good. We had a system in place for three years that was gathering scanner price data for meats, but it lapsed when the U.S. Senate allowed the mandatory price reporting legislation to lapse in the fall of 2005. That legislation has finally been reauthorized, but USDA has neither issued new price reporting rules nor restarted the scanner price gathering effort. There is talk of getting it going again, so there is hope that we will have better retail data in the future.
Third, and possibly most important, exports have an impact on wholesale prices but not necessarily on retail prices. Exports are up for all three species this year, so this is a major factor.
Of course, the bad part of this story is the position of the 2006 price-quantity observation for pork. It was substantially below the 2004 and 2005 positions and reflects low chicken prices last year and a decline from the big demand surge in 2004 that was driven by high protein, low carbohydrate diets. But 2006 is history and 2007 appears to be off to a much better start. Let's just hope the remaining quarter can maintain that growth trend!
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
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Farm labor requirements have evolved, as farms have gotten bigger. Owners have become employers. Motivating employees to do their work in a manner consistent with the herd's best interest has become a greater challenge.
Different strategies have been used to encourage employees to make the "right" decisions or perform the "right" actions. Possibly the most common strategy is management by "rules." An example could be -- "Cull all Parity 5 or older sows with a born alive average under nine pigs per litter in their last three farrowings." Or, "Feed all newly weaned sows 5-6 lb. of feed with the morning drop, then hand feed 3 lb. more in the afternoon."
The challenge with the rule approach is that it is often designed to address the bottom-performing animals -- and the poorest-performing employees. But the routine use of rules alone runs the risk of failing to teach the underlying principles. Additionally, blanket rules often fail to account for surrounding circumstances.
For example: When herd inventory is high and gilts are plentiful, an aggressive culling program may be required to make room. However, when gilts are scarce, sows that would otherwise be culled should be retained. After all, some pigs are better than no pigs.
Another example: Newly weaned sows should be fed ad libitum, but that does not mean that all sows will eat 8 lb. of feed.
We're all familiar with the phrase -- "Rules are meant to be broken." While we can think of some rules that are useful and imperative (i.e. safety), blanket rules applied across the entire pig population can undermine the greater goals.
Consider a farm with blanket rules for culling. If there are no exceptions to the rule, the farm could be forced to drop its breeding herd inventory.
Similarly, a blanket rule for feeding newly weaned sows could lead to resentment among the employees left to clean out the water troughs each day.
In the end, farm employees either follow the rules or they learn that rules are not to be respected.
I have been in the business long enough to know that some situations and some employees do require rules. Yet, educating employees on the underlying production principles is a source of employee empowerment. In the end, the absence of underlying principles and use of rules alone can be a double-edged sword.
Stephanie Rutten, DVM
University of Minnesota
Editor's Note: For all your agricultural news, markets and commentaries, go to www.farms.com.
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Ethanol's Impact on Food Prices
A new study released this week estimates that increased corn prices, "driven by rapidly expanding" U.S. ethanol production, has increased U.S. retail food prices by $14 billion annually. The study also projected the impact if season-average corn prices increased to $4.42/bu. over a 10-year period ending in 2016, and assuming crude oil prices ranged from $65-70/barrel. Given those assumptions, the impact on the following commodities is projected against the $2/bu. corn prices that existed in mid-2006:
USDA Clears Swine for Processing -- USDA tests confirm that meat from swine fed rations supplemented with pet food scraps containing melamine and related compounds is "safe for human consumption." Thus, USDA will allow swine held on farms to be released and approved for processing. It is estimated that approximately 56,000 swine consumed the feed in question. The hogs are located in California, North Carolina, South Carolina, New York, Kansas, Utah and Illinois.
House Approves Disaster Assistance -- The House of Representatives passed a $3.5 billion agricultural disaster assistance package for producers recovering from weather-related damage in recent years. The package includes assistance for farmers who lost 35% or more of their crop in 2005-2007 and for livestock producers in counties that experienced USDA-designated natural disasters during that time. Producers can apply for a disaster payment for only one of those three years. And, for the first time, only farmers who had insured their crop are eligible for payments. The White House has threatened to veto this disaster bill saying the "generous safety net" of the 2002 farm bill and crop insurance makes the disaster bill "unnecessary and unwarranted."
Farm Bill Moving Forward -- The House Agriculture Committee plans to move forward on the 2007 farm bill beginning next week. The conservation title of the farm bill will be marked up by the House Agriculture subcommittee on Conservation, Credit, Energy, and Research. Also, the House Livestock subcommittee will consider livestock issues next Thursday. The various subcommittees will consider other titles of the farm bill after the Memorial Day recess. Congressman Collin Peterson (D-MN), chairman of the House Agriculture Committee, has indicated he would like the farm bill to be considered by the full House Agriculture Committee beginning the week of June 11.
House-Senate Budget Agreement -- The House and Senate conferees reached an agreement on the FY '08 Budget Resolution. A $20 billion reserve fund for agriculture is created, but requires an offset (increased new revenues or reduction in spending) in other areas. At this time, there is no new money for the farm bill.
Trade Agreement -- The administration and Congressional Democrats reached an agreement that certain labor standards be written into trade agreements. The agreement makes reference to the five International Labor Organization's 1998 declaration of core labor standards, which will be included in the text of trade agreements. This was a key issue for Congressional Democrats. The agreement will let Congress move forward on the Peru and Panama Free Trade Agreements (FTAs). The National Pork Producers Council (NPPC) praised the Bush administration, House Speaker Nancy Pelosi (D-CA), and Congressional leadership for reaching a bipartisan deal to move forward FTAs. NPPC said, "Increasing export markets through international trade agreements is vital to the profitability of U.S. pork producers and we will fight hard to get these pending FTAs approved."
Export Forecast -- USDA is forecasting agricultural exports to reach $78 billion for fiscal year 2007. This will be an increase in exports of $9.3 billion over last year. That would be the fourth consecutive year of record exports. USDA now estimates that U.S. world market share is over 19%.
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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 email@example.com for more information.
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Dale Miller, Editor, National Hog Farmer
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