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June 1, 2007



Table of Contents
Packers' Status Remains Unsettled
Are We Evaluating Employee Performance Fairly?
Disaster Assistance Approved
World Pork Expo Career Center

Market Preview
Packers' Status Remains Unsettled
It was a tumultuous week for the North American pork industry's packers. The culmination of the Swift & Company derby and the closure of the Mitchell's plant in Saskatoon (owned by Maple Leaf) do not mark the end of change, however. They merely serve as signposts on the path that the U.S. and Canadian pork sectors will take to an always-uncertain future.

If you are a horse racing fan, you were likely thrilled by the charge that Street Sense made from 19th on the Churchill Downs backstretch to win the Kentucky Derby by two lengths a few weeks ago. Likewise, the stretch run by Curlin to run down the Derby winner at the Preakness was something to behold.

Neither of those charges from the back of the pack have anything on the upset win by JSB, S.A., South America's largest beef processor, in the race to acquire Swift. JSB's parent company, J&F Participações, purchased the third-largest U.S. processor of both beef and pork for a reported $225 million in cash and the assumption of $1.16 billion in debt. The acquisition makes JSB the world's-largest beef producer and gives them large capabilities in both grass-fed and grain-fed beef.

Here are what I see as key issues regarding this acquisition:
  • It leaves Smithfield Foods in somewhat of a quandary regarding the U.S. beef business. They have announced plans to build a major beef slaughter facility in the Oklahoma panhandle and will probably move forward with those plans now that their bid for Swift has failed. There is little indication that JSB will sell any beef assets, though at least one analyst colleague thinks JSB may have really been more interested in Swift's Australian operations. Still, any sale of a beef plant is a long shot, in my opinion, and a new Smithfield plant will add capacity to a sector that already has too much. That's not a good harbinger for beef slaughter firms, especially since Smithfield has more than enough fed cattle available from their joint venture with Conti to feed a new plant. That means Smithfield will be buying corn and hay and selling beef while their competitors will, for the most part, be buying cattle and selling beef in a world in which most of Smithfield's 1.7 to 1.9 million head/year are unavailable. That should mean fed cattle prices would be higher.

  • While the dust may have settled a bit on the Swift pork business, it may yet be in play. JSB made clear that it is not a "pork company" and said it would review the pork plants in six months. Whether they will be sold will likely depend on whether they are contributing any cash to service the acquired debt. The pork plants may well be contributing more cash than any of the other assets! I still think it will be difficult for Smithfield to buy the two Midwestern Swift plants (Marshalltown, IA and Worthington, MN) on antitrust grounds, but what about one of them? That's a different ballgame. These two plants are considered by industry insiders to be among the most efficient kill-cut operations in the country, so there will be plenty of interest should JSB decide to unload them. Both Cargill and Seaboard were reported to be suitors (partnered with Smithfield and National Beef, respectively) on this go-round and I can see little that would stop them from doing the same in the future -- if the price is right.

  • I was never terribly concerned about the impacts that a Cargill or Seaboard acquisition of the Swift plants might have on competition in the hog or pork markets, but Swift's remaining an independent company is the best outcome from a competitive markets standpoint. It is difficult to quantify by how much this is the "best solution," but it no doubt is, provided that Swift's pork business remains viable and there is not much concern about that.

  • Finally, this acquisition drives home the point I made last week about exchange rates. One year ago this week, the Brazilian real was worth $0.4355 US. It is worth $0.5144 this week, meaning that in terms of reals, the purchase cost JSB 18% less than it would have cost them one year ago. That's assuming, of course, that the price in U.S. dollars would have been the same. In addition, this purchase gives JSB the ability to sell beef from the United States or Australia to any market where the U.S. or Australian dollar will give it an advantage over the real. That difference is substantial at present since the U.S. dollar is lower than the real vs. most world currencies.
I'll provide some analysis of the Mitchell's closure in next week's North American Preview.

Tracking Feed Costs
Feed costs have been inching higher, again, driven by increases in soybean meal and corn prices. Cash meal is up more than $20/ton since April and cash corn has gained about 30¢/bu. Chicago Board of Trade (CBOT) soybean meal and corn futures have risen by about the same amounts. My feed cost index (see Figure 1) has not reached the high levels we saw in March, but it is inching upward again.

The market's biggest concern right now appears to be soybean meal. This week's Crop Progress Report shows corn planting and emergence and soybean planting and emergence all higher than both year-ago levels and the five-year averages. So what's the concern?

There are really two -- weather and Brazil.

As we have pointed out many times, this is a big-time weather market and prices will swing with it at least until we get some clear idea of yields in July and August. The issue with Brazil mainly affects soybeans and is directly tied to the real. While lower U.S. soybean acres will reduce record-high soybean stocks and should spell opportunity for Brazil's soybean growers, the stronger real will make them less competitive in world markets and depress domestic soybean prices. Which of those forces will win? We'll probably have to wait for Brazil's planting season this fall to determine the answer.




Click to view graphs.

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



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Production Preview
Are We Evaluating Employee Performance Fairly?
Many of us have grown up with systems that measure our performance -- homework and tests in school, for example. When it comes to our work, many of us are accustomed to some form of performance evaluation, too.

Just like the grading of an essay, the challenge with many of these performance measures is that they are subjective. That is, they inadvertently incorporate the bias of the grader/rater/evaluator.

In an attempt to reduce the level of subjectivity in performance evaluations, farm owners have turned to using production numbers. After all, shouldn't the farm's numbers be a good measure of the manager's performance? But which numbers really matter and which numbers are under the farm manager's control?

Arguably, some herds have good productivity in spite of their management, not because of it. Similarly, not every production-related measure is under the manager's control. Gilt availability is one such example; semen sourcing is another.

Another challenge that our industry faces is recordkeeping systems that largely separate production from financial records. We can recognize managers for producing weaned pigs at the lowest cost. And while one might think that the lowest weaned-pig cost reflects the best sow efficiency, one might also find it being achieved by shorting the farm (and farm employees) on equipment, maintenance and supplies.

So, which numbers are really under the farm manager's control? Inventory is one such measure. The farm manager can control the rate of sow removal according to the rate of gilt entry. Employee turnover may be another measure, as stable farm crews often produce predictable results in an efficient manner. And the ability of the farm to consistently produce the required number of weaned pigs from a designated sow inventory could be a third.

I would argue that this last number is also a reflection of the farm's design. That is, the farm's expectation for weaned pig production needs to be realistic, given the herd's size and genetic potential.

All too often we raise performance targets/expectations for herds that don't measure up. But, unless we make changes to the system, why should our expectations change? Without question, people can make a big difference. But even the best people in a flawed system generate flawed results. Maybe the most effective performance evaluation would be an objective evaluation of a herd or system's true capability.

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
Disaster Assistance Approved
President George Bush signed the Iraq supplemental appropriations bill that included a $3 billion agriculture disaster assistance program. The program would provide assistance to farmers and ranchers nationwide who experienced serious losses in 2005-2007. According to the House Agriculture Committee, the quantity loss threshold for eligibility is 35% and the payment rate is set at 42% of the established crop insurance price. Only producers with crop insurance coverage or who signed up for the Non-Insured Assistance Program would be eligible for assistance. The 95% crop value cap and deduction for crop insurance indemnities would be in place. The bill includes a Livestock Compensation Program (LCP), which provides benefits for producers in designated disaster counties for their added costs of procuring livestock feed in 2005, 2006 or 2007 (up to Feb. 28, 2007). The payment rate is 61% of the payment made under the LCP announced in the Federal Register notice dated Feb. 12, 2007. Eligible livestock under that announcement are: adult or non-adult dairy cattle, beef cattle, buffalo, beefalo, equine, poultry, elk, reindeer, sheep, goats, swine, deer, catfish and other livestock the Secretary may designate. Also, a Livestock Indemnity Program (LIP) would be available to cover livestock deaths caused by a natural disaster or related condition that occurred in 2005, 2006 or 2007 (up to Feb. 28, 2007), including losses due to hurricanes, floods, wildfires, blizzards and anthrax. The payment rate is to be not less than 26% of market value of the livestock on the day before the date of death, as determined by the Secretary. Congressman Collin Peterson (D-MN), chairman of the House Agriculture Committee, said, "This Congress has delivered a fiscally responsible package that meets the most pressing needs for assistance in agriculture and rural communities."

Payment Limitations -- Senators Chuck Grassley (R-IA) and Byron Dorgan (D-ND) have introduced S. 1486, the "Rural America Preservation Act," which would limit farm program payments to $250,000. The bill caps direct payments at $20,000; counter-cyclical payments at $30,000; and marketing loan gains (including forfeitures), loan deficiency payments and commodity certificates at $75,000. Senator Grassley said, "It is unfair to family farmers and to American taxpayers that the government has been awarding seven-figure payments to corporate mega-farms. When 10% of the nation's farmers receive 72% of the payments, it erodes public confidence in federal farm programs. And, it only gets worse every year." This legislation has passed the Senate in the past and will be considered this year during the farm bill debate.

Interstate Shipment of State-Inspected Meat -- The National Association of State Departments of Agriculture (NASDA) is urging Congress to pass legislation to allow for the interstate shipment of state-inspected meat and poultry products. NASDA said, "Allowing interstate meat sales is just plain common sense -- no other food commodities inspected by state authorities are prohibited from being shipped across state lines. Why aren't the same market options available for meat and poultry?" Two bills (H.R. 1760 and H.R. 2315) have been introduced in Congress to allow for the interstate shipment of state-inspected meat.

National Pork Board Members Named -- USDA announced five appointments to the National Pork Board. Those appointed to a three-year term are Tim A. Bierman, Larrabee, IA; Henry E. Moore, Clinton, NC; G. Steven Weaver, Elk Grove, CA; Bruce A. Samson, Three Forks, MT; and Everett L. Forkner, Richards, MO. The 15-member board is to develop budgets and award contracts to "carry out a coordinated program" designed to strengthen the position of pork in the marketplace.

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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