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June 8, 2007

Table of Contents
Cheap Corn Makes Cheap Hogs
On-Farm Trials - the Facts and Fallacies
COOL Stakeholders Discussions

Market Preview
Cheap Corn Makes Cheap Hogs
That's the adage and it has historically been very true. It's corollary is that high-priced corn makes high-priced hogs. That one is a bit shakier but we know that, in the long run, the cost of inputs must be captured in the price of the product.

The increases in the prices of both corn and soybeans that have been driven by subsidized biofuels appear at present to be permanent. That judgment is based on two factors that are not likely to wane or disappear over the next few years: high oil prices and the political popularity of ethanol.

Figure 1 shows crude oil futures on four different days since early March of this year. While there has been some movement in these prices, note that the most recent set of observations is by far the highest of the group. The June 5 prices do not represent the high for crude oil futures (that came back in mid-2006) but the fact that they are still in the upper-$60s and lower-$70s indicate that market conditions have not gotten much better if you are on the buying side of the oil market. There is still ample worldwide demand for oil, and the supplies of oil are still limited and risky. Those translate into what is likely to be persistent high prices.

If we had a graph of the political popularity of ethanol, it might look much like the oil price graph -- and that similarity is no accident. In addition, the rhetoric regarding ethanol is at a four-year high, and highly correlated with the presidential election cycle. The political parties are trying to "out-renewable-fuel" one another and a veritable army of presidential candidates have now invaded Iowa and nary a bad word about biofuels will be uttered in their speeches.

The bottom line is, we have probably seen another major shift in corn prices. Figure 2 shows annual averages since 1908. Note that two major shifts have taken place in that time. The first was during and after World War II when wartime shortages, pent-up demand and a booming post-war economy drove corn prices from the 1908-1942 average of 78¢/bu. to a whopping $1.26/bu. -- an increase of 62% -- for 1943-1972.

The second jump occurred in 1973 when the Russian grain deal ushered in a new era of world trade in grain and eventually other agricultural products. That price increase, to $2.37/bu., amounted to 88%.

Note that the first period was 35 years and the second was 30. Now, 34 years later, we see another sea-change in the price of corn. Technical analysts would put a lot of stock in the 30-35 year period. I'm more inclined to write it off to coincidence. Regardless, it certainly is interesting that the period is relatively consistent and that this shift was right on schedule.

The $64 million question for the pork industry is "How will we adjust?" Corn prices that could well be in the $3.50 to $4.00 range for the foreseeable future have some analysts predicting lean hog prices of $100/cwt. or more. And some are predicting those within a couple of years.

But prices don't just adjust automatically. Either supply or demand has to shift. When corn prices jumped in 1974, the pork industry was poised to come out of a liquidation phase. High corn prices continued that liquidation, driving 1975 hog slaughter to its lowest level in a decade and basically precluding one cyclical increase in output. Cyclical highs occurred in 1971 and 1980, with nothing in the way of a cyclical high in between.

But the reason for that action was that producers lost money and continued to reduce output. It doesn't look to me like the present situation is going to cause the kind of producer losses that lead to output reductions. Cash hog prices and CME Lean Hogs futures have kept producers in the black so far. History tells us that producers simply do not cut back unless they actually lose money.

The more likely scenario is that production will remain relatively stable over the next few years since there is no incentive to cut back and the much lower margins will provide little incentive to expand. That means demand must be the driver of higher margins. Pork demand grows each year due to domestic population growth and more access to larger numbers of people in export markets. That growth, though, is pretty slow, so it may take awhile to restore the margins to which we have become accustomed.

The key assumption, of course, is that producers do not expand while margins are so low. I think that is a safe assumption except for the fact that producers' balance sheets are in such terrific condition. Many are going to want to "Do Something!" Will they diversify or "dance with who brung them" by expanding hog output even though the returns aren't as attractive as they once were?

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.

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Production Preview
On-Farm Trials - the Facts and Fallacies
Many producers are looking for ways to improve performance. One approach to determining if a new product or procedure will improve performance is to run an on-farm trial. We'll use today's space to consider some of the challenges with the on-farm trial from the statistical perspective.

For clarification, the "trial" we are discussing refers to the type of trial producers do to determine if they should make a change -- such as switch feed suppliers, using farrowing mats vs. heat lamps, or change in the pig processing protocol.

As an industry, we are accustomed to looking at averages. And we commonly use averages to determine if one site is performing better than another, or the performance during one week is better than another, for example.

These simple judgments based on averages generally fail to account for the high degree of variability, however. To really determine if one site/program/protocol is truly different than another, that difference needs to be observed under identical conditions for an extended period of time.

One way to describe variability is in terms of a standard deviation. The standard deviation is a way of describing how near or far the individual values lie from the average. As a general rule, approximately two thirds of individual values lie within one standard deviation above or below the average.

Consider the examples of grow-finish average daily gain (ADG) or preweaning mortality in a sow unit.

Within a sample of farms, the standard deviation of grow-finish ADG ranged from 4% to 9% of the farms' average ADG. Because ADG is affected by several factors, including temperature, feed ingredient quality (i.e., old-crop versus new-crop corn), piglet age and weight at weaning, weight at finisher placement and group health, comparison of only a few groups from each treatment could yield misleading results.

From a statistical perspective, if you wanted to be confident that there is a 0.1-lb. difference in ADG between treatments for a system with an average ADG of 1.73 lb. gain/day and a standard deviation of 0.18, you would need to run a trial with 52 groups/treatment. This sample size would result in 95% confidence that over the long run you would observe a difference this large or larger.

From the sow unit perspective, the standard deviation of weekly preweaning mortality for a subset of farms ranged from 15% to 50% of the farms' overall averages. If a farm wanted to test an intervention that could reduce preweaning mortality by 2.5% and their average preweaning mortality was 11.5% with a standard deviation of 2.8, the trial would need to have 21 groups in each treatment.

Additionally, when a statistically valid trial is run, treatments need to be assigned at random (i.e., with a coin toss). The random assignment helps to distribute the other causes of variation across all treatments. The smaller the difference between the treatments, the larger the trial will need to be.

Most farms neither desire nor are designed to perform statistically valid trials -- so what are the options?

First, if a valid trial is really desired, the farm can change the unit of measure. For example, an intervention can be used at the pen level instead of at the group level. However, this requires measurements of pigs at the pen level instead of the group level. Second, the farm can use a non-statistically valid "trial" to assess its comfort with the new treatment or intervention. While some producers aggressively seek least-cost production, others are concerned with both cost and convenience.

As with all numerical interpretations, it is important to keep in mind the context. Failure to do so can result in interventions that are not necessary and expectations that cannot be met.

Stephanie Rutten, DVM
University of Minnesota
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Legislative Preview
COOL Stakeholders Discussions
Congressmen Collin Peterson (D-MN), chairman of the House Agriculture Committee, Bob Goodlatte (R-VA), ranking member of the House Agriculture Committee, and Senator Saxby Chambliss (R-GA), ranking member of the Senate Agriculture Committee, have written producer and industry groups asking them to participate in discussions concerning country of origin labeling (COOL) for meat sold at retail. The letter states, "We have heard from many producers that they see the current law and regulations as too burdensome from a recordkeeping perspective. And we have heard from other stakeholders that the law will interfere with some of the branded and value-added programs that have evolved quickly over the last few years. We know there are complexities with ensuring the origin of culled cows and even with this spring's calf crop. Pork producers have other challenges to manage, such as the impact on those operators who solely source their feeders from outside the U.S." The members are asking the groups to address these issues that could "lead to a workable solution" of COOL.

Agriculture Security Facility -- The House Homeland Security Subcommittee on Emerging Threats, Cybersecurity, Science and Technology approved H.R. 1717 which would create a National Bio- and Agro-Defense facility to study diseases caused by livestock and poultry. The legislation would require research and development on a range of foreign animal and zoonotic diseases. The Department of Homeland Security is considering a number of sites for the new facility which it expects to select in October 2008. Currently, this research is done at Plum Island Animal Disease Center on Long Island, NY.

Open Fields - Hunting & Fishing -- Senators Kent Conrad (D-ND) and Pat Roberts (R-KS) have introduced legislation to provide incentives to farmers and ranchers who voluntarily open their land to hunting, fishing and other wildlife-related activities. The "Open Fields" legislation would provide modest payments to landowners who make their lands accessible for public hunting and fishing. Senator Conrad said, "Millions of new acres are opened to hunters and fishermen while farmers and ranchers get a little additional income. My bill gives rural America an economic shot in the arm and protects the land for future generations to enjoy the great outdoors."

Farm Bill Continues -- The House Agriculture Committee is continuing its efforts to complete writing the farm bill at the subcommittee level. This week various subcommittees completed action on the rural development, horticulture, organic, peanuts and sugar provisions. Next week the commodities and nutrition titles will be considered at the subcommittee level. Congressman Collin Peterson (D-MN), chairman of the House Agriculture Committee, has indicated his desire for the full House Agriculture Committee to consider the farm bill the week of June 25 and the House of Representatives to consider the bill in July.

USDA to Appeal Private BSE Testing Ruling -- USDA will appeal a federal district court ruling, which would have allowed Creekstone Farms to privately test its own cattle for bovine spongiform encephalopathy (BSE). The National Cattlemen's Beef Association has stated its objections to private testing and believes it is the role of the federal government.

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


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