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June 22, 2007

Table of Contents
Time to "Make Hay"
Seasonal Variation in Pigs Born Alive
Energy Tax Package

Market Preview
Time to "Make Hay"
What a difference a week can make! While I remain steadfast in my concern about the hog and pork markets this fall, the run-up in cash hogs and some reduction in corn and soybean meal futures this week have me, and many readers, no doubt, in a much better mood -- at least for now. The old motto, "Make hay while the sun shines" applies to more than just making hay right now!

USDA's 51-52% lean pork carcass cutout value gained $3 last week (see Figure 1). The weekly average for this benchmark value indicator was $76.36. That's the highest level since the last week of May and less than $1.50 from this year's previous weekly high of $77.83 in mid-May.

The cutout value increase drove a major improvement in estimated gross packer margin (see Figure 2) and provided a big incentive for packers to chase hogs and push slaughter rates this week. As the graph shows, gross margins have been pretty good most of this year, but a $24/head margin in June is almost unheard of. Remember as you look at that graph that those are gross margins from which labor, utilities, packaging, etc. must be paid. Those costs have gone up for packers just like they have for you, so net margins are not that much better, but they are still pretty good for June!

What is impressive about that gain is that it occurred in a week when slaughter was 5.7% larger than one year ago. Packers were very aggressive buyers and have continued to push slaughter up this week with the total increasing by 2.6% from last week and 5.9% from last year through Wednesday.

The historical data do not provide us with a very clear-cut week for the "normal" seasonal peak. The gray line in Figure 1 tells us that the yearly high can occur any time from mid-May to early July. Last year's high occurred in this week and, given the strength of cutouts and cash hogs, we could certainly see a repeat. It is very difficult for these markets to sustain this strength after retailers have made their July 4th purchases.

Wednesday's cutout value reached $78.89 with loins, butts and ribs all gaining ground. Hams, though, fell by $1.15 to a primal value of $61.72. This is the normal seasonal doldrums for hams, but difficulties with exports to Mexico have made that situation worse this summer compared to the past few. Bellies were unchanged in Wednesday trading, but the primal value is still over $1.00/lb.

Yesterday's weighted average hog price on the afternoon national report was $76.51/cwt. carcass, up $1.14 for the day. That is a base price, so most producers would take home $1.50 to $2 more than that, making the total somewhere near $78/cwt. carcass or $58.50/cwt live. That provides a very nice profit even with high-priced feed.

For perspective, the record high for the weighted average national afternoon purchase price was in May 2004 and $78.31 -- just $1.80 above yesterday's price.

Finally, all of this is apparently being done without dipping deep into the population of market hogs. Last week's average live weights were estimated at 269 lb., the same as the week before and just 2 lb. lower than last year.

History says that weights should fall quickly about now and this week's push by packers may bring that about, but it appears that there are plenty of hogs to feed this frenzy. That's a positive since it implies that this entire surge is driven mainly by demand.

Tyson Joins Antibiotic-Free Ranks
The latest development on the natural, free-range, antibiotic-free product scene is the announcement by Tyson that it will eliminate antibiotics from its chicken production units and tag its products as "raised without antibiotics." Tyson's announcement said its decision was based on its own research indicating that over 90% of consumers "agree it is important to have fresh chicken produced and labeled as 'raised without antibiotics," according to a story at

There are three interesting aspects to this development:
First, Tyson's decision may be based on consumer research but the anti-meat crowd (HSUS, PETA, CSPI, Keep Antibiotics Working, etc.) will be quick to claim that Tyson is bowing to their political and economic pressure.

Second, Tyson cited "the size and scale of our operations" as a major reason it can make this move. Raising any meat animal without antibiotics is a risky proposition. Tyson's multiple farms and large production base will allow it to remain a viable supplier even if a disease situation necessitates antibiotics at one or a few locations. This is one of the reasons why I, and other industry analysts, have warned small-farm proponents that natural-antibiotic free, etc. is not a panacea. Big guys can do those things, too, and their size and scope makes them more dependable suppliers than single-location, small operations.

Finally, and this is an extension of point number two, Tyson's announcement pointed out that while producing antibiotic-free chicken is more costly, there is still room for good margins. The message: "We can do this for less added cost than the current antibiotic-free producers can." This has happened in other specialty product production -- organic vegetables, for example.

Niches do not last long unless one has unique, non-duplicable skills, knowledge or an effective barrier to entry. None of those is very common, so expect more encroachment of the "big boys" into the niches that have heretofore been the territory of small producers.

Click to view graphs.

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


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Production Preview
Seasonal Variation in Pigs Born Alive
Within a given herd, weekly average number of piglets born alive (NBA) per litter can vary substantially. In an evaluation of Iowa PigChamp herds, the range between highest and lowest weekly average NBA was two pigs or greater for more than 90% of the herds.

Such week-to-week variation may be attributed to any number of factors, including herd health, quality of the semen, composition of the breed group (i.e., gilts, prime weaned sows and rebreeds) and group conception rates. But there's an additional factor worth considering -- the role of season.

To explore this issue further, weekly PigChamp production data was tracked across four years. Farrowing rate, average total pigs/litter (TB), and NBA were tracked weekly in a set of herds. (See Figure 1.)

In each of the four years, the seasonal decline in farrowing rate corresponds with a decline in NBA. However, it has often been difficult to see the seasonal variation in litter size as it is "noisier" and less predictable on a week-to-week basis than the changes in farrowing rate. Moreover, these changes in litter size show up after the hot season in the late fall and early winter.

The underlying causes behind the seasonal depressions in NBA remain unclear. Again, litter size could be a function of the animals bred and the quality of the matings (including the number of matings per service). Among the annual preparation to mitigate the effect of seasonal infertility on a herd or system's production, the change in litter size may need to be taken into account.

There is a tendency to retain poorer animals during summer breeding period. Weaning ages also tend to be lower as there is a surplus of farrowings, forcing farrowing crates to be turned more quickly.

But, there should also be a concern about the effect of temperature on litter size. This can be a direct effect through temperature on ovulation or implantation rates. Or the effect can be indirect, such as lower feed intake or the sow's performance during lactation.

As we understand how to better control farrowing rate, gaining a consistent litter size from week to week needs more analysis.

Stephanie Rutten-Ramos, DVM
University of Minnesota
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Legislative Preview
Energy Tax Package
The Senate Finance Committee unveiled a package of energy tax incentives to promote the development of clean and green power, alternative vehicles and biofuels and the responsible use of coal. The key provisions concerning biofuels include:
  • Establishes a new tax credit for the production of cellulosic ethanol, offering $1.11/gal. for the first 60 million gallons of production per year up to one billion gallons for the duration of the incentive.

  • Extends through 2010 the $1/gal. biodiesel credit (producers from soy, camelina, and other plant materials) with no limit for a single facility's production.

  • Extends through 2010 the $1/gal. renewable diesel credit (which may include materials such as chicken fat), up to 60 million gallons per taxpayer.

  • Extends through 2012 the 30% credit (up to $30,000) for installing E-85 alternative energy fueling stations that can service flex-fuel cars running on 85% ethanol fuel.

  • Extends through 2012 the small producers credit (those with annual capacity of 60-million gallons or less) for biodiesel and ethanol, which provides a 10¢/gal. credit on the first 15 million gallons of production.

  • Extends the tariff on imported ethanol through Dec. 31, 2010.

  • Modifies the ethanol tax credit. The proposal would reduce the 51¢/gal. tax credit for ethanol by 5¢/gal. beginning the first calendar year after the year in which 7.5 billion gallons of ethanol (including cellulosic ethanol) has been produced.
The Senate is voting on this bill and a number of amendments this week. More details will be provided next week.

Expansion of Biodiesel -- Senator Dick Durbin (D-IL) introduced legislation to increase the production of biodiesel to 1.25 billion gallons in 2012. Senator Durbin said, "Biodiesel is a fuel that holds great promise in terms of moving our country toward energy independence. While in its infancy, the biodiesel industry has seen tremendous growth due to the high cost of oil. This bill will create incentives for producers and consumers alike and will allow this important alternative fuel source the chance to become a mainstream alternative to foreign oil." The bill creates the following biodiesel fuel standards:
  • "Minimum Percentage: Included in the requirement is a minimum amount reserved for biodiesel, where at least 80% of the mandate will be biodiesel.

  • "EPA Registration: In order to be introduced into commerce, all fuel, either biodiesel or bio-based diesel replacement fuel, is required to be registered through Environmental Protection Agency (EPA) pursuant to the Clean Air Act, and must have an appropriate American Society for Testing Materials standard.

  • "After 2012: The administrator of EPA, in consultation with the Secretary of Agriculture and Secretary of Energy will determine the appropriate amount in 2013 and each year thereafter.

  • "Waiver Authority: The administrator of EPA, in consultation with the secretary of agriculture and secretary of Energy, would have the ability to waive the standard in cases of market disruptions."
COOL Reopened for Public Comments -- USDA's Agricultural Marketing Service (AMS) has reopened the comment period for the proposed rule concerning mandatory country-of-origin labeling (COOL) for beef, lamb, pork, perishable agricultural commodities, and peanuts. The comment period closes Aug. 20, 2007. Mandatory COOL takes effect Sept. 30, 2008. The Federal Register document reopening the comment period can be found at:

Continue Commodities Programs -- During consideration of the commodities title of the farm bill, the House Agriculture General Farm Commodities and Risk Management subcommittee voted this week to extend the current commodities programs. Congressman Collin Peterson (D-MN), chairman of the House Agriculture Committee said, "The proposals approved today by the Subcommittee on General Farm Commodities and Risk Management reflect the message we heard loud and clear from farmers and ranchers nationwide -- the structure of the 2002 Farm Bill works for them. We will continue to develop proposals on rebalancing and reform in farm programs that will build on this good foundation as we move forward. The Agriculture Committee has a tough job ahead, but I am committed to continuing a process that is open and allows for a complete debate of all the important issues involved in writing a farm bill." Secretary of Agriculture Mike Johanns said, "I am disappointed in the Title I legislation put forth today by the House Subcommittee on General Farm Commodities and Risk Management. The bill fails to recognize the need for greater equity and predictability in farm policy, and does nothing to provide a more responsive safety net. Having said that, I am encouraged by the signal from subcommittee members that this is only a starting point and I'm gratified by the kind and thoughtful comments offered by several members regarding the administration's proposal. I will not waste a moment in responding to the interest expressed in adopting some of our ideas as part of the full committee mark up." We can expect modifications to the subcommittee's proposal when the full House Agriculture Committee takes up the farm bill after the July 4th Congressional recess.

FSA County Committee Nominations -- USDA announced nominations for local Farm Service Agency (FSA) county committees will continue through Aug. 1, 2007. According to USDA, to become a nominee, eligible individuals must sign form FSA-669A. The form and other information about FSA county committee elections are available at:; click on "News & Events," then "County Committee Elections." Nomination forms for the 2007 election must be postmarked or received in the local USDA Service Center by close of business on Aug. 1, 2007.

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

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