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June 29, 2007



Table of Contents
Protecting Valuable Pork Exports
In the Black
Energy Bill Passes Senate

Market Preview
Protecting Valuable Pork Exports
Watch your e-mail this weekend for our summary of today's USDA Hogs and Pigs Report. The report will be released at 3 p.m. eastern standard time.

I have spent a good deal of time over the past few years trumpeting the exporting success of the U.S. pork industry. It is a record of which producers and packers are duly proud: 15 consecutive record years, growth of nearly 75% over the past three years, and nearly $27 worth of products (both pork and pork variety meats) exported for every pig slaughtered in 2006. Those all add up to a significant contribution to producers' and packers' bottom lines.

I don't talk much about Canada's success but it is, if anything, even more impressive.

The Role of Disease Prevention
Audiences have rightfully questioned, especially in the aftermath of the Bovine Spongiform Encephalopathy (BSE) disruptions on both sides of the border, "How much is too much dependence on exports?" In true economist fashion, I have responded, "That depends." Of course, that answer isn't too satisfying, and audiences have unreasonably wanted to know, "Depends on what?" It's funny how people want to know the whole story when they get a small taste, isn't it?

In fact, determining the optimum proportion of sales, which are dependent on exports, is a very difficult undertaking. I will not attempt to arrive at a magic number since I doubt that one exists and it will change rapidly as a host of underlying variables (exchange rates being a big one!) change. There are a few relationships, though, that I believe we can count on.

First, the optimum proportion of production devoted to exports will be higher if the probability of having an export-disrupting disease is lower. This means that as the industry depends more and more upon exports, it should devote more and more attention and resources to biosecurity at our borders to keep diseases out.

Second, the optimum export level increases as our ability to identify and control a disease outbreak improves. A key strategy in handling diseases such as foot-and-mouth disease or classical swine fever (hog cholera) is to quickly regionalize the disease so animals in other parts of the country can move and exports from those non-infected areas can resume. Diagnostic systems and animal tracking (premise and animal identification) are key components to enable relatively quick regionalization.

Third, controlling a disease outbreak must take priority over virtually every other goal, at least in the first few hours and days of an incident. That's not a comfortable position to be in because some "innocent" people are going to get hurt, animal and product flows are going to be blocked, and markets are going to be disrupted. And all of that could happen even though no trade-disrupting disease is actually found.

Foreign Animal Disease Impact
Some readers may not know it, but we looked into the abyss of this matter on Wednesday when a load of Canadian pigs was quarantined at a Minnesota packing plant under suspicion of foot-and-mouth disease (FMD). Laboratory test results showed the pigs only had enterovirus and circovirus, but USDA's Animal and Plant Health Inspection Service (APHIS) was apparently quite concerned. APHIS head Dr. Ron DeHaven pointed out that USDA investigates 400-500 potential trade-disrupting disease outbreaks each year and that the agency does not usually report negative test results. But this one occurred at a packing plant, and word had spread that a potential problem existed, so APHIS felt compelled to respond.

And what might have been the impact had FMD been confirmed? I'm no expert but FMD in Canadian pigs on U.S. soil would, I presume, mean that exports from both countries would have been blocked. In 2006, the U.S. exported 2.397 million metric tons (mmt) or 2.642 million tons of carcass-weight pork, 14.2% of total production of 9.562 mmt or 10,540 tons. Using a hog demand elasticity of -.25 (and thus a price flexibility of -4), forcing that much product back on the U.S. market would drive prices downward by roughly 57%.

So, we would have to deal with about 20% more product in the Canadian-U.S. market for the short run if a foreign animal disease outbreak affected both countries. Using a hog demand elasticity of -.25 and thus a quantity-to-price multiplier of -4, this would imply an 80% drop in hog prices. That is a very shocking number and it is possible that consumers would rally to the aid of producers just as Canadians did with the beef industry in 2003 -- but the impacts would still be catastrophic.

I hate using poultry analogies, but we indeed have a lot of eggs in this export basket. It is imperative that everyone on both sides of the border do everything possible to reduce the probability of a foreign animal disease outbreak. The price of failure is quite high.




Click to view graphs.

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



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Financial Preview
In the Black
The month of June is in the black for most producers. Prices have averaged over $70/carcass for the past month. I would say, on average, pork producers will make $10-15/head during this month, with breakeven prices approaching $65/carcass or $48/cwt. live weight.

Although I have read other reports that say producers are in the black for the year to date (Jan-June), I would say that on average most producers are at about a breakeven. The best producers have made some money, while the average producers are at about a breakeven to a slight loss for the year.

It is hard to believe that despite the fact that prices have been good this year, averaging close to $65/carcass, this has not turned out to be a home run year for the pork industry. In the past, with that type of market price, producers would be making an average of close to $20/head. However, the price of feed (corn) has increased producers' breakeven costs by close to $20/head.

Advantages of the Small Producer -- The small pork producer who raises his/her own corn now has an advantage over the large systems. I explained this situation in earlier reports. An integrated model can be a 1,000-sow producer who can market 20,000 pigs a year. He will need approximately 200,000 bushels of corn to feed his livestock. If he has 1,200 acres of land that yield 170 bu./acre, he can raise enough corn to feed his livestock.

If land rent prices are reasonable, this producer should be able to raise corn cheaper than the price on the current corn market. This producer model can be very competitive long-term, provided there is sufficient labor force to manage the livestock. The key question for these producers will be whether they want to continue to do hog chores.

What to Do -- The challenge for the larger production systems is accessibility to adequate corn supplies. Recently, I looked at southern Minnesota posted bids and corn was around $3.20/bu. The issue is being able to acquire this corn in large amounts. You can buy small amounts, but getting access to large amounts of corn is a challenge. Pork producers are looking at a variety of ways in which to get access and availability to corn.

Meanwhile, everyone is watching the weather and hoping that we can produce a large corn crop. The issue then is whether you can get your hands on it, and when is the best time to buy it. If you live in southern Minnesota, the question is whether $3.30 or $3.60/bu. is a good buy. Because we are so used to buying corn at much lower prices, it is very hard to pull the trigger on this decision. Pork production companies are facing some very difficult decisions.

A separation is occurring -- I attended World Pork Expo in Des Moines, IA, recently where people were asking me how the swine industry was doing. I responded that it is much like watching a 400-meter race (Being a runner I can relate to these analogies). Everyone is even until the last 100 meters. Then you start seeing the strong ones pulling away from the rest of the pack. Since October 2006, this has started to occur in the pork industry. There has been a separation from the best to the average producer. When you have higher costs of production, this separation becomes wider and it leaves little room for error.

Many systems have not only had higher corn costs, but they have also been battling health challenges such as Porcine Circovirus-Associated Disease (PCVAD). This has really impacted some systems and hurt their operations significantly. They are now in the process of trying to catch up. For sure, the pork industry is not one where you can ever relax or get complacent. You must work every day trying to become better to stay viable. Those who achieve that have tremendous opportunities in the future.

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



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Legislative Preview
Energy Bill Passes Senate
The Senate passed a comprehensive energy bill that increases the use of biofuels, increases fuel efficiency and mileage requirements for vehicles, and establishes penalties for gasoline price-gouging. Key items in the legislation include:
  • Renewable Fuels Standard (RFS) -- increases the RFS from 7.5 billion gallons in 2012 to 36 billion gallons in 2022. By 2022, 21 billion gallons is to come from advanced biofuels, such as cellulosic ethanol.

  • Gas Stations - provides gas station owners with a reimbursement for 30% of the costs (not to exceed $30,000) of adding an alternative fuel tank, such as E-85 ethanol, biodiesel, compressed natural gas and hydrogen.

  • Pipelines -- establishes studies on the feasibility of ethanol pipelines, higher blend levels and the optimization of flex-fuel vehicles.

  • Greenhouse Gas -- establishes a 50% reduction standard for advanced biofuels.

  • CAFÉ -- increases the Corporate Average Fuel Economy (CAFÉ) standards for automobiles to 35 miles per gallon by 2020.

  • Flex-Fuel Vehicles -- establishes a goal of increasing the country's flexible-fuel vehicle fleet by 50%.
The tax provisions (June 22, 2007 edition of North American Preview) of the bill were not adopted. Senator Harry Reid (D-NV), Senate majority leader, plans for the Senate to consider the tax provisions later this year.

MAP & FMD -- The House Foreign Affairs Committee passed legislation reauthorizing USDA's food aid and trade programs. The committee reauthorized the Foreign Market Development (FMD) program at $34.5 million per year and the Market Access Program (MAP) at $225 million per year. These are critical trade programs for U.S. agriculture in expanding and promoting U.S. agricultural exports. These programs will now be considered by the House Agriculture Committee during consideration of the farm bill.

Farm Bill in July -- Indications are the House Agriculture Committee will begin marking up the farm bill the week of July 16.

Card Check Bill Fails -- The Senate failed to bring to consideration H.R. 800 which would have replaced the current secret ballot elections with a process called "card check" which would allow a union to be recognized in the workplace if a majority of workers sign a card provided by the union. The legislation was a major priority of the unions. The administration had threatened to veto the legislation if passed.

Pork Producers Visit Capitol Hill -- A number of pork producers have been traveling to Washington, D.C. to meet with their senators and congressmen to express concerns on key issues that will be considered this year during the farm bill discussions that would negatively impact the pork industry. The producers are asking their members to oppose:
  • Legislation that would require 25% of the hogs slaughtered each day in each plant to be purchased through spot transactions.

  • Legislation that would ban meat packers' ability to own or contract for livestock.

  • Legislation that would require "open and public" bidding for livestock and prohibit "formula pricing" of hogs delivered more than seven days after a sale.

  • Efforts to move up the implementation date of mandatory country-of-origin labeling (MCOOL) from Sept. 30, 2008 to Sept. 30, 2007.

  • Legislation that would prohibit the federal government from purchasing meat from farms that use individual sow housing.

  • Legislation that would ban the use in livestock of certain antibiotics.

  • Legislation that would limit livestock marketing options, restrict contracts and prohibit certain business practices.

  • Legislation that would keep fatigued hogs out of the food supply.
P. Scott Shearer
Vice President
Bockorny Group
Washington, D.C.



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