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Losses Driving Futures Prices?
Chicago Mercantile Exchange (CME) Lean Hogs futures
prices surged upward on Thursday buoyed by rumors that China was
shopping for pork in the United States. The rumors were not confirmed,
but traders took August futures up the daily limit of $3.00 to close at
$74.075, its highest level since June 19.
The limit move broke several key technical resistance items, including a
former support line at $71.80 and the 50-day moving average at $73.18.
Though not up the daily limit, the other deferred CME Lean Hogs
contracts also broke through key technical resistance.
This could well be a wonderful opportunity for pork producers who failed
to price hogs during earlier rallies. While it would be nice for
October and December to hit new highs, waiting that long may not be
prudent. October is back above $68.50 and December ended the day at
$67.00. Those prices are clearly back in the black, given the recent
decline in corn prices.
Back to China, I don't know whether to believe the rumors or not. We do
know that China's pig industry has been hit hard by "fever disease" or
"blue ear" or a new strain of porcine reproductive respiratory syndrome
or something. Earlier reports had indicated 20 million pigs had died.
That would be devastating here, but that's only about 5% of China's
herd. Saying "only" is not intended to minimize the importance of such
a loss, if it has occurred. Rather, it's an effort to keep the loss in
the perspective of China's enormous pork industry.
I have been thinking that something must be brewing on the chicken
export front, given what has happened to leg quarter prices. Figure 1
shows the rally of these prices to record high levels in recent weeks.
That has occurred as chicken production has increased by 2.4%, 3.1% and
4.5%, respectively, for the past three weeks. Inventories of chicken
legs and leg quarters on May 31 (the last data available) were at 59%
and 74%, respectively, of year-ago levels, so this product is moving
somewhere and that usually means exports.
Export data, of course, runs two months in arrears, so all we know at
present is that chicken exports through April were down 4.6%. May data
will be released on Friday.
Weaned Pig Price Slippage
Another reason that I am urging producers to look at pricing
opportunities on this rally in Lean Hogs futures is what has been
happening in the weaned pig and feeder pig markets. Figure 2 shows spot
prices and weighted average prices (includes pigs sold under contracts)
for weaned pigs and 40-lb. feeders. Note that the weaned pig spot price
reported by USDA reached a low for the life of this USDA report at
$24.57/head the week of June 15, and that low twice was broken again
with last week's price plunging below $20/head. The decline in 40-lb.
pig prices is nearly as dramatic though they have not reached a low for
the life of this USDA report -- at least not yet.
Declining weaned pig and feeder pig prices are nothing new for June and
July as the normal seasonal low occurs in August. But this decline is
larger and faster than normal and has occurred as cash and futures
prices for corn have fallen -- a change that should have bolstered
weaned pig and feeder pig prices. Pig numbers in the USDA reports have
not been large by historical standards, but it could be that there are
larger numbers of unreported pigs. There's no good way to know that
except by seeing what the reported prices are doing.
Extremely low pig prices tell me that there were plenty of pigs farrowed
from mid-May through late June. If that is so, slaughter in
mid-November through December could be higher than anticipated.
It all fits with my concerns about larger supplies due to effective and
available circovirus vaccines. Whether demand from China, or wherever,
is strong enough to overcome larger numbers remains to be seen.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
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what you see--after all, it is just what you asked for.
One of the starkest characteristics of benchmarking
productivity is the wide range of performance seen across the industry.
One of our favorite numbers is "pigs born alive/mated female/week,"
which measures the output on a weekly basis as a function of the
inventory of sows in the herd. "Mated females" includes all females in
the herd except the gilts that have not been mated for the first time.
What strikes us is the wide range of performance. First, the output is
approximately 0.45 pigs born/mated female/week. However, the range that
covers 95% of weeks for pigs born/mated female/week within a farm is
from 0.26 to 0.64 pigs born alive. This range occurs in farms that are
trying to stabilize output to utilize downstream facilities as
efficiently as possible. Part of this variation is due to seasonal
infertility, but much of it is due to variation in performance.
Interestingly, this variation in productivity is highest when
productivity is lowest. Though the average standard deviation across
weeks for the year is 0.09 pigs/mated female/week, this varies over the
year from 0.07 to 0.11. This suggests that there are increased
opportunities for improvement when the herd is challenged.
The study of variation is really a study of capability. Where variation
exists there is opportunity for improvement that should be readily
available. Where variability increases, we see an illustration of
differing capabilities of farms to adjust to "insults."
The largest insult on a regular basis is seasonal infertility. By
showing a larger variation in output from sows bred during the summer,
we can focus on more than the simple fact that the average farm reduces
productivity levels. Not all farms are affected equally. Some farms
are relatively unaffected, while others are severely affected by this
factor. The real question is not the average effect but the variation
There is a large area of benchmarking studies that examine variation
quite closely, especially in similarly operated enterprises. By
"similarly operated enterprises" we are not speaking simply of farms
that have the same geographic region. We are referring to farms that
have the same objective, in most cases maximizing sow output, and that
are operated in a similar manner.
Across the PigChamp database, most farms use farrowing crates and have
relatively similar genotypes. There are some differences in
capabilities to gain large litter size, but opportunities to maximize
farrowing rate and other efficiencies appear to be quite similar.
What we find in variation analysis, often called capability analysis, is
that implementation of strategies is the largest source of variation
between enterprises. In other words, it is not what we know; it is how
we do it.
A case in point would be the variation in farrowing rates. The
coefficient of variation in this index is 14.1%. Compare this to the
variation in total number of pigs born where the coefficient of
variation is 6.2%. This suggests that there is greater opportunity for
improvement in the farrowing rate.
Total number of pigs born is affected by genotype, as well as the region
in which they are born. However, it is more difficult to pick up a
pattern in the variation of farrowing rate, even though it is much
larger. Most producers have access to the latest technologies.
Therefore, it appears that the implementation of correct procedures
within a farm is needed to reduce variation.
As producers look for benchmarks that offer the greatest capability for
improvement, they must look at not only the rankings of their farms
compared to the rest of the population, but also the breadth of
variation within that ranking.
Looking for the greatest range of variation in productivity will point
you to the areas where you have the greatest capabilities for change.
Not only will you identify the greatest capability for change, you will
also realize that the answers are close at hand because other producers
are actually implementing a higher level of compliance to proper
John Deen, DVM
Editor's Note: For all your agricultural news, markets and
commentaries, go to www.farms.com.
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Farm Bill Released
Congressman Collin Peterson (D-MN), chairman of the
House Agriculture Committee, released his chairman's mark for the farm
bill. This is the document members of the House Agriculture Committee
will use next week when they begin writing the farm bill. The proposal
- Target Prices - Wheat increases from $3.92/bu. to $4.15/bu.;
corn remains at $2.63/bu.; soybeans increase from $5.80/bu. to
$6.10/bu.; cotton is lowered from $0.72/lb. to $0.70/lb.; and rice
remains at $10.50/cwt.
- Loan Rates - Wheat increases from $2.75/bu. to $2.94/bu.; corn
remains at $1.95/bu.; soybeans remains at $5.00/bu.; upland cotton
remains at $0.52/lb.; rice remains at $6.50/cwt.; cane sugar increases
from 18 cents/lb. to 18.5¢ /lb., and beet sugar from 22.9¢/lb.
- Ends government storage payments for commodities.
- Renews the Conservation Reserve Program (CRP) at 39.2 million
- Increases funding for the Environmental Quality Incentives Program
(EQIP) by $2 billion by 2012; 60% of the funding is for livestock.
- Extends the wetlands program through 2012 and adds 1.5 million
acres to the program.
- Renews the Foreign Market Development (FMD) program at $34.5
- Renews the Market Access Program (MAP) and increases funding to
$225 million through 2012.
- If livestock and poultry contracts provide for the use of
arbitration, it can only be used if both parties agree in writing to use
arbitration after the controversy (this provision was passed by the
House Livestock Subcommittee in June).
- Does not include any provisions concerning animal welfare
(amendments will be offered when the farm bill is considered by the full
- Does not include a competition title for livestock and poultry.
However, during committee mark-up next week, amendments will likely be
- Allows producers to purchase supplemental, area-based crop
insurance in addition to individual yield or revenue policies and
increases USDA's focus on risk management education for beginning
farmers and ranchers.
- Sod Saver -- Requires farmers to build actual production history
on newly broken grasslands before they become eligible for crop
insurance on that land.
Agriculture Competition Enhancement -- Senators Chuck Grassley
(R-IA), Herb Kohl (D-WI) and John Thune (R-SD) have introduced
legislation concerning agricultural competition. The legislation will
have USDA and the Department of Justice coordinate their efforts and
share expertise and data when considering agribusiness mergers. Senator
Thune said, "Increased concentration in the livestock and other sectors
of agriculture is adversely impacting independent producers. It is past
time to update our antitrust laws to address this problem." The bill:
- "Creates an Agriculture Competition Task Force to assist the
Justice Department and Federal Trade Commission in drafting agriculture
antitrust guidelines, examine problems in agriculture competition and
coordinates activities to address anti-competitive practices. The task
force will be made up of representatives of the agriculture industry,
state departments of agriculture, state attorneys general, farmers,
ranchers and independent producers, as well as agriculture law and
economics experts, the Department of Agriculture, the Justice Department
and the Federal Trade Commission.
- "Directs the Justice Department and the Federal Trade Commission,
in consultation with a working group of the Agriculture Competition Task
Force, to draft agriculture-specific guidelines to use when reviewing
- "Amends the antitrust laws to shift the burden of proof in
agribusiness mergers to the defendant to prove that the merger will not
substantially lessen competition or create a monopoly in one or more
- "Requires the Justice Department and the Federal Trade Commission
to conduct a post merger review of certain agribusiness mergers (mergers
that submitted second requests for information) five years after they've
- "Formalizes the Department of Agriculture's review of agriculture
mergers with the Justice Department and the Federal Trade Commission so
that the Agriculture Department now will be an integral part of the
anti-trust approval process in every agriculture merger.
- "Authorizes additional resources for Grain Inspection, Packers and
Stockyards Administration (GIPSA) and the Department of Justice to
review agriculture transactions.
- "Creates USDA Office of Competition and Fair Practices, headed by
Special Counsel for Competition Matters.
- "Creates Department of Justice Deputy Assistant Attorney General
with responsibility for agriculture matters."
Animal Research Facility Dedicated -- Secretary of Agriculture
Mike Johanns dedicated a new USDA high-containment, large animal
facility that combines several research facilities into one location.
The facility, in Ames, IA, is designed for work on endemic, zoonotic and
foreign animal diseases. Secretary Johanns said, "Construction of this
state-of-the-art animal health center is an important milestone in
USDA's efforts to provide first-class animal health services. The work
here has generated tremendous benefits for livestock agricultural
workers and consumers."
Livestock Consuming More Ethanol Co-Products -- A recent study
by USDA indicates that 38% of dairy operations, 36% of cattle feed
operations, 13% of beef cattle operations, and 12% of hog operations
were feeding ethanol co-products.
P. Scott Shearer
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