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July 13, 2007 A Penton Media Property

Table Of Contents
Are China's Losses Driving Futures Prices?
Variation Reveals Opportunities
Farm Bill Released in House

What's new on National Hog Farmer?
- Illinois Swine Industry Recovers
- Oregon Passes Gestation Stall Ban
- No Foreign Animal Disease Found in Suspects Tested
- Read the full June issue

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Dale Miller, Editor, National Hog Farmer

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Market Preview
Are China's 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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Production Preview
Variation Reveals Opportunities
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 in effects.

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 technique.

John Deen, DVM

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Legislative Preview
Farm Bill Released in House
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 includes:
  • 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. to 23.5¢/lb.

  • Ends government storage payments for commodities.

  • Renews the Conservation Reserve Program (CRP) at 39.2 million acres.

  • 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 million/year.

  • 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 House).

  • Does not include a competition title for livestock and poultry. However, during committee mark-up next week, amendments will likely be offered.

  • 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 agriculture mergers.
  • "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 geographic markets.

  • "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 been approved.

  • "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
Vice President
Bockorny Group
Washington, D.C.


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