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July 20, 2007 A Penton Media Property



Table Of Contents
Export Expectations Adjusted
Variation in Pigs Born Alive
Farm Bill Drafts





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Market Preview
Export Expectations Adjusted
Export sales in May 2007 continued a disappointing trend. Year-to-date export volume through May was down 4.7% vs. one year ago (see Figure 1). As we've seen all year, the biggest problem for U.S. exporters is Mexico. May shipments there were 24% lower than last year. That is a slight improvement relative to April, but it's still disappointing for our second-largest market in 2006. Year-to-date shipments to Mexico are now 30% below those of January-May 2006.

It still appears that higher tortilla prices are the main driver for lower pork exports, but another factor may be weighing on U.S. shipments. Fiona Boal of Rabo International pointed out to me this week that Rabobank representatives in Mexico report that Mexican producers have been reducing the size of their herds due to higher feed costs. Those reductions have put more product on the Mexican market, driving down prices and reducing the need for U.S. product. This reduction is likely to wane as hog numbers reach more optimal levels and feed costs fall in light of a larger expected U.S. corn crop. Both of those may help exports later this year but will probably not drive shipments to Mexico up on a year-over-year basis by year's end.

Year-to-date shipments through May were also lower to Russia (-26%) and Taiwan (-42%). Japan has purchased 10% more pork this year while 3% more U.S. pork has been shipped to Canada. Both China and Hong Kong (still kept separate in USDA accounts) have purchased 38% more U.S. pork this year.

China has purchased 19.442 thousand metric tons (21,431 tons) as of May 2007. If the rumors are true, China will buy two to three times that much in the near future. That would be a large shot in the arm indeed -- if the United States and China can solve this week's troubles over ractopamine and alleged food safety issues. I find it almost laughable that China would throw such a fit over food safety given the nature of the country's food system. But this spat is as much about melamine (and our negative but true statements about adulterated feed ingredients) as it is about ractopamine.

The good side of the export news is that the value of exports is still higher this year. Just over $1.086 billion of U.S. pork was exported during January-May, a 6.1% increase over a year ago (see Figure 2).

Exports to China Drive Futures Rally
The rumors of significant exports to China and last week's slaughter run that was just barely larger than one year ago helped continue the increase in Chicago Mercantile Exchange (CME) Lean Hogs futures this week. Contracts for October, December, February, June and July all hit contract life highs yesterday, while April and May 2008 are within $1 of their contract life high. The eight futures contracts that cover the next 12 months averaged $73.66 carcass ($55.25 live) at Thursday's close.

The rally of the past two weeks has added $10 to $15 to the value of every hog. The rally shows no technical signs of being over, so there may be more to come, especially if we see some actual shipments to China.

More Acres, More Rain Helps
USDA's increase in harvested acres for corn and rains across the Midwest this week also helped the feed cost situation. As can be seen in Figure 3, the costs of soybean meal and corn to make a 16% crude protein hog diet has fallen by $20-30/ton over the past month. Allowing roughly one-third of a ton of feed for a market hog means that the feed cost reduction has added $7-10/head to producers' bottom lines.

Put the two together and we have seen potential producer margins for the remainder of 2007 and all of 2008 increase by $15-25/head in recent weeks. Those margin increases may persist and be reflected in cash markets next year but, then again, they may not. Look carefully at your potential costs and income given this change in futures prices. It may well pay to lock those margins in on at least a portion of your production for the next 12 months. The rally at least begs you to pay attention!



Click to view graphs.

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



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Production Preview
Variation in Pigs Born Alive
Continuing our discussion of variation, this week let's consider the variation in the number of pigs born alive/litter (NBA). Although the week-to-week variation in herd litter size remains relatively low, that does not mean that litter size has relatively low variation within a herd.

Recently a producer expressed frustration about the variation in NBA for consecutive litters from the same sows. He asked whether that was "normal."

In an analysis of data from three different herds, coefficients of variation for within-parity NBA ranged from 27-35%. In practical terms, this means that NBA for two thirds of the litters of any given parity falls within three pigs above or below the parity's average.

Wouldn't it be nice to be able to predict litter size for every sow? If you knew her next litter would be small, you could remove her preemptively and put a more productive female in her place. However, the data on individual sow prediction is not reassuring.

Returning to the data analysis, there are a few points of interest. Across a sow's productive lifetime (eight parities), the average within-sow correlation of litter-to-litter NBA ranged from 0.15-0.18. Since correlation is measured on a scale of 0-1, in practical terms it is easy to appreciate that the correlation of litter-to-litter NBA for any sow is not very large.

Why is NBA so unpredictable at the individual sow level?

Without question, there is both a herd effect and a sow effect. In other words, any sow within a herd has a baseline NBA potential. But other factors also play a role. Examples include the litter service number (number of estrous cycles required to generate the litter), the month of farrowing and sow parity. From the farm's perspective, the timing of matings, age and quality of semen, and the sow's plain of nutrition at the time of follicular development, conception and embryo implementation could also affect NBA.

So although week-to-week variation in herd NBA remains low, higher variability of NBA at the individual sow level could offer potential for improvement. At the very least, it could serve as a caveat against making removal decisions on the basis of a single litter.

Stephanie Rutten-Ramos, DVM
University of Minnesota
rutt0011@umn.edu
Editor's Note: For all your agricultural news, markets and commentaries, go to www.farms.com.



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Legislative Preview
Farm Bill Drafts
The House Agriculture Committee began writing the 2007 farm bill this week and worked late into Thursday night to finish. Chairman Collin Peterson (D-MN) expects the House of Representatives to vote on the farm bill before the August recess -- maybe as early as next week. The House Democratic leadership is providing the committee with an additional $4 billion for nutrition and $2.5 billion for renewable energy above the base-line. This would be part of the $20 billion reserve that was in the budget passed by the House. A major change that Chairman Peterson provided in the commodities title is that a producer will now have the option of using either the current counter-cyclical program or opt for a revenue-based counter-cyclical program. More details of the committee's action will be in next week's column. The Senate Agriculture Committee is expected to begin consideration of the farm bill in September or October.

Payment Limitations -- The House Agriculture Committee is making reforms in payment limitations. The bill would:
  • Adjusted Gross Income (AGI): Under current law, individuals with a 3-year average AGI greater than $2.5 million are ineligible for farm program payments (commodity and conservation), unless 75% of income is agriculturally related, in which case the $2.5 million limit does not apply. The committee will forbid the payment of subsidies to anyone with an AGI of more than $1 million -- no exceptions.

  • Percent of income from agriculture: Individuals with $500,000 to $1 million in income would have to have 66.66% of that income from agriculture to get payments.

  • Direct attribution: Would remove the current three-entity rule and move to direct attribution for farm program and conservation payments.

  • Direct payments: Would increase the current cap on direct payments to $60,000 (currently $40,000).

  • Counter-Cyclical Payments: Would maintain the current counter-cyclical payment (CCP) limit at $65,000.

  • Generic certificates: Would remove the use of generic certificates, but there would be no cap on marketing loan gains/loan deficiency payments.

  • Married couples: Would allow payments to be doubled for a married couple.

  • Conservation payments: Direct attribution would apply to conservation payments, as well as crop subsidies, while increasing conservation program payment limitation to $60,000/year for participants in one program and $125,000/year for participants in more than one program. This increases the existing payment limitation for both the Conservation Reserve Program and the Conservation Security Program, and lowers the current limitation for the Environmental Quality Incentives Program (EQIP) if participating only in EQIP and raises it by $50,000/year if participating in more than one program.
Payment limitations will be a major issue in the Senate.

COOL & Agriculture Appropriations -- The House Appropriations Committee has included a timeline for the implementation of mandatory country-of-origin labeling (COOL) in its fiscal year 2008 agriculture appropriations bill. The bill provides USDA's Agricultural Marketing Service with an additional $2 million to implement COOL and requires USDA to publish a revised rule by Jan. 17, 2008, which would be open for a 60-day comment period. On July 19, 2008, USDA is to publish a final rule, which will implement mandatory COOL on Sept. 30, 2008. The Senate agriculture appropriations bill will have similar language.

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



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