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September 7, 2007 A Penton Media Property

Table Of Contents
Volatile Packer Margins Stabilize
Regional Performance Levels Have Standardized
Circovirus Epidemic Makes News
Record Farm Income

What's new on National Hog Farmer?
- News: U.S. Pork Center Adds Feature
- News: Manure Isn't What it Used to Be
- Sow Housing Debated
- August issue: Focus on Animal Welfare

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Dale Miller, Editor, National Hog Farmer

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Market Preview
Volatile Packer Margins Stabilize
The roller coaster ride of pork packer margins abated a bit last week as my weekly calculated gross margin of $22.43/head was only $0.63/head lower than one week earlier. As you can see from Figure 1, that change represents unusual stability compared to the recent history of this important number.

Pork packers have fallen into the "get some margin and bid it away" syndrome since June. That is usually good for hog producers as it results in some very high hog bids relative to cutout values. It also provides a lot of volatility for hog prices and that, depending on one's ability to deal with rapid changes, can be the source of considerable heartburn.

This year's gross packer margins have been pretty good though. Only one week since February have gross margins been below the five-year average. And, while the ride has been wild, the average margin for this year is actually about $1/head higher than that of last year.

The volatility of margins has resulted in some weeks in which cutout values and carcass weight hog prices have been inverted. That doesn't happen often these days but it is certainly not unprecedented. Figure 2 shows the components of my gross margin calculations, and you can see that prior to 1997, negative meat margins were fairly common.

Packers Adjust Costs to Maintain Positive Margins
Did the rationalization of packing capacity of the early '90s, and the increase in packer leverage that contributed to the 1998-99 price debacle, cause this change? Perhaps. But we have seen sufficient slaughter capacity since then and have not seen any regular return to negative meat margins.

The better explanation, in my opinion, is that packer costs changed in the mid-1990s due to HAACCP (Hazard Analysis and Critical Control Point) systems and other food safety measures. Margins must cover costs in the long run, and it looks to me that the fairly discreet change in gross packer meat margins from an average of around zero to today's level of roughly $8 is more consistent with a cost increase.

Byproduct Values Surge
What is interesting is the composition of the total packer margin in recent weeks. As you can see in Figure 2, byproduct values are record high. They have stabilized somewhat since late July at between $17 and $18/head, but those levels are considerably higher than we have grown accustomed to over the past few years.

The increase in byproduct values started earlier this year as fat prices rose in response to corn and other high-energy feed ingredient prices. Recent increases have been more attributable to price increases for stomachs, snouts and other variety meat cuts. Those increases certainly suggest interest in export markets and would fit the idea that Chinese buyers have been quite active even before the rumors of large purchases drove futures markets higher. I don't have specific data to support this, but the improvement could also be the result of more shipments to Mexico, our largest pork variety meat customer.

Regardless, this is all good for U.S. producers and consumers. Adding value to byproducts adds value to pigs without forcing meat values higher. Export customers get the low-cost products they want. U.S. consumers do not have to pay more for the chops, roasts, and bacon they prefer. U.S. and Canadian producers get more for the hogs they sell. About the only downside is the increase in prices for domestic consumers of these byproducts and variety meats. I guess you can't win them all - but this seems to get close.

Click to view graphs.

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


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Production Preview
Regional Performance Levels Have Standardized
To follow up on our earlier comparison between Canada and the United States, this week's column will review PigChamp data differences in U.S. regions.
We have split the United States into three regions:
  • The Corn Belt includes Iowa, Illinois, Indiana, Kansas, Minnesota, Missouri, Nebraska, Wisconsin, Ohio, South Dakota and North Dakota.

  • The East region, consists of Kentucky, Michigan, North Carolina, Pennsylvania, Tennessee and Arkansas, and

  • The West region includes Colorado, Montana and California (see attached table).
All in all, the results show that the differences are relatively small across the industry. However, we see some evidence that there are different kinds of sow herds in the different regions, with larger herds in the Midwest.

The lack of differences should not be surprising. For the most part, technologies and approaches are common across the industry. Genotypes are available throughout the United States, and we have a good basis of skilled workers in each area. Moreover, the opportunity to transport weaned pigs easily results in a relatively common demand for high productivity across the industry.

This lack of diversity is a change from 10-20 years ago when we saw real differences in sow breeding operations across regions. As breeding-gestation methods have intensified, and these units have become a supplier to off-site nurseries, we have seen improvements across the board. Conversely, we see a decrease in the number of breeding herds that can survive with low productivity.

Click to view table.

by Sukumarannair S. Anil, DVM, and John Deen, DVM
University of Minnesota or
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Animal Health Preview
Circovirus Epidemic Makes News
The recent epidemic of porcine circovirus-associated disease (PCVAD) has been newsworthy. Morbidity and mortality associated with the presence of porcine circovirus type 2 (PCV2) has impacted pork producers throughout North America and around the globe.

Positive News from the Lab
The two accompanying graphs from the Iowa State University Veterinary Diagnostic Laboratory may be telling a similar, perhaps positive story. The first illustrates the number of immunohistochemistry (IHC) tests (chemical analysis of living cells and tissues) by month over the last four-plus years. This test is used by diagnostic laboratories to detect PCV2 in the presence of typical lesions and is very important in the accurate diagnosis of PCVAD. The number of positive tests is decreasing, while the number of negative tests is increasing.

The second graph represents a summary of the number of cases by month in which PCVAD was a primary finding over the past four-plus years as judged by veterinary diagnosticians. These data confirm the increased frequency of PCVAD during 2006 and suggest a decrease in frequency in recent months. The reason for the decline is not clear. But certainly increasing national herd immunity through vaccine and herd stability could be contributing factors.

Accurate Diagnosis Critical
Since PCV2 is present in nearly all pigs, accurate diagnosis by demonstration of lesions and the agent within formalin-fixed tissues by IHC remains the preferred method for diagnosis of the disease, PCVAD, associated with this virus.

Other testing methods, such as PCR (polymerase chain reaction) or serology, do not predict disease status, but may be helpful for defining infection status or placement of interventions.

Click to view graphs.

Kent Schwartz, DVM
Iowa State University Veterinary Diagnostic Laboratory


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Legislative Preview
Record Farm Income
USDA's Economic Research Service (ERS) is forecasting a record net farm income for fiscal year 2007 of $87.1 billion. This is an increase of $28.1 billion over 2006 and $29.7 billion above the 10-year average of $57.4 billion. The past record for net farm income was $85.9 billion in 2004. According to ERS, the average farm household income is greater than the U.S. average household income. The ERS report indicates the value of the sector's production is expected to rise $47.7 billion to $323 billion in 2007, with production forecast to be up $23.5 billion for crops and up $20.4 billion for livestock. ERS states, "The rise in prices of grains and oilseeds due to the demand from the rapid expansion of ethanol production could result in a record corn crop and record cash receipts for crops. Rising prices for milk and poultry have led to a surprisingly large jump in projected cash receipts for livestock and animal products, likely setting a new record level, also."

Record Agricultural Exports - USDA announced that U.S. agricultural exports will reach a record of $79 billion for fiscal year 2007. Projections for fiscal year 2008 are $83.5 billion. The previous record was $68.6 billion that was reached last year. The major growth areas for U.S. agricultural exports are Asia and the Western Hemisphere. China, Canada, and Mexico are key growth markets for FY '08. China is now the fourth-largest market for U.S. agriculture. Secretary of Agriculture Mike Johanns said, "These export numbers, once again, demonstrate that U.S. agricultural products are in high demand around the world. They also reflect tight world markets for grains and oilseeds. U.S. farmers are hard at work to supply these markets, both at home and abroad. In short, the world wants what we produce and at USDA we will continue to work aggressively to maintain and open markets for our farmers and ranchers." USDA expects there will be record sales in FY '08 for bulk grains, oilseeds, cotton and high-value horticultural and livestock products. Imports for FY '08 are estimated at $75 billion, which is up $4.5 billion over FY '07. According to USDA, the largest import gains are expected for fresh and processed fruits, coffee beans and other tropical products, bulk grains, wine and beer.

Peru FTA -- The Agriculture Coalition for Latin American Trade is contacting Congress to urge the passage of the U.S.-Peru Trade Promotion Agreement (PTPA) and relay its importance to U.S. agriculture. The American Farm Bureau Federation (AFBF) estimates that the agreement will increase U.S. agricultural exports by nearly $1.4 billion. The agreement will provide U.S. agriculture with the same duty-free access to the Peruvian market as Peru has to the U.S. market under the Andean Trade Preference Act.

Nearly 70% of current U.S. agricultural exports to Peru will immediately become duty- free. Current tariffs are between 12 and 52%. U.S. products expected to see improved prospects include wheat, feedgrains, cotton, oilseeds and products, rice, dairy products, meats, poultry, processed foods, pet foods, apples and other fruits, juices, distilled spirits and wine.

Currently, Peru has duties as high as 25% on U.S. pork exports. The PTPA will immediately reduce tariffs on all pork products. Some will receive unlimited duty-free access on implementation of the agreement and other items will be phased out within five years. Congress is expected to vote on the trade agreement this year. Members of the coalition include: American Feed Industry Association, American Meat Institute, American Seed Trade Association, American Soybean Association, National Association of Wheat Growers, National Cattlemen's Beef Association, National Chicken Council, National Corn Growers Association, National Cotton Council, National Milk Producers Federation, National Oilseed Processors Association, National Pork Producers Council, U.S. Apple Association, United Egg Producers and USA Rice Federation.

Congress is Back - Congress returned this week from its summer recess. Senate Majority Leader Harry Reid (D-NV) indicated that appropriations will be a priority for the Senate this month. The Senate has only passed one of the 12 annual appropriations bills. The House has completed action on all 12 bills. The new fiscal year begins Sept. 30. Other key issues will be Iraq, Children's Health Insurance Program, higher education legislation, patent law overhaul and defense authorization bill. The question remains when the Senate Agriculture Committee will consider the 2007 farm bill this year.

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


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