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Dale Miller, Editor,
National Hog Farmer
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As cash hog prices have fallen to near or below
breakeven levels for many pork producers, we thought it would be good to
take a look at some historical relationships between the various
published prices that the U.S. Department of Agriculture (USDA)
releases. The relationship between the different purchase methods
changes constantly, especially when markets are making major moves such
as we have seen recently.
Figure 1 shows daily data for prior day base purchase prices by purchase
type from January 2002 through last week. One of the most notable
characteristics of this graph (and the underlying data) is the
variability or "noise" that it contains. The source of this noise is
the wide differences in packer-buying programs that are manifested in
different base price and premium and discount schedules.
Figure 2 shows daily data for prior day net slaughter prices by purchase
type for the same period. Note the "quietness" of these data series
relative to the prior day base prices. One reason, of course, is that
those widely variant packer-buying philosophies must, at the end of the
day, arrive at hog values that are reasonably similar. The net money
paid by each packer must be competitive.
In addition, there is more certainty in the slaughter data in that the
day for which the data are recorded is more certain. Prior day
slaughter data include the prices for all of the pigs actually
slaughtered on a given day. Prior day purchase data include prices for
trades in which the price and a delivery date were agreed to on the
prior day -- regardless of when the delivery date may actually be. That
variation in delivery date is another source of some of the variability
that we see in the daily purchase prices.
Impact of Mandatory Price Reporting
The proposed rules for the renewed mandatory price reporting system will
remove one source of this variation. Should the proposed rule become
final, a purchase will qualify as "negotiated" if it represents
agreement on a price through buyer and seller interaction. The
requirement for "agreement on a delivery date" is being dropped since
many negotiated sales do not arrive at a specific delivery date on the
day that a price agreement is made. This change will put the prices of
these sales into the data for the day of the negotiation instead of the
day of the delivery. We think that is a proper change that will better
reflect the prices negotiated on each day.
Of particular note in both of the graphs below is the relationship of
the Other Market Formula prices to the others. Other Market Formula
prices are prices based on Chicago Mercantile Exchange (CME) Live Hogs
Futures markets. These prices have averaged $1.16 below negotiated
prices and over $2 below hog/pork market formula and other purchase
arrangement prices since January 2002. Is this proof that selling based
on futures markets is a bad idea? Not necessarily.
What it really means is two things. First, when producers sell to
packers based on futures market prices, packers will make sure they
include enough basis in that price to cover them in virtually all
instances. They will hardly ever use the average basis. The reason is
that the packer is now taking the basis risk. There is no such thing as
a free lunch. If you don't want basis risk, you have to pay someone
else to take it and that results in a lower price for your hogs.
The other reason has nothing to do with futures markets and nothing to
do with packers and everything to do with human nature. Note that the
Other Market Formula line rarely goes above the other prices, but is
frequently far below them. That variation is due to producers'
experiences and expectations.
After a time of low prices, producers who were burned by low cash prices
say, "I'm not doing that again," and aggressively forward price hogs
based on futures -- and miss out on the ensuing cyclical rally. That's
what happened in 2004.
The shortfall of Other Market Formula prices in 2006 was the result of
producers' concerns about a normal cyclical low in the fall of 2006.
Those concerns were, no doubt, fed by the predictions of well-meaning
agricultural economists based on years and years of data that showed a
four-year hog cycle. If 2006 was the cyclical low, then it was a very
mild cycle, and producers would have clearly been better off if they had
sold hogs on the cash market.
Futures Market Rewards
The good side of this discussion is that producers who have sold hogs on
futures-based contracts (again, we point out, based on the advice of
well-meaning agricultural economists) are this year being rewarded.
Those prices have run $3 to $4/cwt. higher than the negotiated and
swine/pork market formula prices since mid-August. That difference will
likely grow as we move through the fall, as a good number of hogs were
priced on October and December futures at $70 or more.
Hogs and Pigs Report Analysis
Watch your e-mail this weekend for our summary and analysis of Friday's
Quarterly Hogs and Pigs Report from USDA.
Click to view graph.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
Hermitage NGT offers their North American clients:
- Breeding Stock (GGP/GP/Parent stock)
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- Closed herd breeding programs
- Genetic monitoring through the Hermitage BLUP recording system
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design a program to allow you to take advantage of these exciting
Cost of Production
Hike Brings Losses
It's amazing how quickly market conditions can change.
Remember back in early August? Cash market prices were in the low to mid
$70s and we had every futures month on the board at $70 or above. Plus,
the rumor was that China was in the market for buying lots of U.S. pork.
Life was good, and it seemed that even though we had more hogs coming to
market, prices were going to be profitable. Also, at the same time,
grain prices were coming down and corn in southern Minnesota was below
$3/bu., and it looked like even with the ethanol boom, we were going to
have realistic corn prices.
Now, at the end of September, the cash hog market is hovering in the
high $50s. Corn has jumped from $3/bu. to $3.50/bu. in southern
Minnesota, and soybean meal has jumped from around $220 a ton to $265 a
In just a 60-day period, your cost of production has risen about $8-$9 a
head, and your revenue has dropped $30 a head. Needless to say, I do not
think September will be a profitable month for the pork industry -- and
we could be looking at a tough fourth quarter for the industry.
Lots of Pigs
The fact that there are a lot of pigs out there should not be a surprise
to anyone in the industry if they have been looking at a couple of
The first factor responsible for this trend is the number of weaned pigs
and feeder pigs coming down from Canada. I do not see this trend slowing
down. The Canadian dollar was on par with the U.S. dollar last week.
What many Canadian producers are doing is selling weaned pigs and/or
feeder pigs into the United States, retaining ownership and feeding them
out. To the Canadian industry, this is a means of self-preservation.
Secondly, performance in most sow herd systems in the United States is
excellent. That fact combined with improved production due to the
circovirus vaccines being so effective, equates to a lot more pigs being
produced and marketed.
I remember writing a column in the beginning of 2007 and stating that
death loss on hog farms in the United States was up 1-2%. That equates
to a loss of 70,000 sows.
Today I believe that death loss is down at least 2%. Along with the
improvement in sow productivity, that equates to the addition of 100,000
more sows to the marketplace, even though we didn't actually add more
sows to the U.S. breeding herd.
The Future for Pork
What does the future hold? If you look at the futures market for pork in
2008, things do not look that bad, and there are still opportunities to
lock in profits for next year. If you look at prices on the Chicago
Board of Trade through October 2008, the average price is above $72 or a
total return of $140 a head on a 200-lb. carcass. Even with the higher
feed costs, there is still profit potential for 2008!
I have stated numerous times in this column about locking up profits. It
is up to you as a producer to manage that risk. Since 2004, locking up
prices on the futures market has proven to be the wrong decision, and
you were better off just using the cash market. That still might be
true, but also betting that the cash market will always be there is also
a hedge in my mind. If you know your costs and can see a margin that you
can live with, I think you might sleep better at night than not knowing
what lies ahead. I firmly believe in the next two years that marketing
-- selling your pigs and procuring your feed needs -- will separate the
best from the rest more than any other factor in the marketplace.
Swine Industry Consultant
Contact Greenwood at firstname.lastname@example.org
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Ethanol Does Not
Need Federal Support
A new study, "Fuel Ethanol Subsidies: An Economic
Perspective," indicates the ethanol industry "no longer needs a high
level of federal support." The study, conducted by Thomas Elam of
FarmEcon.com, indicates the influence of the federal support program,
which consists of direct support to small ethanol producers and a tax
credit of 51¢/gal. to fuel blenders who add ethanol to gasoline,
has shifted from making ethanol feasible to causing significant
increases in food costs and distorting planting incentives. According
to Elam, "If the ethanol industry achieves 100% E10 market share in the
United States, it would take about 200 million tons of corn annually.
This is equal to a 10% reduction in the current global grain supply."
The American Meat Institute, National Chicken Council and the National
Turkey Federation commissioned the study.
Senators Support COOL -- Thirty-one senators have sent a letter
to Senator Tom Harkin (D-IA), chairman of the Senate Agriculture
Committee, urging him to include the House-passed farm bill's mandatory
country-of-origin labeling (COOL) compromise in his farm bill chairman's
mark. The Senators said, "Because of USDA's inability over the past
five years to create a workable and common-sense rule, now is the time
for congressional intervention to ensure the long-awaited implementation
of mandatory COOL. The consensus reached by strong COOL proponents and
opponents represents a reasonable compromise and finally clears the way
to timely and reasonable implementation. The problems and concerns
created by USDA among producers, packers and retailers are alleviated by
this compromise language." The letter was organized by Senators Tim
Johnson (D-SD) and Mike Enzi (R-WY).
Water Resource Bill Passes Senate -- The Senate passed the
Water Resources Development Act by a vote of 81-12. The legislation
authorizes funding for flood control, navigation and environmental
projects managed by the Army Corps of Engineers. It provides $3.6
billion for the modernization of the locks and dams on the upper
Mississippi River and the Illinois Waterway system and restoring the
ecosystems. The House overwhelmingly passed the bill on Aug. 1.
President Bush is threatening to veto the bill because of cost.
However, many believe Congress would override a veto. This has been a
high priority of the National Corn Growers Association and the American
Committees Pass Peru Agreement -- The Senate Finance Committee
and the House Ways & Means Committee approved the U.S.-Peru Trade
Promotion Agreement (PTPA). This is the first step in congressional
approval of the agreement. Acting Secretary of Agriculture Chuck Conner
and the Agriculture Coalition for U.S.-Peru Trade held a press
conference this week announcing agriculture's support for the agreement
and urged Congress to approve the PTPA. Speaking on behalf of
agriculture were American Farm Bureau Federation, Corn Refiners
Association, National Association of Wheat Growers, National Cattlemen's
Beef Association, National Corn Growers Association, National Milk
Producers Federation and the National Pork Producers Council.
Continuing Resolution -- Congress plans to pass a continuing
resolution before they leave town this week, which will fund the federal
government until Nov. 16. This will allow the government to continue to
operate as Congress and the administration to continue to work on the FY
'08 appropriation bills.
USDA Issues Final 2007 Direct Payments -- USDA announced that
nearly $4 billion in final 2007 direct payments will be released to
producers with base acres enrolled in the Direct and Counter-Cyclical
Program (DCP). According to USDA, to receive direct payments, producers
with base acres must be enrolled in the DCP for an eligible commodity
for the respective program year. Direct payments are tied to historical
acreage bases and yields established for a farm, rather than the current
farm's production. It is a complicated formula. For each commodity, the
direct payment for each crop year equals 85% of the farm's commodity
base acreage, times the farm's direct payment yield, times the direct
payment rate. The Commodity Credit Corporation reduces final direct
payments by any advance direct payments producers have already received.
For more information on DCP, visit your local USDA office or www.fsa.usda.gov.
P. Scott Shearer
Advancement in PRRS Research Award.
Boehringer Ingelheim is awarding $75,000 annually to fund three
research proposals to help solve the PRRS mystery.
Entries due January 1, 2008.
Pork Industry Calendar
Oct. 3, 2007: SowBridge Program on Heat
Detection; contact: Sherry Hoyer, Iowa State University, by phone (515)
294-4496 or fax (515) 294-5698.
Oct. 11-12, 2007: Employee Management for Production
Agriculture Conference, Airport Marriott Hotel, Kansas City, MO;
contact: Sarah Fogelman, Kansas State University research and Extension
economist, (620) 431-1530.
Click here to get National Hog Farmer's
complete pork industry calendar.
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