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September 28, 2007 A Penton Media Property



Table Of Contents
Variations in Price Reporting
Cost of Production Hike Brings Losses
Ethanol Does Not Need Federal Support



What's new on National Hog Farmer?
- News: Newsham Purchasing Monsanto Choice Genetics
- North Carolina Finalizes Swine Lagoon Ban
- Swine Flu Virus Turns Endemic
- September Issue's Focus: Manure Management Technologies

NationalHogFarmer.com



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Market Preview
Variations in Price Reporting
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.
e-mail: steve@paragoneconomics.com



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Financial Preview
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 ton.

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 things.

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.

Mark Greenwood
Swine Industry Consultant
Contact Greenwood at mgreenw@agstar.com



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Legislative Preview
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 Soybean Association.

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
Vice President
Bockorny Group
Washington, D.C.



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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. Visit www.PRRSresearch.com

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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