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October 19, 2007 A Penton Media Property



Table Of Contents
Cash Hog Prices Show Resiliency
Control the 'People' Factor
EPA Establishes Ag Advisory Committee
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Market Preview
Cash Hog Prices Show Resiliency
If there is anything more remarkable than the weekly slaughter runs we have seen thus far in October (in case you missed it, we set another record last week at 2.353 million head), it has been the fact that cash hog prices have held their own. If you had told me (or anyone else for that matter) last summer that we would see this level of slaughter in October, I would have told you I was concerned, but that slaughter wouldn't get that big, especially that early. If you had told me that slaughter would indeed get this big this early, and that negotiated net hog prices would still be nearly $58, I would have inquired about your inhaling habits!

Figure 1 shows negotiated net prices on a weekly basis. The decline in hog prices two weeks ago was definitely no fun for those selling on that pricing method. But slaughtering 2.321 million head two weeks ago and 2.353 million head last week hasn't triggered an unmitigated disaster. Further, Thursday's price was higher than last week's average, and this week's estimated federally inspected (FI) slaughter is 5,000 head more than last week's pace through Thursday.

The cutout value has fallen as well but it remains above $60/cwt. Again, this is not a bad showing for these kinds of supply levels. Hams are still the only cut that is under heavy pricing pressure. Think of where we would be had ham shipments to Mexico during the summer just matched those of 2006.

None of this means that I'm not concerned and I'm skipping along singing, "Don't Worry, Be Happy" to pork producers. This fall could still be very tough on the bottom line, cash reserves and/or operating loan balances. On average, FI hog slaughter levels out for the remainder of October and into November before spiking about 5% in early December to handle the hogs not slaughtered during the Thanksgiving holiday.

It will be very difficult to push 5% (about 100,000 head) more through U.S. packing plants given the fact that last Saturday's run was 243,000 head. But U.S. packers processed 300,000-plus on a Saturday in 2003 and 2005 and almost did it last year. Oh yes -- and it happened twice in 1998. Ugh.

Pork Demand Holds Prices Together
Why have things held together? Demand. Domestic pork demand is 1.9% higher than last year through August, and export value is higher even though export quantity is still slightly lower than last year (see last week's North American Preview for details). Whether those numbers are going to be large enough to soak up continued high production remains to be seen, but they have done well so far. One packer told me last Friday that they were remarkably "clean" (meaning they had most of the week's production sold) going into the weekend considering the number of hogs they had handled the past two weeks. I hope that trend continues.

Cashing in on Futures Prices
Producers should note that the quotes for negotiated prices, whether on the daily purchase reports or the prior day slaughter reports, will not be a perfect barometer of producer revenues and profits this year. The prices of hogs sold on Other Market Formulas (virtually all cash delivery contracts tied to futures market prices) are running as much as $10/cwt. carcass above the negotiated price. It certainly appears that a number of you did indeed price hogs during last summer's futures rally. Good for you!

And there are many, many more hogs that have been hedged by producers instead of contracted through packers. Those premium prices will not show up in a price report, since the producer will simply sell the hogs at the negotiated or some formula-based price, and then capture the extra profit from the future market when they lift hedges this fall. Good for you, too!

Futures May Provide Profits in '08
Which brings us to the futures market now and what it means relative to fundamental supply and demand. Figure 2 shows a summary of price forecasts by four analysts or analysis groups based on the September Hogs and Pigs Report. Note that all of us actually forecast a different price series, but you can use the annual averages for 2006 to see the "normal" differences that exist in these prices.

Regardless of differences, one thing is clear: none of us believe that current fundamental supply and demand will result in hog prices anywhere near what Chicago Mercantile Exchange Lean Hogs Futures are offering for next year. That doesn't mean the futures are wrong. I don't like to bet against many, many people using real money. But the fact is that futures prices are offering positive margins for much of next year if you have costs in the high $40s on a live weight basis or mid $60s on a carcass weight basis. Perhaps more important, they are offering only small losses in Q1 and Q4 of 2008 and those quarters appear quite problematic at present.




Click to view graphs.

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



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Production Preview
Control the 'People' Factor
In a column a few weeks back, I referred to the concept of "processes that are robust to sources of variation." We'll use today's space to expand on that concept.

The concept of variation seems relatively straightforward -- it can simply be thought of as the extent to which observed values differ from the average. Variation comes from many different sources including season, disease and people-related factors. And while some of these sources are outside of our control, others are not.

The concept of robust processes may seem more challenging in a biological production system. A robust process could be thought of as a process that is insensitive to those factors that cause variation. For example, the use of light timers in a gestation barn can be used to make a breeding program more robust to the effects of changing photoperiod. And vaccination programs can be used to make a herd robust to disease burdens. But can we make processes robust to "people" factors?

There are a few issues critical to developing processes robust to people factors. First, it is important to understand the real sources of variation. Distinctions must be made between coincidences and correlations. For example, while it is easy to associate the presence of an employee with an occurrence, the outcome may have taken place whether that person was there or not. And second, it is important to understand which of these factors can be controlled. For example, vaccines can be used to improve herd immunity, but their effects can be muted if the animals are placed into unsanitary environments.

In biological systems, some processes may be more suitable for robust design. Take, for example, the process of breeding sows into weekly groups. We often credit or blame the manager and breeding crew for achieving or not achieving targets. However, for the established herd, the majority of females bred are freshly weaned sows. A schedule that weans a consistent number of sows week-to-week will provide a consistent base for the breeding groups -- both in number and conception. This, in turn, contributes to more reliable farrowing groups, and leads to more consistent lactation lengths and more consistent piglet weaning age.

For this example, the process' robustness originates with its inputs. Because process inputs are often a large source of variation, addressing issues at this level has the potential to reduce and potentially even eliminate the people factors.

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
EPA Establishes Ag Advisory Committee
The Environmental Protection Agency (EPA) announced the establishment of a Farm, Ranch and Rural Communities Federal Advisory Committee to advise the EPA administrator on environmental policy issues affecting agriculture and rural communities. The committee's membership will include large and small farmers, ranchers and rural communities; rural suppliers, marketers and processors; academics and researchers who study environmental issues impacting agriculture; tribal agricultural groups and environmental and conservation groups. EPA will ask the committee to focus initially on three issues:
  • "How EPA's policies and regulations on climate change and renewable energy will affect the agricultural community. The agricultural industry -- through the development of renewable energy sources -- can play a significant role in the nation's ability to reduce its dependence on oil imports, as well as provide a source and repository of greenhouse gas emissions.

  • An environmental strategy for livestock operations that considers regulatory and voluntary approaches, and provides tools for producers to attain superior environmental performance.

  • Development of a constructive approach to advancing sustainable agriculture and protection of the environment, addressing communication between environmental and agricultural interests and urban encroachment in rural areas."
Ag Groups Oppose Increase for Ethanol -- A coalition of meat and poultry groups has written congressional leaders urging them to oppose any increase in the Renewable Fuel Standard (RFS) for grain-based ethanol in the energy bill. The coalition reminded the leadership that an expansion in the RFS as contained in the Senate-passed energy bill would result in higher production costs, impair international competitiveness and risk driving some production off-shore. The letter stated, "We strongly support efforts to encourage the commercialization of ethanol from cellulosic biomass and similar sources. Nevertheless, we note that by all accounts, this commercialization is still some years away. If Congress chooses to increase the RFS for cellulosic ethanol, the law should be clear that this portion of the mandate is to be met only with non-grains-based fuels. Those signing the letter were the American Meat Institute, National Cattlemen's Beef Association, National Chicken Council, National Meat Association, National Turkey Federation, United Egg Association and United Egg Producers.

25 by '25 -- The House of Representatives passed a resolution expressing the sense of Congress that by the year 2005 at least 25% of the total energy consumed in the United States should come from homegrown renewable sources. Today, renewable energy sources provide approximately 6% of the U.S.' total energy needs. Congressman Collin Peterson (D-MN), chairman of the House Agriculture Committee, and Bob Goodlatte (R-VA), ranking member of the House Agriculture Committee, introduced the resolution.

Former Ag Secretaries Favor Peru Trade -- Four former secretaries of Agriculture have written Congress in support of the Peru Trade Promotion Agreement stating the agreement "will achieve a more balanced bilateral relationship in the agricultural sector." Former secretaries Bob Bergland, John Block, Dan Glickman and Clayton Yeutter also reminded Congress of the gains agriculture has made because of previous trade agreements. "Our food and agricultural exports have grown to all-time records, due almost entirely to prior trade agreements. Indeed, it is difficult to name an agricultural product our farmers sell in the world market that has not benefited from earlier trade agreements. The United States cannot stand by complacently, however, while our competitors are negotiating preferential trade deals around the globe, or we will soon see an erosion of our hard-won access to key markets."

No Progress on Beef with South Korea -- No progress was made on reopening South Korea's market for U.S. beef after two days of meetings between South Korea, the U.S Department of Agriculture and the U.S. Trade Representative. The United States continues to press South Korea to follow Office of International Epizootics standards by reopening its market for all beef products from all ages of cattle.

Grass-Fed Marketing Claim -- USDA's Agricultural Marketing Service (AMS) finalized a voluntary standard for a grass-fed livestock marketing claim. The grass-fed standard will be for a ruminant animal that grass and/or forage was the feed source consumed for the lifetime of the ruminant animal, with the exception of milk consumed prior to weaning. The diet is to be solely from forage and animals cannot be fed grain or grain by-products. The standard will go into effect on Nov. 15.

Senate to Mark Up Farm Bill Next Week -- The Senate Agriculture Committee plans to mark up the farm bill next Wednesday after an agreement was reached between Senators Tom Harkin (D-IA), chairman of the Senate Agriculture Committee; Saxby Chambliss (R-GA), ranking member of the Senate Agriculture Committee; and Kent Conrad (D-ND), chairman of the Senate Budget Committee. Details of the agreement are expected later this week. However, indications are that farmers will be given an option to choose between the current farm program or a state-based revenue insurance program. Also, mandatory country-of-origin labeling for meat is expected to be in the compromise.

More House Members Decide to Retire -- This week the 14th member of the House of Representatives announced he would not run for reelection next year. So far, there are 12 Republicans and two Democrats who have announced they are either retiring or plan to run for the U.S. Senate. There are expected to be additional announcements this year. Only one member of the House Agriculture Committee, Congressman Terry Everett (R-AL), has announced retirement. Five Republican senators have announced they will not be running for reelection.

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



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Pork Industry Calendar
Oct. 26, 2007: Healthy Hogs Seminar, Sampson Community College, Clinton, NC; contact: Karla McKinney at North Carolina State University at (919) 515-4000.

Oct. 28-31, 2007: Global Outlook Symposium & Strategic Planning Conference, Omni Shoreham Hotel, Washington, DC; contact U.S. Meat Export Federation at (303) 623-6328, by fax (303) 623-0297 or log onto www.usmef.org.

Click here to get National Hog Farmer's complete pork industry calendar.



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