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Articles from 2008 In January


Sow Prices Crumple

Sow prices have plunged this week as large numbers of sows -- especially light ones, according to my contacts -- hit the market at a bad time of the year. A collapse in the sow market always seems like a kick in the ribs when you're down, since it always comes just behind low prices for hogs. It is a tough occurrence that, unfortunately, can hardly ever be avoided.

Figure 1 shows weekly averages of prior day slaughter sow prices from USDA's mandatory price reporting (MPR) system (part of report LM_HG201), as well as a 4-week moving average for U.S. sow slaughter. Note that the most recent data points (for the weeks ending Jan. 4 and 11) for sow slaughter are very low because they include both Christmas and New Year's weeks.

Prices for three weight classes are shown. They are highly correlated. Spreads between heavy and light sows tend to increase as sow prices increase (probably due to short supplies of big, fancy sows preferred by fresh sausage manufacturers) and to tighten when sow prices fall.

As you can see, last week's averages were the lowest since late 2002, when the light sow price went to $13. This week's average may well challenge that low, as yesterday's quotes were $17, $19 and $22 for the light, middle and heavy sows, respectively.

Readers should note that the sow prices in mandatory price reporting come from the largest sow slaughterers only. The size requirements of the MPR system exempt smaller, more regional sow slaughter firms and those firms tend to buy sows at even lower prices. In fact, USDA's daily slaughter sow report (NV_LS231) includes virtually all of the MPR sows and many of the sows bought by the smaller packers. The quote from the 231 report for Friday was $11, $20 and $22 (light, medium, heavy sows, respectively) and Agriculture Marketing Service (AMS) reports some low prices of just $2 and $3/cwt. at some country buying points.

Reasons for Collapse
There are three reasons for the collapse -- all part of a normal supply-demand driven hog cycle.

First and foremost, both U.S. and Canadian producers are cutting back their breeding herds. Imports of cull breeding animals (the data include boars) were just 1.3% larger for all of 2007, but were 6.2% larger for the fourth quarter. After two relatively slow weeks to start the year, they shot to over 9,000 head last week. Look for more to come.

U.S. sow slaughter (which includes those Canadian animals) was 2.4% higher for 2007, but was 3.5% higher than one year earlier in the fourth quarter. That means the extra Canadian sows were only part of the increase. U.S. producers are shipping them, too.

Second, it's not the best time of the year for sausage sales, so packers are reluctant to kill many more sows right now. The growth of dinner sausages, Italian sausage and bratwurst over the past few years, not to mention the ever-present pork usage in hot dogs, puts a decidedly warm weather seasonal pattern in sausage sales. It's just too early for this large supply to feed into that.

Finally, this surge is very likely comprised of a lot of under-conditioned sows. This is an estimate on my part and we will see if the USDA weight category data confirm it in weeks to come. High feed prices definitely discourage producers from adding condition to sows before selling them. And, the market still prefers those big sows that produce enough fat to make a good sausage product without adding trim from butcher hogs.

More Sows on the Way
And now the bad news: It will not get very much better soon. I think the Canadian industry is not far along (and may just be getting started) in the process of herd reduction. U.S. producers just began incurring losses of any size in October and the latest run-up in feed prices has really occurred in the past few weeks. Hog futures, while still good, relative to my cash price expectations for the rest of 2008, have faltered a bit. There are many producers contemplating just how long they want to hang on -- especially if they have grain to sell!

It would be pretty hard to get the low end of a bid range below $2/cwt. and I would have to think that this week's low bids would slow down the flow of sows a bit. Don't be surprised to see a low spike like we saw in 2002, but don't expect a recovery to $40 sow prices any time soon.




Click to view graphs.

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

Pork Producer Groups Set Long-Term Lease

The National Pork Board and the National Pork Producers Council (NPPC) have agreed on a new, nearly 30-year lease that allows the Pork Board to remain in its Des Moines, IA, headquarters building until 2037.

The office building at 1776 NW 114th St. is owned by NPPC, and served as the organization’s headquarters until 2001, when a court-approved settlement ended NPPC’s role as general contractor for the pork checkoff program. The Pork Board has occupied the building since that time.

The building was constructed in 1979, mainly with contributions from thousands of pork producers from across the country.

“There is a strong emotional attachment between producers and this building,” says Lynn Harrison, Elk Mound, WI, pork producer and Pork Board president. “The way it was built – with individual contributions – represents the way we continue to work today. We bring producers and their resources together to accomplish things they couldn’t achieve on their own. The building is a powerful symbol of that philosophy.”

The Pork Board’s staff and board members discussed other options for their headquarters late last year as their lease on the building was expiring.

“It was clear almost immediately that pork producers want to keep the building in the family,” says Harrison. “This new lease, with the rent to be determined by third-party appraisals, assures that will happen.”

Hog Cycle: Misery Loves Company

The last time that the hog-corn price ratio was at 30 was the week of June 22, 2006. Omaha cash corn was $1.99/bu. and Iowa-southern Minnesota barrows and gilts sold at a base price of $84.02/cwt carcass or $62.18/cwt live.

I do not know what the cost of producing corn was in the 2005-06 crop year, but I would bet money that it was higher than $1.99/bu. Whomever sold corn that week at $1.99/bu. would not have been a happy camper if they had not used some effective risk management/price enhancement strategies or received government payments. In fact, they may have been downright angry had neither of those taken place.

The reason for this soliloquy is to pose this question: Would the corn seller have been any better off if the hog producers that week decided to sell the hogs for 10% less? Would the hog producers have been better or worse off? How would that action, altruistic as it may have been, have affected hog producers' future abilities to buy corn?

It's that time in the hog cycle again when hog producers are asking packers and retailers to do just what I have described: Cut their selling prices. And about the only good reason I can come up with for that desire is that misery loves company. Let's think this through.

The reason that any seller reduces his/her price is to sell more of a product. That desire may be driven by shelves or warehouses full of surplus product or by a desire to increase profits, but whatever the reason, the goal is the same: Increase the number of units sold.

If the demand for the product in question is elastic, then the number of units sold will increase by a larger percentage than the price is decreased and the seller's total revenue will rise. If the demand is inelastic (such as the demand for pork!), the seller's revenues will fall -- but he/she may be willing to do that to empty the shelves or warehouse, or to attract customers who may buy other items on which the seller can make a profit.

Slashing Retail Prices Wouldn't Boost Sales
Would cutting retail pork prices now help move more product? Absolutely. Consumers will buy more at a lower price. But we need to ask ourselves whether product movement has really been a problem. Unfortunately, November is the most recent month for which we have the data to answer that question since domestic pork disappearance is a function of stocks, production, exports and imports.

Figure 1 illustrates the results of monthly domestic disappearance calculations, and clearly shows that monthly domestic pork disappearance was record high in October and November. In those two months, U.S. retailers and foodservice establishments moved 155 million and 108 million pounds more pork, respectively, than they did one year ago. That's an increase of 8.9% and 5.9%. If we adjust for the difference in slaughter days (since disappearance is a function of production and production is a function of slaughter days), during October and November 2007 vs. 2006, those numbers are +4.1% and +5.9%.

During those two months, the amount of pork in cold storage did increase, but the increase amounted to 4.4 million pounds (+0.6%) in October and 7.6 million pounds (+1.6%) in November vs. one year ago. Production in those two months was 211.5 million pounds (11%) and 149.8 million pounds (8.0%) higher than one year ago. It is apparent to me that domestic pork movement was not a problem. We sold more than we ever have and put very little product into freezers.

So what would slashing retail prices accomplish? It wouldn't do much except to reduce the number of dollars flowing into the pork value chain and reduce profits of retailers, restaurateurs and, perhaps, packers. I would never argue for extreme profits for any of those groups -- but retailers and restaurants do not have to sell pork and they will not sell it if it is not profitable.

Finally, the USDA retail price data is still very shaky. It is still derived from prices gathered by the Department of Commerce as part of its monthly computations of the consumer price index. But food and meat comprise such a small proportion of total expenditures that Commerce has gathered prices on fewer and fewer pork items over time. In addition, Commerce has no idea how much product sells at each price. Every piece of evidence suggests that pork featuring was widespread this fall, especially in October. If people indeed buy more at lower prices, it makes sense to conclude that the $2.39 special on pork chops should be weighted much heavier than the regular price of $3.39, right? Yet Commerce and USDA would publish the average as $2.89 -- equal weighting because they have no other data.

What makes this rather maddening is that the Livestock Reporting Act of 1999 that created the mandatory price reporting system also created a retail price system based on scanner-derived data that did include sales volume. That program lapsed in 2004 when several key senators decided to allow the enabling law to lapse due to phantom "problems" with mandatory price reporting. The scanner-based system has been revived, but it is not yet again operational, and it will be a while before we have the data to fill the nearly three-year gap and create a useful data series.

Glut of Hogs Produces Low Prices
Hog prices are low because there are lots of hogs available largely because hog producers solved their circovirus death and morbidity losses en masse and did so very abruptly. Let's get the hogs to town, do whatever we have to do to get them moved, and not dwell on whether someone else is making money. When hog prices go back up (and they will!) you are still going to need those people to aggressively sell your product. And given where retail prices may be headed in the future, they may have to work very hard to get that done.




Click to view graphs.

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

Clearing Up the Confusion Over Pork Quality-Plus

Fact sheet offers quick rundown of new industry program.

Participation in the National Pork Board's Pork Quality Assurance-Plus (PQA-Plus) program, introduced last June at World Pork Expo, has been slowed by some confusion as producers try to figure out how to move beyond the old Pork Quality Assurance (PQA) program and Swine Welfare Assurance Program (SWAP).

For its part, PQA was around for about 20 years. It was a simple sell. Producers voluntarily became certified, and their swine veterinarians signed a card during a herd visit confirming that the producer knew about the correct use of medications.

However, there really has been little validation that the producer was doing the right thing in PQA, says Colin Johnson, Iowa Pork Industry Center (IPIC) Extension specialist and PQA advisor, based in Ames, IA.

SWAP followed in an attempt to place more emphasis on animal care and handling.

“What PQA-Plus has done is combine PQA with SWAP, lumping those older programs together and streamlining them into PQA-Plus,” he adds.

Similar to PQA, PQA-Plus is a voluntary program with a three-year producer certification.

“Current PQA certification is valid until its expiration, when producers should go through the PQA-Plus certification process,” Johnson clarifies.

There has been some confusion as to how producers should make the transition from those older programs to PQA-Plus. To help Iowa producers, the Iowa Pork Producers Association and IPIC banded together to build a question-and-answer fact sheet. It can be accessed on the IPIC Web site at: www.ipic.iastate.edu/information/PQAPlus.factsheet.pdf.

Questions and answers follow:

What does the PQA-Plus program include?

There are three separate components:

  • PQA-Plus certification for the producer;

  • PQA-Plus site status for farm sites; and

  • Potential audit of the farm site (random).

How do I get certified in PQA-Plus?

Certification requires attendance at a training session conducted by a PQA-Plus advisor. The advisor records your information with the National Pork Board, and a PQA-Plus certification card will be issued to you. Producers can be certified without obtaining site status.

Who are the PQA-Plus advisors and how do I find one?

Advisors can be veterinarians, Extension specialists and educators who have two years of documented production experience and have successfully completed training to be a PQA-Plus trainer. To locate an advisor, contact the Pork Checkoff Service Center at (800) 456-7675 or visit the PQA-Plus Web site at www.pork.org.

If my PQA Level III does not expire until 2009, do I need to recertify before then?

Producers do not need to join PQA-Plus until their PQA certification expires.

What if I am 19 years old and still exhibit in swine shows?

If you are 19 or older, you need to be certified through the new PQA-Plus program. Johnson explains that youth exhibitors aged 8-18 need to participate in the “Youth PQA-Plus” program.

Is there a cost to become PQA-Plus certified or to achieve site status?

A fee schedule will be determined by the certified PQA-Plus advisor to reflect costs of services, including program administration activities. Training for certification takes about two hours and many advisors will likely charge $25/participant in a group setting. Individual certifications may range from $25 to 50. Site assessments will vary greatly in cost depending on the size of the site, housing arrangements and the advisor's prior interaction with the farm, Johnson says. The minimum charge will be $100/site.

What is the difference between certification and site status?

Certification refers to the individual, while site status refers to a specific production site. An individual can be certified without having any connection to a specific production site.

How do I obtain a site status for my farm?

For site status, the production site must first be identified with a National Animal Identification System premises identification number that can be obtained from the state veterinarian or animal health official. A PQA-Plus-certified individual must be associated with the site, and an assessment of animal care must take place. A PQA-Plus advisor, or an individual with direct knowledge of the farm who has a PQA-Plus Site Self-Assessment Endorsement, is eligible to conduct the site assessment.

What is PQA-Plus Self-Assessment?

A PQA-Plus Self-Assessment En-dorsement allows individuals to be trained in the assessment process, pass a test and then conduct a PQA-Plus Site Self-Assessment of the operation with which they are directly associated. A PQA-Plus advisor will review assessment results and report completion of the site assessment to the Pork Board.

How can I receive a PQA-Plus Self-Assessment Endorsement?

For a Self-Assessment Endorsement, producers must hold current PQA-Plus certification, attend a training session with a PQA-Plus advisor, and pass a test covering the 10 Good Production Practices and the on-farm assessment process.

IPIC's Johnson sees particular value in the site assessment. “It opens the door to bring some new tools into the operation, and it provides tremendous value in having another set of eyes in the operation looking at production and public health-related issues.”

Once a farm site assessment has been completed, the site is placed into a pool/database maintained by the Pork Board, explains Johnson. “After so many site assessments have been done, a separate third party contracted with by the Pork Board will randomly select a farm to audit, to validate to the customer that this program is working,” he notes.

In addition, the audit will not be a pass-fail for the site. It is designed to provide some assurance that the program is set up properly, and if lapses are discovered, then they can be corrected. But ultimately, the goal of the audit is to show that PQA-Plus is being implemented properly in the industry, acknowledges Johnson.

PQA-Plus Program Update

The Pork Quality-Plus (PQA-Plus) trainers are providing uniform instruction of advisors in all states to ensure that all producers are receiving the same message, assures Paul Sundberg, DVM, vice president of Science and Technology for the National Pork Board.

That way, when restaurants and retailers come calling, the industry can respond that producers have been uniformly educated about proper production practices, their farm sites have been assessed and program implementation in the industry has been verified.

“We've got to have assessments done in a uniform manner, because we fully expect restaurants and retailers to ask for assurances about industry implementation in the future,” Sundberg adds. Assessments are producer-friendly, commonly in cooperation with the regular swine veterinarian.

In order to demonstrate this implementation, premises identification is necessary (see related story, pages 22-24), according to Sundberg. About 66% of pork producers have enrolled their farms in USDA's National Animal Identification System (NAIS) program.

Producers can wait to adopt PQA-Plus until after their current PQA enrollment expires. A better understanding of the value of participation and market demand could be another factor that might encourage early enrollment, he says.

Hatfield Quality Meats (Hatfield, PA) has taken that first step in market demand. “They have said that all of their pork suppliers need to be PQA-Plus certified or educated. Once that is done, then those producers have 90 days to get a site assessment,” Sundberg explains. He says Hatfield has agreed to allow producers to complete the rollover of their current PQA program before requiring certification in the new PQA-Plus program.

However, he stresses there are other good reasons beyond market demand for producers to consider completing certification in PQA-Plus. “There is new information in PQA-Plus, better information about standard operating procedures, such as needle use, and more information about proper antibiotic use,” Sundberg says.

Information has also been updated on facilities, air quality and water quality management.

Sundberg says swine veterinarians report one notable advantage of using PQA-Plus is in helping producers with sows using body condition scores. “For example, swine veterinarians used to be just able to say those sows looked too thin, and now they can provide the guidelines for what should be happening and talk about how to get there, instead of just saying, ‘here is what they should look like,’” he observes.

The PQA-Plus program offers knowledge to improve production practices at a time when producers are facing increased feed and other production costs and lower returns.

In the end, PQA-Plus should enable producers to spend a buck and get back more than they invested, while improving their operation and securing market access, Sundberg states.

Researchers Identify New Swine Flu Strain

A team of scientists uncovers avian genes in swine influenza virus strain.

Scientists in the United States collaborated in the discovery of a new strain of swine influenza virus (SIV), H2N3. The H2 viruses are unique to swine.

This new flu strain has a molecular twist: It is composed of avian and swine influenza virus strains.

USDA Agriculture Research Service (ARS) veterinarians Juergen Richt, Amy Vincent, Kelly Lager and Phillip Gauger conducted the breakthrough work with Iowa State University (ISU) visiting scientist Wenjun Ma, ISU veterinarian Bruce Janke and other colleagues at the University of Minnesota and St. Jude Children's Research Hospital, Memphis, TN. The ARS veterinarians work at the agency's National Animal Disease Center in Ames, IA.

The research team studied an influenza virus that was first identified by University of Minnesota veterinary diagnostician Marie Gramer. The virus infected two groups of pigs at separate production facilities in 2006, where both groups of pigs drank from ponds frequented by migrating waterfowl.

Molecular studies indicated the untypable virus was an H2N3 influenza virus that is closely related to an H2N3 strain found in mallard ducks. But this was the first time the strain had been detected in mammals.

Influenza viruses have eight gene segments, all of which are interchangeable between different virus strains. Two gene segments code for virus surface proteins that help decide whether an influenza virus can infect a specific host and start reproducing.

In the newly isolated H2N3 flu strain, researchers report that the avian H2 and N3 gene segments mixed with gene segments from common swine influenza viruses. This exchange and additional mutations gave the H2N3 viruses the ability to infect swine. Lab tests confirmed that this strain of H2N3 could also infect mice and ferrets.

Gramer clarifies the role of pigs in the identification of this new strain of SIV. “Pigs are suspected to be a mixing vessel for avian and human influenza viruses because cells in their airways and lungs carry receptors for both human and avian influenza viruses. Supporting this theory are findings of genetic reassortment between avian- and human-like influenza viruses in Italian pigs.”

Richard Webby, an international expert in human and animal influenza viruses at St. Jude Children's Research Hospital, worked closely with the many veterinarians involved with this research, and co-authored the scientific article describing the discovery.

In the article, Webby observes the role that pigs play in the transmission of influenza viruses: “Pigs have often been implicated in the emergence of human pandemic strains. More recent evidence has, however, shown that similar receptor expression is also available in the human and quail host, and the direct evidence that human pandemic viruses are generated in swine is ambiguous.”

“Nevertheless, our findings of H2N3 in swine provide further evidence for the potential of swine to promote reassortment between different influenza viruses,” the authors conclude.

The findings also support the need to continue monitoring swine and farm workers for H2 subtype viruses and other flu strains that might someday threaten swine and human health.

Gramer emphasizes that no illnesses were reported among farm workers in connection with the swine cases, and no workers were tested at the time. However, serologic testing of the workers is scheduled soon and will be conducted under a grant from the Centers for Disease Control and Prevention.

Does the newfound virus represent a threat to humans? “No more than any other influenza virus in the world,” Gramer says. “Transmission of flu from pigs to humans is likely rare. This flu, itself, is rare… we haven't found it again.”

Actinobacillus Suis Poses Uncertain Risk

This bacterial organism causes unpredictable outbreaks, especially in multi-site production systems.

Today, young growing pigs become exposed to disease-causing bacteria, but their immune systems ward off the spread of the organisms in the body. These bacteria are harbored in the tonsil or lungs, without causing clinical disease.

When naive pigs encounter other pigs shedding the organisms, they may become infected and develop clinical disease, depending on bacterial load and various stress factors.

One such bacterial organism causing unpredictable outbreaks is Actinobacillus suis (A. suis). This bacteria is more common in pigs reared in multi-site production systems, where a few carrier animals pose a risk of exposure to the rest of the population. These carrier pigs can shed the A. suis organism from the tonsil, where it resides in these clinically normal animals. Susceptible animals develop a bacterial septicemia causing acute respiratory disease or sudden death.

A. suis is sensitive to many antibiotics, and animals respond well to individual, prompt treatment.

Case Study No. 1

A farm purchasing 2,400 weaner pigs every two weeks was facing persistent challenges with respiratory disease two to eight weeks after delivery. The pigs were negative for porcine reproductive and respiratory syndrome (PRRS). The producer normally placed the pigs on water medication for five days, one week after arrival at the wean-to-finish barns. The pigs developed a mild, chronic cough.

One morning the producer called to report that 35 “good-looking” pigs died in three days.

At the wean-to-finish barn, 15% of the pigs had a mild cough; 2% of the pigs demonstrated labored breathing with a cyanotic (red-purple) appearance of the ears. Eleven more good quality pigs were found dead.

Upon postmortem examination of several pigs, the thoracic and abdominal cavities contained a moderate amount of light yellow fluid. All of the lungs had lesions. Six pigs showing signs of labored breathing were euthanized. Tissues were sent to the lab.

However, due to the severity of this respiratory outbreak, a treatment plan had to be developed immediately.

Lung appearance and the acute nature of the outbreak suggested either Actinobacillus pleuropneumonia (APP) infection or A. suis. The entire population of pigs was injected with an antibiotic and given water medication.

The lab results confirmed A. suis on the lungs, liver and spleen. A test for porcine reproductive and respiratory syndrome (PRRS) virus was negative; however, lung tissue was positive for swine influenza virus (SIV). Streptococcus suis was also isolated.

Based on the isolation of the two bacterial organisms, I revised the feed and water medication programs to address the antibiotic sensitivities of both organisms. The lab confirmed SIV, and the sow unit agreed to vaccinate sows. Also, the producer started treating all incoming pigs with a long-acting injectable antibiotic. Water medication was to be a last resort.

Case Study No. 2

A farrow-to-finish producer, who expanded his sow herd three years ago to 1,200 sows, was having some unexplained deaths at a finishing site. Semi-annual blood testing of the sow unit and nursery were negative for PRRS and SIV. Nursery mortality remained under 2%. The pigs were vaccinated for Mycoplasmal pneumonia at 5 and 7 weeks of age.

A walkthrough of the nursery revealed no signs of clinical disease. In walkthroughs of finishers, a mild cough was heard in a barn with pigs 11 and 12 weeks old, as well as in a barn with pigs 13 and 14 weeks old. Several pigs also had labored breathing, gaunted with cyanotic ears and underlines. Three pigs were euthanized, and postmortem exams demonstrated extremely enlarged lymph nodes between the two lung lobes. The problem rapidly dissipated in the rest of the finishing sites as the pigs got older; fall-behind pigs were observed.

The lab had cultured A. suis from the lung and also found PCV2 (porcine circovirus type 2). The lymph nodes were also stained positive for PCV2.

A. suis was the likely cause of the unexplained finishing deaths; however, the presence of PCV2 posed a challenge to the immune system.

I revised the farm's vaccination program to include PCV2 vaccination of all piglets, and the owner elected to inject all piglets at weaning with a long-acting antibiotic for A. suis.

Summary

Actinobacillus suis is not easy to routinely diagnose. Many times the animals are carriers and the infection goes unrecognized until there is a problem. Recently, a PCR (polymerase chain reaction) test was developed by tonsilar swabs. A diagnosis is usually made by tissue analysis. Commercial vaccines are not available. Therefore, control and prevention are customized for each farm. Consult with your veterinarian to confirm and implement a control program for A. suis on your farm.

Perfect Storm Converges On Struggling Industry

Perfect Storm Converges On Struggling Industry

All is not well in the Canadian pork industry.

Producers from one end of Canada to the other are enduring losses of a magnitude not seen since the fall and winter of 1998-99.

Slaughter capacity is being lost and Canadian packers are also suffering severe losses.

The difference between those dire days in 1998-99 and now is that there doesn't appear to be a light at the end of the tunnel. In 1998, the problem was basically a temporary surplus of hogs.

Some are describing the situation facing the Canadian pork industry as a “perfect storm,” with various factors converging to create challenges that will test industry participants to the limits.

Exchange Rate Review

A good place to start is to review the relatively rapid appreciation of the Canadian exchange rate relative to the U.S. dollar over the past few years.

Figure 1 shows how many U.S. dollars it takes to buy one Canadian dollar. Back in 2004, it only took about 75 cents (US) to buy one Canadian dollar. As of November 2007, it took over one U.S. dollar to buy one Canadian dollar.

The impact of this currency shift is best explained by looking at how prices are discovered in Canada. As with most agricultural commodities, Canadian hog and pork prices closely follow the U.S. price because Canadian pork producers are readily able to sell to U.S. buyers. This ability results in a price arbitrage, which keeps prices in the United States and Canada closely correlated. The price arbitrage has historically been a fixture of the North American live hog and pork pricing structure.

After the U.S. hog/pork price, the next step in the Canadian price discovery process is the exchange rate. If the exchange rate appreciates, the Canadian price will decline, and vice versa. As a basic rule of thumb, for every 1% change in the exchange rate, hog prices in Canada will move by about 1% in the opposite direction.

The final part of price discovery is the “spread,” or “basis.” The most important component of the spread or basis is the cost of transportation to an alternative market or packer outside of the Canadian-producing region, such as the provinces of Ontario or Manitoba.

Currency Crunch

Movements in the exchange rate are immediately translated into changes in price. This occurs because about 85% of Canadian hogs are priced on a formula tied to a particular U.S. market or pricing structure. Therefore, the exchange rate is a key part of the pricing formula.

Figure 2 illustrates how the exchange rate impacts hog prices. The graph shows U.S. carcass prices converted into Canadian dollars (Can$). One line shows what pricing would have been like in Canada had exchange rates stayed where they were at the start of 2007 (about US$0.85). The other line shows prices based on actual exchange rates.

The graph shows by the end of the year that the appreciation this year alone cost Canadian producers about $10/cwt., carcass, or approximately $20/market hog. The most important point is that the appreciation simply trimmed top line revenues directly and rapidly, especially since the middle of 2007.

Feed Cost Challenge

Beyond the exchange rate, the most important challenge facing Canadian pork producers is the feed cost differential vs. their U.S. counterparts.

The cost of production models used at the George Morris Centre indicate that the most efficient producers in Canada face a feed cost differential of at least Can$5/head, and more likely up to $8/head. In recent months, the spread has likely been worse.

The root of the feed cost problem, of course, is higher grain pricing in Canada. Ontario is on an import basis in corn, and prairie barley pricing has been running higher than U.S. corn for the last several years.

The reasons for the feedgrain disadvantage are centered largely on the U.S. Farm Bill of 2002. Crop support programs kept feedgrain prices low and production high in the United States. As a result, Canadian crop acres and production were reduced over the years, which in turn meant that relative pricing in Canada increased compared to the United States.

Besides the higher feed costs and the shift in currency values, Canadian producers have dealt with a weakening revenue stream.

Packer Challenges

Clearly, the Canadian packing industry has been very inefficient compared to packers in the United States. A lack of economies of scale and double shifting are the biggest obstacles. These inefficiencies have left Canadian packers unable to price hogs at a level that would be more competitive with U.S. packers.

Naturally, the appreciation of the Canadian dollar has negatively impacted Canadian packers as well. Consider this example: If Canadian labor costs are $20/hour (including benefits), that translates into $15/hour labor costs in the United States, when the exchange rate is US$0.75. That looks very competitive with U.S. rates.

However, when the exchange rate is par (Can$20 = US$20), Canadian packers are not competitive with U.S. rates. Canadian operating costs were relatively competitive in U.S. dollars at a low exchange rate but, at par, remaining competitive is much more difficult.

In addition, Canadian packers are suffering from a severe labor shortage. Packers, particularly those in the western provinces, have been unable to staff their plants at rates that will allow them to operate at capacity. This, of course, means the plants are not operating as efficiently as they could. The lack of labor also prevents these packers from adding value to pork cuts, which means lost revenues and lost market share.

Figure 3 shows Canadian hog slaughter from 1997 through 2007 (estimated). As shown, total hog slaughter has been declining fairly significantly over the past three years.

Losses Take a Toll

Due to these and other factors, Canadian producers have faced severe financial stress during 2007. They have simply not been competitive compared to U.S. producers for the past few years.

According to Iowa State University data, farrow-to-finish operators in the United States likely saw about two months of losses from 2004 through September 2007. Similar data compiled at the George Morris Centre estimates that Canadian producers likely saw 19 months of losses during those same 45 months.

Debilitating losses and higher feed costs have meant more and more weaners and feeders sent south to U.S. finishers. Likewise, Canadian market hogs have moved south in larger numbers as Canadian packers close or slow their daily slaughter.

In the past, U.S. producers saw increasing exports of live hogs as a sign of Canadian advantage. Now, the increased live hog volumes are viewed as a sign of Canadian weakness.

The lack of competitiveness through the Canadian supply chain is resulting in incremental gains for the U.S. industry. Canadian pork exports to the United States are on a steady decline, while U.S. exports climb steadily upward (Figure 4). Canada still has a positive trade balance in pork, but it is slipping. During the fall of 2007, Canada became the second-largest export market for U.S. pork, surpassing Mexico. From a Canadian perspective, this is a dubious honor, but it is reflective of the Canadian pork industry's situation.

What Does the Future Hold?

Going forward, prospects for Canadian pork producers do not look promising, at least through 2008. In late December, current futures markets were suggesting that U.S. prices could average around $69/cwt. on a carcass basis in 2008. At a par exchange rate, and using typical Canadian pricing formulas, that would translate into below breakeven prices once again. In turn, this weakness has translated into decreasing sow numbers across Canada. I expect that attrition to accelerate in 2008 as producers decide to leave the business.

To Stall or Not to Stall?

What is the single, most important issue facing the pork industry in 2008?

In the near term, feed costs would surely top most lists. In the long term, sow gestation housing would likely be a high priority. Both could very easily reshape U.S. pork production as we know it today.

It was just 12 months ago that Smithfield Foods announced their intent to phase out individual gestation stalls within a decade. As the nation's largest pork producer and processor, the ripple effect was probably inevitable.

Since then, the sow gestation housing issue has become the industry's dilemma and its challenge. Most pork producers I've talked to are trying to decide if and when they will abandon individual sow stalls.

Who's Decision Is It, Anyway?

I have no problem with Smithfield Foods making a management decision that better positions their various branded pork products for the foreign or domestic marketplace. It is a marketing decision, and they have every right to run their business in the best interests of their shareholders.

In the last few years, the citizens of Florida, Arizona and Oregon raised their collective voices in opposition to individual gestation stalls by voting to outlaw their use.

In mid-December, the debate was exacerbated by an announcement from the Colorado Pork Producers Council (CPPC) stating its members have decided to “end the use of gestation crates in response to public concerns and changing market conditions.” The release went on to say: “Colorado pork producers will embark on a 10-year phase-in (period) that will allow producers to thoroughly evaluate and determine the best animal welfare practices for group housing.”

Did the announcement appease the anti-gestation-stall campaigners?

Hardly. Shortly after the announcement, Wayne Pacelle, who heads the Humane Society of the United States, praised the CPPC decision, then quickly took aim at Colorado egg producers, calling for them to eliminate chicken cages.

Translated, Pacelle is saying: “That's nice, but now we want you to do this, and this, and this!”

What troubles me most about the CPPC statement is the implication that group sow housing is the only way to go. That seems a bit premature.

It seems to me now would be a good time to step back and consider whether there is some middle ground, which, in fact, could better serve the sows' well-being than group housing.

For example, gestation stalls could be designed with more space — wider, longer, taller.

When farms are successful at increasing the average parity of the sow herd to 3 or higher, generally they are dealing with larger sows that need more space to extend their feet and legs while they are lying down.

Modern nutritional programs and genetic selection have resulted in larger sows, too. We must recognize the fact that the “standard” gestation stall may not fit the 2008-model sows.

Some of you might also remember a turn-around gestation stall design that was studied at the University of Illinois nearly 20 years ago. Some feel the design was ahead of its time. Maybe some tweaking of the design would lead to a better option than individual stalls or group housing.

Yes, of course, grouping sows in gestation can and does work very well for some. I've seen several that deserve high marks for both productivity and sow well-being.

New Series Might Help

Negotiating the sow gestation-housing maze will take time, trial and error, and refinement — the same evolutionary process that eventually led the industry to widespread use of gestation stalls.

We recognize that there is a lot to learn, and perhaps relearn, about housing gestating sows. If the Smithfield decision is to serve as an industry standard, that means we have nine years to sort this out.

In this issue, you will find two articles describing two very different approaches to housing, feeding and caring for sows in gestation. These are the first in a series of articles we will offer on as many different sow housing options as we can find. Some will be proven and documented with sow performance data. Others will be new technologies still being refined, but worth considering.

In this industry, we are fond of saying: “There's more than one way to raise hogs.”

That's certainly true, and it remains at the heart of our editorial commitment to deliver solid information that will help you make informed management decisions.

I'm sure those who decide to move away from sow stalls will study, test and revise various options until they fit the needs of the sows in their care. We'll do our best to share as many of those stories as we can in the coming year.

Putting Hog Industry Growth in Perspective

Agricultural economists review the industry's growth over the last two decades and take a stab at what lies ahead.

The structural changes and growth of the pork industry have been startling, notes John Lawrence, professor of agricultural economics at Iowa State University (ISU), who has been studying the subject with Glenn Grimes of the University of Missouri for the last 12 years.

“Two decades ago, there were hundreds of thousands of hog enterprises that were often part of diversified farming operations,” Lawrence says.

“Today, it's been estimated that fewer than 200 hog operations, marketing at least 50,000 hogs a year, sold 64% of U.S. hogs in 2006. Furthermore, another 1,450 firms with annual sales of 10,000 to 50,000 head marketed 21%; the remaining 15% of hogs were sold by firms marketing less than 10,000 hogs a year,” he adds.

Table 1 shows the estimated number of U.S. hog operations in 2006 and their market share by size category. The total number of operations, at 56,350, was based on USDA's projected number of owner operators. That number declined by 20% from the previous survey taken in 2003, Lawrence says.

Table 2 shows that in 1988, about one third of U.S. hogs were produced on farms selling less than a thousand hogs. By 2006, about two-thirds of the hogs were raised on farms marketing 50,000 head or more.

These structural changes have jointly affected the producing and packing industries, Lawrence observes. “For example, in 1988, the estimated rate of slaughter was 87.8 million head from 323,000 farms. By 2006, there were 102 million head slaughtered — 14 million head more — but on 80% fewer farms with hogs.

“That is a pretty substantial change in a rapidly changing industry,” he says. Size changes continued over short spans of time. From 2003 to 2006, the industry went from 59% of operators producing over 50,000 head marketed to 65%, a 10% increase.

Although the numbers are surprising, Lawrence says he's seen some evidence that industry growth has started to slow in the last decade, probably due to the double-digit losses producers absorbed in 1998-1999.

Still, the largest producers are getting larger and grabbing more market share, he concludes.

Contract Production Growth

Lawrence says contract hog production presents some interesting twists regarding the structure of the pork industry. In 2003, the industry had been through a rough patch. Those raising contract pigs were pretty happy because they were saved from lower prices, while the owners of those pigs were not so sure they liked contracting.

In 2006, the reverse was true. “We had been through a profitable time and prices were up. Contract growers were less than happy. They wished they were independent producers.”

Of the U.S. hogs finished in 2006, two-thirds were owned by firms that used production contracts.

Table 3 reports the estimated percentage of hogs that were produced by growers under contract in the growers' facilities. That includes an estimated 20% of U.S. farrowings and 46% of U.S. market hogs.

Overall, Lawrence says a review of the industry structure study reflects that contract growers have been very satisfied with their arrangements over the 8- to 10-year life of their contracts.

That contrasts with what critics said about hog contracts a decade or so ago, he recalls. Critics suggested that only those who couldn't raise hogs on their own raised hogs under contract. They said that contract hog barns would never last 10 years, and that contract owners would rob growers blind and leave them hanging. Many contract growers said they would become independent producers just as soon as their contracts ran out.

“Quite frankly, none of those things happened,” Lawrence says. In most cases, buildings have been well-maintained and funds have been placed into escrow to ensure that repairs and equipment replacement were done as needed.

Nearly 80% of contract growers reported in both 2003 and 2006 industry surveys that they planned to continue contracting and stay with the same company when their contracts expired.

A decade or more ago, the joke was that contract hog production was a low-paying job and you got to keep all of the manure, Lawrence recalls. Today, manure's escalating value and fertilizer's 100% increase in price in the last five years are attracting droves of grain farmers to contract hog production.

Those changes are not surprising as farmers adapt to survive.

Similarly, driving down the cost of production and adopting technologies, such as all-in, all-out and multiple-site production to improve animal health, have enabled the pork industry to expand at a dizzying rate in the last 20 years, Lawrence says.

Future Industry Structure

There's little doubt that just as the energy crisis will continue to impact the general economy, so too, will rising feed costs affect the structure and future growth of the U.S. pork industry.

Lawrence suggests that Iowa's and Minnesota's future looks fairly bright because they have a plentiful supply of fertile farmland to grow the grain to finish out a sizeable number of U.S. and Canadian pigs. In the last decade, Iowa has added 2.9 million finishing spaces, while Minnesota has added 1.6 million. And both states have suitable cropland to readily absorb manure nutrients.

However, rising feed costs will put added financial pressure on grain-deficit states and hog operations that operate there, especially the larger operations.

That may well play a huge role in keeping hog production and family-sized operations a mainstay in the Midwest, according to Lawrence.

Table 1. Estimated Total Number of U.S. Hog Operations and Share of U.S. Production in 2006, by Size Category
Category Number of Operations Market Share
Less than 1,000 48,434 1%
1,000-3,000 4,025 5%
3,000-5,000 1,150 3%
5,000-10,000 1,100 6%
10,000-50,000 1,450 21%
50,000-500,000 164 21%
500,000+ 27 43%
Total 56,350 100%
Table 2. Share of Annual U.S. Hog Production by Year and Size Category, %
Category 1988 1991 1994 1997 2000 2003 2006
Less than 1,000 32 23 17 5 2 1 1
1,000-2,000 19 20 17 12 7 8 5
2,000-3,000 11 13 12 10 5 8 5
3,000-5,000 10 12 12 10 7 4 3
5,000-10,000 9 10 12 10 10 9 6
10,000-50,000 12 13 13 16 18 19 21
50,000+ 7 9 17 37 51 59 65
Table 3. Percentage of U.S. Hogs Raised by Growers under Contract, 1997-2006
Category Farrowed Finished
1997 2000 2003 2006 1997 2000 2003 2006
1,000-50,000 1 2 7 1 8 3 5 7
50,000-500,000 4 7 5 4 7 10 11 14
500,000+ 11 13 17 15 16 21 25 25
Total 17 22 23 20 30 34 41 46

Specialized Feed Product Introduced

Feed ingredient targets starveouts and pigs falling behind in nursery and farrowing barns.

Hubbard Feeds has introduced Jumpstart, a specialized feed to provide extra nutrition to at-risk or lightweight pigs in nursery and farrowing barns. Test markets of Hubbard's research and customers have shown positive results when Jumpstart was fed for the recommended five to seven days to pigs starving out or falling behind in weight gain. “Jumpstart is targeting those pigs that are significantly challenged because they're getting limited nutrition,” states Mark Johnson, general manager of Hubbard's swine division. “Balancing highly digestible carbohydrate sources with gut-enhancing products and a quality milk replacer, immature and stressed pigs receive the special start they need to not only survive, but to thrive.” Jumpstart is a powder that mixes with an equal amount of water to make a liquid gruel that is highly palatable and digestible. Optilac milk replacer and spray-dried whey provide high quality lactose products. Spray-dried animal plasma, soy protein concentrate and cheese meal provide essential amino acids that also promote lean muscle growth. Steam-rolled oats with high quality carbohydrates add energy. Jumpstart should be fed in combination with a dry starter until pigs have fully transitioned to nursery feed. For more information, contact Hubbard by phone (507) 388-9400 or log onto www.hubbardfeeds.com.

Water Proportioner Makeover

Dosmatic U.S.A. International, Inc. unveils the latest addition to its Professional Line of non-electrical, water-driven proportional injectors. The new SuperDos features a redesigned body with an enhanced and improved internal mixing chamber and patented one-way chemical seal. Improved engineered polymers provide added strength and chemical compatibility. While the body is new, the proportioner provides the same dependable and proven motor piston and dosage system. An on/off feature is standard, with an improved remote injection option also available. For more information, call (800) 344-6767.

Premix Product Treats Haemophilus Parasuis

Pulmotil Premix from Elanco Animal Health has been approved in Canada as the first in-feed solution to treat Glasser's disease. “Glasser's disease poses a serious threat, and by providing solutions such as Pulmotil Premix, Elanco can help Canadian hog producers compete in the world marketplace,” says Marie Anne Paradis, an Elanco senior research and development scientist. Elanco received Canadian regulatory approval for Pulmotil premix to reduce the severity of Glasser's (porcine polyserositis and arthritis associated with Haemophilus parasuis) when fed to pigs about seven days prior to an expected outbreak. Pulmotil (tilmicosin) has a withdrawal time of 14 days. Elanco recommends feeding the product the first three weeks after weaning. This practice gets an animal off to a strong start to help producers yield more full value pigs. Contact Elanco Canada by phone at (519) 821-0277 or log onto www.elanco.com.

Computer Herd Control

Diversified Import's Rotem Communicator allows the user to stay in touch and control the hog farm environment at all times. The communicator serves as a pipeline between multiple controllers and various communication interfaces, permitting the producer to control the herd environment from a local computer or from a remote computer connected via modem. An integral part of the computer, the modem is easy to program and set up. The communicator features a built-in programmable voice chip that announces all active messages and alarms. The user can also compose messages. An optional cellular modem can deliver cellular or text messages. A built-in transceiver can communicate with a local network on the farm. Three dry contact relays can control various devices near the communicator. An internal data plug saves settings and provides a table of events. All data generated by the controller sends alerts on any problems in the hog environment. The controller also has a large LCD screen. For more information, call (732) 363-2333 or click on the company's Web site, www.diversifiedimports.com.

Send product submissions to Dale Miller, Editor (952) 851-4661; dpmiller@nationalhogfarmer.com