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Hog Price Surge Viewed as a Miracle

The recent spike in hog prices defies sharply higher supply costs.

Purdue University Extension marketing specialist Chris Hurt describes recent high hog prices as a “miracle” amounting to an answered prayer.

“Overall, the current futures forecasts say that producer losses will not be nearly as bad for the rest of this year as had been anticipated,” says Hurt. “But the markets also agree that it will be the spring of 2009 before the industry gets back into the black.

“Earlier, I suggested it would take a 6-8% cut in the breeding herd to return to profitability. Now it appears that more modest cuts may return the industry to profitability, at least if the world keeps buying ‘high value’ U.S. pork. Thank goodness for miracles and thank goodness economists' bleak forecasts aren't always right.”

Hurt's comments were in reaction to recent changes in the hog market. In mid-March, eastern cornbelt hog prices were $35/cwt. live basis. In mid-May, they were $58/cwt. live.

“The huge financial losses have slowed as hog prices have recovered much closer to costs of production,” he relates. “What an amazing turnaround in such a short period of time. Just how surprising is this reversal of fortune?

“The average seasonal price increase from early April to early June over the past five years was $11/cwt. This year, the seasonal increase has been $23/cwt. so far, more than double the normal increase. Next, consider this remarkable price increase is occurring with pork production up about 10%, almost defying basic economics.”

Since supply costs are sharply higher, demand is the most likely answer for the price surge, and export demand is the best probable source, says Hurt.

“Unfortunately, trade data are only available through March of this year, but that data show a robust export period,” he says. “In the first quarter of 2008, pork exports were up 40% and imports were down 10%. The net impact was a 61% improvement in net trade volume. The bottom line was that additional trade enhancement in the first quarter accounted for nearly 5% of all production.”

Domestic demand may be another reason for some of the strength in hog prices, he adds. Pork is a cheap find, and consumers are looking for bargains as both food and fuel price hikes have cut into family budgets. In April, for example, retail beef prices averaged $4.17/lb., compared to $2.86/lb. for pork, a difference of $1.31/lb.

For the rest of this year, Hurt predicts hog prices will average $54 for the second quarter and $55 for the summer, then drop back to $53.50 for the fall.

If predictions hold true, prices in 2009 would average $57.50 in the first quarter and $64 in the second quarter, returning hogs to profitability.

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Searching for Hidden Dollars

Editor's Note: Skyrocketing feed prices and the everyday uncertainties in the hog market have veteran pork producers and newcomers alike scratching their heads and scrimping wherever they can to save a few dollars — and to survive.

The old pork production playbook that has served the industry so well in recent decades unfortunately doesn't offer an effective game plan for the next couple of years — maybe longer.

There are no quick fixes. No single strategy. No individual with all the answers. Particularly now, procrastination is not your friend.

But there are some buying and selling strategies that can help during these tumultuous times. To gain a better understanding of the risk management tactics being utilized in the trenches, I recently spent some time with a lender, a marketing specialist and a couple of pork producers to garner some survival tips that could fit into your operation.

The lender represents one of the nation's largest pork investment portfolios. One producer is aggressively focused on feed costs and relatively long-term buying and selling strategies for an 11,000-sow, farrow-to-finish production system. The other producer has initiated an exit strategy, encouraged by his banker. The cooperative marketing firm representative offers guidance for those struggling to manage short- and long-term marketing strategies.

I chose to forego my monthly editorial column, From My Perspective, to allow more space for these timely management suggestions. I hope they provide some help during these stressful times.

A Lender's Perspective: Mark Greenwood
A Producer's Perspective: Bob Taubert
A Producer's Perspective: Norlin Gutz
A Marketer's Perspective: Larry Sills

CT Scans Advance Genetics

Computer scanner advances efficiency and sow productivity.

Norsvin USA has announced that it has implemented computer tomography (CT) in its new boar testing facility near Hamar, Norway. Norsvin now CT-scans 3,500 live boars annually, contributing to the highest accuracy possible for Norsvin's genetic improvement and selection. Company scientists predict an annual increase in genetic improvement of 30% for Norsvin terminal lines and 17% for Norsvin maternal lines, boosting feed efficiency, lean meat yield and sow productivity. Less than 3% of the 3,500 boars tested are selected as nucleus level Elite boars, contributing semen to Norsvin nucleus herds in the United States, Scandinavia and Europe. Norsvin USA holds exclusive distribution rights for Norsvin Genetics in the United States, Canada, Mexico and Columbia. For more information, go to www.norsvin.com.

EPA Approves Fly Product

Novartis Animal Health has won registration approval from the Environmental Protection Agency for its broad-spectrum insecticide OxyFly for control of adult flies in livestock and poultry operations. Besides flies, OxyFly controls other pests including fleas, ticks, litter beetles and cockroaches often found in animal housing and feed storage facilities. OxyFly provides rapid knockdown of adult flies as well as long-lasting residual activity. The product is odor-free and has low toxicity. OxyFly features a micro-encapsulated formulation that offers convenience and an easy-to-use spray or paint-on application. The highly concentrated formulation is ideal for larger operations. “OxyFly gives livestock producers and other animal operators an effective solution to pest problems that surface in the warmer weather months,” says Steve Boren, head of the U.S. farm animal business at Novartis. OxyFly is the latest addition to Novartis' integrated fly control program that eliminates and prevents flies through their lifecycle. For more information, call (800) 843-3386 or visit www.flycontrol.novartis.com.

Breeding Herd Vaccines

Pfizer Animal Health has added two newly formulated 2-ml. vaccines to help protect breeding animals from major reproductive diseases. FarrowSure GOLD vaccine helps provide protection against porcine parvovirus, erysipelas and five strains of leptospirosis. FarrowSure GOLD B helps protect breeding animals from the same seven diseases, plus protects against Leptospira bratislava. “Parvo, lepto and erysipelas vaccination is an important component of any breeding herd health program,” says Steve Sornsen, DVM, director of veterinary services for Pfizer Animal Health. “FarrowSure GOLD helps provide the longest labeled duration of erysipelas immunity available — 18 weeks — for protection you can count on. And we have the manufacturing capacity to ensure a consistent, uninterrupted supply,” Sornsen states. Products include a new, low-volume dose and are available in 50-dose and 250-dose sizes. For more information, go to www.FarrowSureGOLD.com.

Send product submissions to Dale Miller, Editor (952) 851-4661; [email protected]

A Marketer's Perspective

Doing a better job of marketing in the next 12-18 months will be key to the survival of many pork producers.

Larry Sills, Premium Pork senior agent at Producers Livestock Marketing Association (PLMA) in Sioux City, IA, describes the pork market's daily changes as “steady by jerks.”

“The bottom line for a pork producer today is they have got to be more of a business person than they've ever been before,” he declares. “I have told producers for years that I don't understand how they can set back and let someone else price everything that they've worked so darn hard to produce. Remember, profit is not a dirty word!”

Certainly not a newcomer to livestock marketing, Sills spent 17 years with the National Farmers Organization before joining PLMA, a marketing cooperative organized under the Capper-Volstead Act, which essentially gives them the right to pool hogs. Producers Livestock was launched more than 60 years ago in the terminal market structure. Direct marketing was launched in Sioux City in 1995, adapting to an ever-changing industry and filling a void created as packers closed many country buying stations.

To be a member of Producers Livestock takes participation. There is no membership fee. Producers pay 50 cents/carcass cwt. to participate.

Pork producer members call in their hog deliveries a week ahead so Sills and four other agents can begin putting the week's puzzle together.

“We have hundreds of people, and put their pigs together with others to generate loads,” Sills explains. “Of course, we have producers with full-load lots, but the guys who got our direct marketing program off the ground are the small guys. We have marketed in excess of a million hogs (a year) for a long time, so we handle enough hogs to be important to some people.

“Every week on Wednesday afternoon or Thursday morning, we're scheduling hogs with different packers for the week,” he continues.

“I can honestly say there isn't a packer in the United States that I haven't dealt with, but our primary area is Iowa and the states that border it,” he adds.

Period of Volatility

Sills sees the current marketing environment as very volatile. “What it is today might not be what it is tomorrow. It's ongoing and I'm sure it's not over,” he says.

The industry has changed from independent to corporate pork production. Buying grids and grade-and-yield programs have evolved.

Some in the industry like to draw parallels between the 1998 market crisis and current industry strife, often noting the exception that today's industry has adequate packing capacity.

“We had adequate packing capacity in 1998-99, too,” Sills argues. “Don't ever believe that we didn't. We had things happen within geographical areas where we had too many hogs, but if you weren't putting your hogs on wheels and moving them into a void area, then you were doing something wrong.

“I never had a day that we could not move hogs,” he declares. “You could find a home — a very good home — for those hogs and make more money than you could get in that geographical circle. Packers were taking full advantage of their area's excess hog numbers.”

Sills is frustrated by two of the issues facing the pork industry today — lending institutions and the ability of the USDA to get the Hogs & Pigs count right.

“The pig crop report shows 5-8% more hogs (than last year), but the reality is we killed 11% more this week (mid-April), and we're probably not going to be far away from that all the way through 2008. At times, I wonder if the pig crop report is based on statistics rather than an actual evaluation. I absolutely believe that we have more sows out there than we have counted — ever — in the last five years.”

Marketing Assistance

Sills likes to use an analogy to describe the current marketing situation: “A guy just jumped out of a plane without a parachute on, so we're trying to keep him from hitting the ground real hard!”

There are no magic answers, but there are contracting, forward pricing and hedging opportunities that can help keep producers from hitting the ground too hard, he says.

“One of the good things I learned a long time ago was you never, ever tell a producer to not take a profit. You are absolutely and totally wrong every time you do that. I don't care how smart you think you are, or if you have a whole lot of physical or historical evidence that this or that is going to happen. In our industry, we've seen advice like that go awry,” he notes.

In July 2007, Sills attended a meeting in northwest Iowa that dealt with current pig health issues and marketing strategies. An industry leader told pork producers to wait for better hedging opportunities. “It just didn't set very well with me,” Sills remembers, “so I put my own information together.”

He points to the figures in Table 1 to illustrate the spread in years when live hog prices averaged above $50 — just four times. How many times have prices averaged above $55? Once.

“So what are the odds that the average hog price for the eight-month period between August 2007 and April 2008 will be over $50?” he asks. “It's probably not very good, based on the historical averages. Therefore, if you could price hogs at $55, the odds are pretty good that it will be advantageous.”

To calculate an end price per carcass hundredweight (cwt.), Sills uses historical basis and a 74% conversion. “I'm a salesman,” he admits. “When I tell someone something, I want it to come back better. I'm not looking for a one-time transaction here. I'm looking for continued business.”

Using the conversion and Table 1 as a benchmark, Sills knew carcass prices between August 2007 and April 2008 ranged between $67.50 and $75/carcass cwt. The average live price from August to March 27, 2008 was $57.25 on the Iowa-southern Minnesota market (Figure 1).

“We put hundreds of thousands of dollars in producers' pockets using this information for a hedge/cash flow contract,” he continues.

“The cash flow contract we are using works as a hedging program, but producers don't have to pay margin money and they don't have to put in big money up front. They pay 50 cents/carcass cwt. or $200 for a Chicago Mercantile Exchange (CME) futures truckload of hogs. That breaks down to about $1/head.”

The cash flow contract is simply an extension of the hedge contract. “In the hedge contract program, you can hedge increments of 5,000 lb. (carcass). In other words, you can hedge from 25 head to infinity,” he continues. “The beauty of the program is, if you are a small producer and you feed 500-head groups, you can top off the 50 heaviest barrows. Or maybe you want to hedge 400 head and do two full contracts (80,000 lb.) You do not have to deliver 40,000 lb. at a time in this program. If you want to take 10,000 lb. off this contract (50 hogs at 200-lb. carcass weights), you can because we do an extraordinary volume of these.

“It's a very good program for all producers. You could even make eight deliveries of 50 hogs if you wanted to. The minimum cash flow contract is 5,000 lb. (25 pigs), so we're literally giving everybody an opportunity,” he points out. “You can speculate in your own account. It's a hedger's program — period.”

Lenders, Please!

Sills appeals to lenders to stick with producers during this rough time. “If you have clients who have weathered '94, '98 and 2002, they've weathered some heavy duty storms,” he argues, “I'd like to believe that a lender would especially stick with an independent producer who raises his own corn, because he is in absolutely the best position of anyone in the pork industry today.”

The recipe for survival falls on everyone, Sills continues. He admonishes pork producers to cull more sows. “When the money is flowing and pork production is in a fat, dumb and happy mode, producers just put that sow back in the crate and keep going. When you are paying $6 for corn, that sow had better be an excellent producer. If she's not, you really can't afford to keep her. In reality, a deep culling appeals to me a great deal more than mass liquidation,” he adds.

“No doubt, we have too many hogs. As an industry, we have done that to ourselves. We will not survive this industry if we don't sell this thing down and get it into a manageable position,” he warns. “To get them culled down and processed is not going to be easy. As people cull sows and send them to slaughter, and they pull hogs ahead to sell them at lighter weights, this could be a bumpy road.

“I would talk to any lender at any time. I would plead with them to keep these guys out here. This thing will, in fact, turn around. Will it be fun and easy? No, it will not be,” he assures.

“But if we sell mass quantities of hog producers down the river, we will end up with a supply short of the current slaughter capacity, and then we'll have to wonder which pork processor will close a plant.

“Understanding that things could change, along about the July-August timeframe, I think we'll see a light there at the end of the tunnel. At least by the end of the year, I think the light will be brighter,” he predicts.

Making Group Sow Housing Work

New systems of floor feeding and adding complexity to sow pens can reduce confrontations.

If sows can gain greater access to feed by being aggressive, encounters with penmates are inevitable. The aggression leads to a dominance hierarchy, which may affect penmates' access to feed.

To decrease the severity and frequency of these aggressive encounters, sows must perceive that feed is not a limited resource. This is best achieved with frequent meals spread over a large feeding area. Distributing feed widely throughout a complex or structured pen eliminates aggressive encounters by decreasing the perception that competing for feed will result in improved access.

Feed Delivery, Pen Design

Separate feeding areas within a single pen can be created by adding partition walls at the side or in the center of the pen (see photos). Adding complexity to a pen allows timid sows a chance to escape aggressive encounters and discourages aggressive sows from pursuing attacks.

A center dunging alley with solid eating-resting areas on each side is another way to structure a pen into distinct areas. With this configuration, timid sows can cross the slotted area to eat with a less aggressive group on the other side.

Partially slotted finishing pens are easily converted to gestation pens by simply removing the partitions over the slotted/dunging area between two or three pens, leaving the gates or walls over the solid area intact. This increases the total number of sows per pen and provides two or three feeding areas.

In groups of 20 or more, the sows' bodies also serve as “partitions” and create complexity within the pen, and the sows benefit from the increased “shared” space.

Stocking Density

The “right” number of sows per pen is determined, in part, by the number of farrowings per week. Farms with less than 20 farrowings per week should consider batch farrowing so that a larger number of sows can be grouped.

Some producers choose to have a “dynamic” pen, where sows are constantly added and removed. Pen design, space allowance per sow and feeding methods are much more critical in these pens.

If some sows perceive that feed supply is limited, aggression will be continuous in a dynamic system, because new hierarchies are established whenever sows are added or removed.

Farms farrowing more than 40 sows a week should have two sow pens for each week so that sows can be divided by size or body condition. This makes it easier to control the amount of feed per sow — decreasing feed to the pen of larger sows and increasing feed to the pen of thin or smaller sows.

Floor Feeding Efficiency

Peak floor feeding efficiency is achieved by spreading out feed in both space and time. The use of cones or “Y” diverters on drop tubes can help dispense feed over a wider area.

The appropriate amount of feed for a pen of sows should be dropped in small amounts, 3-8 times throughout the day. Multiple feedings prevent sows from becoming overly hungry and anxious at feeding time, thus reducing the incentive to be aggressive. Automatic timers ensure regular drops without added labor.

Another method of providing multiple daily feedings is to split each feeding into two stages. With the first feed drop, the more aggressive sows start eating, leaving the more timid sows to move in and eat during the second feed drop.

These split feedings can be achieved by dropping feed in different areas of the pen at different times.

For example, in pens with a center dunging alley, feed is dropped on the solid floor at one end of the pen first, then 30-60 seconds later, feed is dropped on the solid portion at the other end of the pen. This allows the more aggressive sows to start eating as soon as the first feed drop occurs, leaving the more timid sows to move to the other end of the pen to eat.

When the sows are first mixed, they may move back and forth between the two feeding surfaces until each area has formed a stable group in which the sows are compatible.

Another alternative is to drop feed in the same area at two stages. Feed drops occur 15-20 minutes apart at each feeding episode. The more aggressive sows eat first and within about 20 minutes lie down to rest, while the more shy or slower-eating sows eat during the second drop. This is a good alternative where there is not enough solid floor space for all the sows to eat at once.

For drop feeding to work well, each sow should have at least 15 sq. ft. of feeding floor space. A 5% slope on the solid flooring surfaces running towards the slats ensures the solid flooring will remain clean and dry.

Practicality and Payback

Group gestation barns are a quiet, pleasant environment for sows and employees. They are often cheaper to build than traditional stall barns because there are no stalls, feed troughs or complex gutter and floor designs. Per-square-foot costs vary by region, however.

Naturally, the cost of a group gestation housing system also varies with design, square footage per sow, complexity of the pen, feeding method and amount of slotted area.

A recent review of building costs in Ontario showed that a group gestation barn with a pen structure, an automatic-multiple-drop feeding system and 25 sq. ft./sow costs about the same as a stalled barn.

Producers that feed group-housed sows several times a day report that sows are calmer than sows fed once a day.

However, even with perfect pen design and feeding techniques, an overly aggressive or shy sow will occasionally prove incompatible with the group. These sows must be relocated in a small pen for the duration of their gestation period.

Breeding Stalls Needed

Producers using the various group-housing designs commonly wean sows into breeding stalls to prevent them from injuring themselves or others as they demonstrate normal estrus behavior.

Time spent in breeding stalls varies. Some producers mix sows in pens immediately after breeding, while others keep the sows in stalls until they have been confirmed pregnant at about 35 days postbreeding.

If the gestation pens are well designed and managed, sows can be mixed immediately after breeding with little fear of aggressive encounters decreasing reproductive performance. Pregnancy testing in group housing is usually conducted during feeding time.

The various gestation housing designs and management systems discussed here were developed by Ontario pork producers through trial and error until they had limited or eliminated aggression between sows. The success of these systems has been evaluated in a number of ways:

  1. The sows have fewer scratches, injuries and lameness, and their body condition remains consistent.

  2. Farrowing rates are greater than 80%, with a few approaching 90%.

  3. Producers rarely have to remove a sow that is not doing well in the group.

  4. Some producers find that group sow housing barns are quieter and more pleasant to work in than stall gestation housing.

Questions regarding group housing or converting a conventional stall barn to group pens may be addressed to [email protected].

Pads Radiate Warmth

Precast concrete hot water pads are joining the short list of products designed to keep pigs snug and warm.

The challenge of keeping pigs warm and cozy during the two most stressful events in their lives - birth and weaning - has taken a new twist. A Canadian manufacturer has turned to hot water heat as an alternative to electric heat pads and heat lamps.

John Lichti, co-owner of Cozy Creep, an Ontario-based manufacturing company, began experimenting with hot water heating back in 1996.

The Cozy Creep underfloor heating system offers a low-temperature (84°F - 95°F) heat that warms the floor beneath the farrowing crate by circulating hot water through a maze of pipes encased in the concrete slab (or concrete overpour). A circulating pump returns the cooler water to the heat source where it is reheated in a closed-loop system.

Various forms of energy - natural gas, oil, propane, biofuel or electricity - can be used to power the hot water heater. Geothermal is perfectly suited for such applications, too, says Lichti.

Precast Protoypes

In Lichti's first system, the hot water pipes were installed when the new concrete barn floors were poured.

“It worked extremely well,” he says. “The problem with pouring it in place is that it's labor intensive. The concrete has to be handled and finished properly. You need a plumber, welders, carpenters and concrete people. Everything has to fit together, so it was fairly expensive from a capital standpoint.”

Lichti had plans to expand his hog operation and wanted to retrofit an older barn. The cost for a concrete overpour was prohibitive, so he came up with a modular design. Pipes are pre-cast into 2×4 ft. concrete pads designed so they can be inserted into existing farrowing crate creep areas or nursery pens. Tubing is designed so 20-30 farrowing crates can be linked in a single, closed-loop system.

Because the pads are factory made, quality is consistent and installation is easy because pipes come out to the edge, says Lichti.

“All you have to do is hook up a pipe to the one coming out of the pad and run it to the next pad. Since one control system can handle a loop of 20 to 30 crates it's great for retrofits,” he adds.

Each 2½-in.-thick concrete pad is treated with silica fume - the same technology being used on bridges. “It keeps salt from seeping into the concrete,” he explains. “It has a high ash content and it changes the particle size, making them very small so water doesn't seep in when the pads are washed with high pressure washers.”

An added advantage over hanging heaters with blower fans is the heat radiates from the floor up to the pigs' lying surface, minimizing drafts and circulating dust.

The first 30 units were tested in Lichti's barn.

Comfort for Sows and Piglets

“Since you're just heating the surface where the pig lays, you can keep the ambient temperature in the room quite a bit lower when using radiant heat,” says Lichti. “How much lower depends on your management style, but it could be as much as 10-12°F. lower for a 3-week old pig in a nursery.”

Lichti compared radiant heat against convection heating for 2,600 litters in an informal trial. His data showed that the weaning weight increased by 18% and preweaning mortality was significantly reduced - dropping from more than one pig/litter down to just over a half pig/litter.

No Muss, No Fuss

Lichti says a practical advantage of the hot water pads is it eliminates the risks of malfunctioning, overheating or shocks from electric heat pads or heat lamps. And, they are competitively priced with electric heat pads, he adds.

“When it comes time to wash up, there's nothing in the way,” he says. “It's what clients comment on the most.”

Lichti estimates about 1.5 million Canadian piglets have been weaned on CozyCreep heat pads every year since 2001. The heat pads received Ontario's Agri-Food Industry Innovations Award in 2006.

Most units are currently being sold in Ontario and Manitoba, but the company plans to enter the United States market later this year. Further information can be obtained at the web site: www.cozycreep.com

A Producer's Perspective

This southern Minnesota producer chips away at his highest input costs — sow and pig diets.

One of the best in the nation” is how AgStar's Mark Greenwood describes Bob Taubert's risk management program.

Taubert, managing partner of New Horizon Farms headquartered in Pipestone, MN, approaches risk management with a systematic discipline, which he says may be a throwback to his civil engineer training from the University of Minnesota. Details, fractions and benchmarks are important to him.

He uses pigs weaned/sow/year as a primary measure of productivity, along with adjusted 21-day litter weight, percent sows bred by Day 7, wean-to-first service interval, farrowing rate and sow mortality. He's constantly challenging conventional thinking to squeeze maximum performance from New Horizon Farms' 11,000 sows.

Thinking back to “when things started getting crazy” (late August, early September 2006), Taubert first challenged the recommendation that feed should be ground to 700-750 microns.

“We have pushed that down to around 400 microns, leaning toward a little bit smaller, if possible. The finer the feed particle size, the easier it is for a pig to digest and absorb the nutrients,” he argues. “We have been able to lower feed conversion by doing that.” Granted, all credit doesn't go to micron size, because other dietary changes were also made.

Concerns about ulcers with finer grinding didn't materialize. “One reason may be that the finer-ground corn did not have an inordinate amount of ‘fines’ (i.e., corn was very consistently ground),” he says. “And monitoring the conditions of the rolls in the Roskamp roller mills has been increasingly important.”

The inclusion of alternative ingredients such as distiller's dried grains with solubles (DDGS) and bakery meal increased the fiber level, and are slightly higher in micron size than the finely ground corn.

Another move to economize gestation and lactation diets was the addition of 30% DDGS and initiating a step-up, step-down program of DDGS inclusion in finishing rations. “Eighteen months ago, we weren't using any DDGS. Last week, alone, we used 20 semi-loads,” he explains. “That's anecdotal to how much things have changed as far as feeding these animals more economically. We've actually dropped our overall corn usage by nearly 25%.”

All DDGS products are sourced from a single plant, which is monitored for quality variation. In addition, DDGS is a good source of available phosphorus, an additional cost savings.

Bakery byproducts currently make up about 5% of all rations. “To be quite honest, this has not resulted in a savings in corn price, but it hasn't been a cost either. Part of our strategy is displacement of corn, thereby making the corn we do own last longer. My view was I was buying bakery byproducts against the current cash price of corn vs. some unknown, but anticipated higher price in the future. It's somewhat of a backwards risk management,” he explains.

Taubert also quit using choice white grease as an energy source in rations. “Historically, we were paying 11-13 cents for fat; today, choice white grease trades for 42 cents or higher, so we literally can't afford the energy source. We were able to take the fat out, decrease the micron size and keep about the same feed conversion as we had with added fat,” he says.

Additionally, he has ratcheted down the “old standard amino acid ratios,” which allows him greater flexibility to use synthetic amino acids in diets and take out a little soybean meal, resulting in another cost savings.

New Horizon Farms owns and operates four, 1,200-head research barns, which are operated under the direct supervision of Kansas State University (KSU) nutritionists. “Based on trial results, KSU nutritionists formulate the nutritional requirements for our pigs, in our environment. Anybody can give you a growth and intake curve for their pigs, but can you duplicate that in your environment and repeat it day in and day out?” Taubert asks.

Cargill Animal Nutrition staff serves to challenge the KSU baseline nutri-tional guidelines and provide laboratory services “to make sure we are really feeding what we think we are feeding,” he notes. Cargill is also responsible for diet reformulation, ensuring that the diets are “best cost” for a given set of nutritional specifications.

Taubert also buys soybean meal from Cargill. So, rather than using the 46.5% guaranteed protein level, laboratory testing might confirm it at 47.5% protein. “We can then formulate the ration using 47.5%, which is not a lot of cost savings, but we're able to capture something that we otherwise might not.”

A third nutritional consultant, Noel Williams with PIC, advises on sow diets. “We feel all three nutritional advisors help us maximize our feeding program. They challenge each other, ask tough questions and help us get changes implemented,” he explains. “I think I have frustrated them somewhat by asking and pushing to do things for which there is not a lot of data. This is where the research farm has been critical.”

Mill Ownership

Taubert also believes owning a feedmill is a huge advantage. “The biggest thing is having control of the feed quality. That's not a statement about other millers. It's just that I have control over what goes in and what comes out. I can change things whenever I want. I don't have to ask 25 other customers whether we can change DDGS suppliers, for example,” he says.

“I like being in the market and knowing what the market is for everything, because opportunities present themselves, and I'm there to take advantage of them. If I didn't own the mill, I don't know how I'd keep track of it,” he adds.

“Vitamins are a good example. In part due to the temporary closing of manufacturing plants in China ahead of the Olympics, vitamins, particularly vitamin E, have increased in price quite dramatically. Since we were in the market for vitamins, we were able to buy 8-10 months worth ahead at a nearly constant price. Now the price has more than doubled,” he says.

All corn for New Horizon Farms is purchased from local farmers, which has made Taubert a student of the corn market. “I think we've done a very good job of understanding the market, understanding our costs, and how to use the futures market to mitigate some risk,” he says.

“There's no doubt, if you go back to late August or early September 2006, clearly the market ramped up. Corn got to $2.75, then $3.00, then $3.25, and then $3.45. Most felt there was no way it could keep going up,” he reflects. “Today, corn price is much higher, but it was at $3.45 December 2007 futures when our traditional corn hedging plan ceased and a new era began.

“Historically, ‘bear spreading’ the nearby December corn contract vs. the same crop year July corn contract at $0.10-$0.12 was targeted. We would then buy out of the money corn calls, say $2.80-$3.00 call options, as disaster protection for corn at a cost of $0.15 or less. Most years, the December/July spread would ‘widen’ from $0.10-$0.12, where we entered the market, to $0.25-$0.30. At that point we would remove the bear spread at a $0.15-$0.20 profit. This in effect ‘paid for’ the call option,” Taubert says.

“At $3.45 December 2007 corn futures, we were very aggressive buyers on the board and we had a lot of corn forward contracted into the feedmill. We just kept buying physical corn and stayed long on the board, waiting for a fundamental shift that would indicate the bull market was over. So far, the market hasn't stopped. Whether the long futures position had expired or not, once we've met our corn needs for a certain period, we've been rolling the positions out to wherever we needed corn next. However long we were in, in the fall of 2006, we are long that much corn now, albeit at an ever-increasing price, but not as quickly as just buying ‘spot’ corn.

“My analogy is it is always hardest to just start something. Once we made that initial buy, or got long on the board at a certain ‘X’ amount of bushels, as we continued to move higher, buying the next few month's worth was a lot easier because we were already in the market and we could see that we were ramping this up. I don't want to call it luck, because we have spent a lot of time discussing where we are headed. What are our risks? How much physical corn do we have bought from the farmer? How much corn do we need? How long do we think this period is going to last until the price recesses? We have tried to own enough corn, one way or another, so we could get to whatever period of time that we thought things had reset.

“If we paid too much for corn, fine. If we didn't, great! At the same time we were buying corn, we were laying off risk by selling hogs on the board. At the end of the day, as long as we were selling hogs at a price where we achieved a profitable margin or an acceptable rate of return, it didn't necessarily matter to us if we ended up paying too much for corn or selling hogs too cheap because it was the margin we were after. It wasn't about the net price paid for corn or the net price received for the hogs, it was the relationship between the two,” he explains.

“Once we were able to dumb it down to that, the plan was that much easier to execute. There's no doubt that having this plan in place from 2003 through 2006 cost us some opportunity, but we also had the best 3-4 years we've ever had. We didn't take nearly the high any of those years, but we didn't take nearly the lows either. And, relatively speaking, we had little price risk.

“Had I not been doing this, I'd have never been hedged into this period. Eventually, our protection will run out. You always have a finite supply of corn unless you grow all your needs, but we've felt we have enough that the market will reset by the time we run out and we will be there establishing our new plan,” he says.

“We've got a lot of new crop corn on the books. We are still long on the board as well. We wanted to get enough corn under ownership to be able to get to the 2009 harvest or beyond. It was our hedging and marketing strategy that did it, not any divine intervention or some wisdom that no one else had. It was being able to determine what an acceptable margin was and then executing a well-thought-out plan for risk management. It was like setting a goal.

“Our goal is to get to a certain point in time when we feel like the price of hogs will reset relative to their inputs. They have to, eventually. It's just a matter of how long will it take and then have enough corn bought to get to that period. At some point we will exit all of our positions and buy put options at the average price paid for corn or better. If we were wrong and we paid too much, then we will participate as the market goes back down. That's our strategy in a nutshell,” he says.

Getting Started

Taubert acknowledges that not everyone has the aptitude or desire to master forward buying and forward marketing concepts.

“They should do what we initially did — find a marketing adviser. Ask others in the industry for recommendations. The first thing a good marketing adviser ought to ask is: ‘Do you know what your costs are?’ If he's going to advise you at all, he's going to have to know your costs,” he continues.

“Get a marketing adviser who can help you understand how to protect a positive margin and who understands what you are targeting as an acceptable rate of return. Is he going to be right 100% of the time? No. Is the market going to give you an opportunity 100% of the time? No. But, not having a plan at all — flying by the seat of your pants in the current market environment — is foolhardy.”

Taubert has hogs committed on the board out to February 2009, with a few more scattered through April and June 2009. “At some point the live hog market's going to increase,” he assures. “To what level, I don't know, but I think you will see a number with a hundred in it before 2009 is over — at least for one of the trading months. It wouldn't take much news to run to $92-100 (carcass cwt.). A corn rally would do it too, I think.”

A Lender's Perspective

“If you don't currently have a risk management strategy, you'd better get up to speed really quick to learn how to develop one.”

That's the best advice Mark Greenwood, senior financial services executive at AgStar Financial Services, has to offer pork producers struggling to keep their production units intact. As one of the pork industry's largest lenders, AgStar provides financial services to about 1,100 pork production systems, which accounts for about $1.5 billion in their pork-lending portfolio.

With his 13-plus years of lending experience in agriculture, Greenwood admits the current financial distress in the pork industry is “unlike anything we've ever seen.”

Greenwood sees a chasm between the pork producers who have been very prudent buyers and marketers vs. those who are extremely good at production, but never have really worried much about risk management.

“Even if you are really good at production, that doesn't mean you can be viable in this industry,” he notes. “We've seen some very good production companies today that might not be in business just because they haven't been able to do as good of a job at risk management.”

For starters, Greenwood says: “Be proactive, not reactive.” That means thinking and planning — not just six months out, but 12 months out or more.

He reflects to last fall, when the general consensus was “there was a pile of pigs coming.” The prudent thing to do was to take on some market risk protection. Those who did may not have made a lot of money, but they haven't lost near as much as those who didn't, he says.

The same philosophy applies to feed procurement. “Instead of waiting for the market to act, successful producers were very proactive on corn procurement,” he says. Many of his clients maintain 6-8 months of physical possession of corn. He challenges them to continue to lengthen their feed supply. “It might not be corn. You may have to think entirely differently on how you feed a pig,” he suggests. “You have to think more about alternative feed ingredients and using multiple feed sources as another way to manage part of your risk.”

Current feed procurement strategies may require immediate payment for the product, plus storing it. “It then becomes a capital constraint you put on your lender — and it can be a sizeable dollar amount,” he says. “Normally, we will borrow 75% of the value of corn per bushel. When corn was $3/bu., you had to come up with 75-80¢/bu.; at $6/bu., you would have to come up with twice as much, unless we changed our advance rates. Most lenders don't want to do that. Those capital needs are really, really tough on producers today.”

Taking possession of corn or wheat incurs additional storage and interest costs, “but that might be better than betting you will be able to actually get it when you need it,” he says.

Know Your Feed Needs

At the outset, Greenwood advises producers to get a handle on exactly what their feed needs are going to be, then get aggressive with feed procurement. “A lot of people are trying to own as much corn (in the physical sense) as they can, then buy some form of an option strategy as protection if the price goes down,” he relates.

Looking at the big picture, the United States produces about 53% of the world's corn. It's unlikely that the government will tinker with corn exports, nor will the levels dedicated to ethanol production come down.

“With 8% less corn acreage planted this year compared to last, and a billion more bushels used for ethanol, supplies will be tight,” he assures. “If corn is $6/bu., and soybean meal is $310/ton, that puts the breakeven at about $92/carcass cwt. ($180/carcass). In mid-May, the best a producer could do is lock in a carcass/cwt. price of $70, which leaves producers with a $20/head loss, or more.”

To minimize the feed cost impact, Greenwood suggests all producers should focus on optimizing sell weights. “There's no reason for market weights to be as high as they are today. For every 5 lb. we bring weights down, it is like taking 2% off the U.S. pork supply. It's like taking 8,000 head/day out of the system. Packers don't like this because it means taking more pigs through the plant (for equal pounds), but it's the right thing to do.

“If you want the economic fundamentals to improve — everyone must work to optimize sell weights and get rid of another 10% of sows, so we have a much more efficient system at the end of the day. This strategy will have a much better, quicker return than anything else we could do. Unfortunately, it seems like everybody has this ‘last man standing’ approach. I'm telling you, this time around, that's a pretty tenuous position,” he continues.

“It's also about figuring out a way to find a workable solution for the producer and the lending institution. It's not always perfect, but it's something we all can live with,” he adds.

Greenwood estimates the erosion of assets on balance sheets from October 2007 to May 2008 has averaged 4-5% every month. “In seven months, we've lost 25-30% off our balance sheets. In addition to that, the value of the inventory and the cost of feeding the inventory has probably risen $20-25/head, so it's a compounded effect. As a lender, it becomes a question of how much you're willing to borrow per head,” he explains.

More Integration

The fallout from this economic crisis is familiar - more concentration, more integration. “Packers are starting to worry about supply, so they are faced with what they can do to ensure a supply of market hogs. My guess is they will go to their large suppliers and figure out how they can work with them. It will likely speed up integration,” he predicts.

The caveat to that scenario is the producer who can raise the corn needed for the hog operation. He is in the best position, regardless of herd size. “If he can raise his own feed, he can do whatever he wants,” agrees Greenwood. “The question he needs to answer is whether or not he wants to use his corn operation to subsidize his livestock enterprise. And does he have the passion and the labor to stay in the livestock sector?”

Manure-Corn Contracts

Finally, Greenwood is recommending producers work out an agreement with their contract growers who also raise corn. “I think those producers should look at utilizing first-right-of-refusal agreements on the corn. There should be a way for contract growers who raise corn to work with an integrator to ensure a supply of corn and help manage the price risks for both,” he says.

“A prime example is an individual who farms 5,000 acres and lives within 10 miles of a large pork producer. Have these two ever talked? The guy raising 5,000 acres is worried about making money; the other is worried about feed supply. That could be a sizeable portion of the pork producer's corn needs. And, from a fertilizer perspective, the crop farmer could potentially reduce his fertilizer bill significantly. Isn't there some sort of supply agreement that would benefit the risk management plans of both?” he asks.

“I firmly believe this is an all-agriculture issue, not just a livestock issue. The crop producers are where we were two years ago — you couldn't do much wrong. But, what happens if next year we plant 98 million acres of corn, fertilizer costs go higher and the breakeven costs are $750/acre rather than $600/acre?” he asks.

“You could have an oversupply of corn,” he points out. “Then, suddenly, the grain sector is in crisis. It might not happen in 2009, but it could happen in 2010. As costs spiral higher and higher, there has to be a correction sometime.”

Greenwood and AgStar are committed to providing crop and livestock producers with as much information as possible to develop their risk management plans. “In terms of getting access to capital, producers with very good information systems that show the ‘what if’ scenarios have much better staying power than those without a plan,” he says.

Debt restructuring will be reviewed on a case-by-case basis. Currently, AgStar is requiring interest-only on much of its term debt, which helps with working capital.

“We are asking people to give us 3-, 6-, 9- and 12-month cash flow needs, with updates on a monthly basis. We look at budget-to-actual (reports) to see if they are on target. The producer and the lender need to be flexible in terms of creating solutions,” Greenwood notes. “Open communication between producers and lenders is going to be critical to get through this period.”

Groups to Sue USDA Over National Identification Plan

Attorneys for the Farm-to-Consumer Legal Defense Fund have sent a Notice of Intent to Sue letter to the United States Department of Agriculture (USDA) and the Michigan Department of Agriculture (MDA) regarding implementation of the National Animal Identification System (NAIS).

NAIS is a USDA plan to electronically track every livestock animal in the country.

The notice asks both the USDA and the MDA to “immediately suspend the funding and implementation of NAIS” and “fully and fairly examine” whether there is even a need for such a program.

Fund President Taaron Meikle says that contrary to USDA's claims, NAIS will do nothing to protect the health of the nation's livestock and poultry. “At a time when food safety costs are a real concern, the USDA has spent over $118 million to promote a program that will burden everyone from pleasure horse owners to traditional ranchers and small farmers, to individuals who raise a few chickens, steers or pigs on their own land for their own use.”

The notice points out that USDA has never published rules regarding NAIS, in violation of the Federal Administrative Procedures Act; nor has ever performed an Environmental Impact Statement or an environmental assessment as required by the National Environmental Policy Act.

The notice is available at www.farmtoconsumer.org.

A Producer's Perspective

When markets move to extremes, fallout is assured and business fatalities become a reality.

Norlin Gutz has been raising hogs for over 35 years. In the early '70s, he ran a 120-sow, farrow-to-finish operation near Storm Lake, IA. His wife pursued a nursing career until they started a family.

In the late '80s to early '90s, he began dabbling in the Isowean/feeder pig market, buying a few pigs and placing them on feed on other producers' sites when he could lock in a profit.

In the early '90s, when the purchased pigs showed more profits than the continuous-flow, 120-sow operation, the sow herd was sold.

“I was buying pigs on the open market. Whenever my feed distributor had a finishing floor come open, I would place the pigs, he would get the feed business and I could make a little money. That's how I got started,” Gutz explains.

The feeder-pig finishing enterprise grew to over 12,000 head on feed with independent producers scattered across northwest Iowa, up to Sioux Falls, SD. Gutz spent most of his time on the road, monitoring the pigs, over half of which came from Canada.

“In 1998, things began to change. The crashing hog market left many pork producers filing bankruptcy in its wake, including a brother-in-law's 1,000-sow unit near Jackson, MN,” he explains. “Everybody had walked out on his contracts for Isoweans.” Gutz purchased the unit.

In 2001, Gutz bought a 1,200-sow unit with a nursery and a house north of Albert City, IA. It had set empty for three years,” he notes.

The two operations began cranking out feeder pigs and Isoweans that were sold to independent pork producers across Iowa and southern Minnesota.

“Our costs were below the industry average. Weaning averages were running at about 9.3 pigs/litter. Even when costs began escalating, our costs were still below $34/pig. Our facility costs were very low,” he says.

The situation took a bad turn in the summer of 2007, however, as Canadians began sending more pigs to the area and pig prices dropped to about $10.

“We did not sell an open market, Isowean pig after that. Normally, we had about 3,000 of our pigs on feed, but that grew to 12,000 by Feb. 1, 2008. The feed costs just ate us up. We didn't want to get into finishing because it would have stretched our management too far,” he explains.

In late February, Gutz had 12,000 pigs on feed on sites that were old and not very efficient, but they were all that was available.

In early March, the local banker that carried the loan asked Gutz to form a liquidation plan. He did. The last sows farrowed the first week of June. The unit closes down a month later.

“If we had continued for another six months, we'd have probably lost another quarter-of-a-million dollars. It's very frustrating,” he says.

Worse yet, Gutz is trying to find positions for eight employees - all hired through the worker exchange program, Communicating for Agriculture.

“They come to work with us for a year to learn a trade. They are really good kids and they'll work their tails off to earn some money so they'll have opportunities when they return home. A lot of them are third-year veterinary students who take a year off to work here. Some stay up to three years,” he explains. Most of the workers are from Brazil, the Ukraine and South Africa.

“We've worked with this program since 1998, and built some wonderful relationships. I am trying to look out for their interests, too,” he adds.

“I don't know where the situation in the livestock business will lead. It has upset the whole structure of the industry. A year to 18 months down the road, I think there will be some terrible consequences for jobs that are related to the livestock industry — especially in Iowa where we are so tied to the livestock industry,” he says.

“You really value your family and the relationships with friends — and your faith. You really see what's important,” he says of the experience. “As for my future, we are still sorting that out. I doubt I will be involved with hogs. It would be hard to get involved again once your heart has been broken.”