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Articles from 1999 In July

Evening Out Market Highs And Lows

Kirk Caldwell dodged a bullet. He knows most pork producers have been losing a fistful of dollars on every hog they sold in 1998-99.

During the same time, the Forest, IN, producer maintained a positive cash flow using forward pricing. He has consistently been getting $40-plus/cwt. for his hogs.

"The combination of futures options and market risk-share agreements I have been using have been a life-saver, they really have," comments the 37-year-old, 650-sow, farrow-to-finish producer.

"I sell my hogs in advance and buy my feedgrain needs in advance, just to guarantee the margins, and because I don't like surprises," observes Caldwell.

He says the move to forward price contracting was out of necessity. There really was no other way for him to get started in the hog business. The hog operation he and his wife started back in 1988 in central Indiana was built on the guarantee of profit margins afforded by the futures markets and feed company contracts. Lenders were requiring the guarantee after the agricultural economic crisis of the early 1980s, he points out.

Even with prices locked in, he admits raising hogs has been a bit of a struggle. He borrowed every dime to start his operation at 300 sows. He expanded in 1993, more than doubling the size to 650 sows. Since day one, he and his wife worked long hours with little help to keep costs down. His wife takes care of their two small children now, but still manages to process all the baby pigs and does all the farm paperwork. Caldwell has worked in the units seven days a week since the operation began; he now has two, full-time employees.

Caldwell realizes that simply working long hours, without market price protection, wouldn't guarantee profitability. Most of his hard-working neighbors found that out the hard way. "There were hogs being raised every few miles around here a few months ago," Caldwell says. "Now I am the only one left on this side of Clinton County who's got hogs," he laments.

Keys To Survival For his part, two long-standing practices have been integral to survival.

First, he makes a habit of socking away funds when possible, for the hard times. He believes his level of equity (he only has three years of payments left on one building) could probably have saved him in this current crisis.

Second, the use of futures pricing contracts keeps his margins in the black. He buys a large part of his feedgrains a year ahead, and also sells his hogs in advance, using a combination of futures and option contracts. Caldwell markets hogs to IBP Inc. at 225-230 lb., just above weight cutoffs if carcasses yield well, and making his goal of increasing building throughput.

To make commodity trading work, Caldwell stresses you need to closely measure your feed needs to know how much to purchase that far in advance. And you need to balance major hog operation costs vs. revenues before you venture into hog futures marketing, he advises.

The Indiana producer says pork producers turn to the lean hog futures market, instead of futures options contracts that hold much less price risk, because options are newer and aren't well understood.

Put Option "When you buy a 'put option,' it allows you to take advantage of a market price rise and be protected in a market price fall," says Caldwell. "An options strategy is just like buying an insurance policy."

For example, in a "call option" it could cost you $1-1.50/cwt. to guarantee a cash hog equivalent price of $40/cwt. That insurance or premium places a floor under cash prices. You are guaranteed at least that price. If the price on your contract rises, you get the higher figure, minus deduction of the premium from your options check, explains Caldwell.

Options Hedge The use of an options hedge does involve the use of the futures market, but instead of selling the actual futures contract, the producer would buy the right to sell the futures contract at a certain price, points out Brian Buhr, extension agricultural economist, University of Minnesota. This would be a put option and the purchase price of the put option is the premium. This premium is all the put option will ever cost - there are no margin calls or other financial requirements beyond the "insurance fee" and brokerage commission, he explains.

Of course, the closer the strike price is to the futures price, the more the insurance or premium is going to cost you, points out Dana Scott, Logansport, IN. The disadvantage to the options insurance or premium is that it effectively adds to the cost of production, explains ag economist Gary Schnitkey of the University of Illinois.

Like Caldwell, Scott, a 400-sow, farrow-to-finish producer, mostly relies on futures option hedges to forward contract his hogs. But he has also used fixed, short-term packer contracts to provide some market price protection.

For the options contracts, he buys 40,000 lb. carcass weight contracts, which for him comes out to about 155 hogs at 260 lb. Using an options premium of $2/cwt., he figures it costs about $800 to sell a contract of 155 hogs.

"If you dabble in the futures market, you can have big gains or big losses that can hurt you and sometimes have bankrupted producers," says Scott. "But if you stick with options, you won't have that big of losses."

Caldwell, who has traded forward price contracts for 18 years, suggests using options when hog prices are high, not when they are low. "For instance, when cash hog prices got to $60, I hedged for a year and a half out so I guaranteed myself $55 hogs when everybody else ended up getting $30-35 on the cash market," he explains. "Then you take that money and pay down principal on payments and put the rest in the bank, because if you have been in the hog business long enough, you know that $60 hogs can soon become $30 hogs. And when prices go back up again, you hedge further out and do it all over again."

Monte Moss, DVM, producer from Burnettsville, IN, agrees with that marketing philosophy. "In the past, I used to forward contract my hogs when the futures market was at the bottom and when I was getting scared of cash market prices.

"However, what you want to do is watch the charts and try to lock in prices off some sort of a peak." A lot of times it takes patience to wait to lock in prices until the market starts to move down, he admits.

The other thing that Moss, a 1,200-sow, farrow-to-finish producer, has done is base his forward pricing decisions on projected cash flows. "I project in prices that I think the equivalent cash hog market is going to be for the coming year and put those in my cash flow. And then I look down at the bottom line to see if I have a profit or a loss. If I look at futures prices and can forward contract at a better price than what I've got projected, then I am going to forward contract my hogs and increase my profit picture."

Like Caldwell, Moss has used the lean hog futures market of the Chicago Mercantile Exchange (CME). The idea is simple, contracting for a price in the future that exceeds the cash price you can get for your hogs.

Futures Hedge But instead of the options hedge as described by Caldwell, Moss started out using the futures hedge. For that basic hedging program, the producer would simply sell the lean hog futures contract nearest the date the hogs are expected to be delivered. The live hog equivalent price is based on the futures price, times 0.74 (estimated carcass yield). Packers or whomever is buying the pigs will deduct a basis amount when they believe that the range between futures market and the cash price is too wide, says Moss. Sometimes there is a plus basis when the range between futures and cash prices narrows. Producer cash equivalent prices will vary depending on their marketing arrangements, location and pork quality.

According to Moss, both full and mini contracts are available through CME. A full contract runs 40,000 lb. carcass weight, a mini is 20,000 lb. A full contract converts to roughly a semi-load of 200 hogs for Moss' double-deck truck.

The biggest reason that Moss has not used the futures hedge program much anymore is the amount of future price risk. Producers may be responsible for margin calls. He observes, "Say I lock in $56.30 for August and hog prices go down to $54 on the futures hedge contracts. They are going to call me up and ask that I pay margin calls on my contract, the difference between the price I contracted and the current lean hog futures price. That can quickly get into tens of thousands of dollars."

Fed up with costly margin calls, Moss switched to forward pricing with a packer. In a packer contract, futures hedging responsibility falls on the packer, not on the producer.

Declares Moss, "I like this a lot better because I am no longer responsible for margin calls. The packer or whomever carries the contract is responsible for that."

Of late, Moss has been using short-term packer contracts for the majority of his hogs, selling the rest on the open market. For example, October 1998-February 1999, he forward contracted 80% of production at $29/cwt. During that period of the lowest hog prices in history, the average cash hog price for his peers on United Feeds records program was $14/cwt. He locked in a price that was unprofitable. But the lesson was that the return was still a good deal better than selling solely on the open market, "and I was glad he made that move," remarks brother and partner Mark Moss.

Mark details another important lesson in using market contracts to forward price hogs. "It's risk management. You have to be satisfied with what you are doing. If you locked in a profit, then be happy with what you locked in, not the additional profit you may have missed."

And to their benefit, unlike the futures contracts, forward pricing with a packer does afford market access protection, points out University of Minnesota's Buhr.

The Mosses finish half their hogs, selling the other half as early weaned pigs to a Michigan producer.

Forward Pricing Basically, there are only two types of forward price contracts for pork producers: futures market forward pricing and forward pricing with packers.

Indiana producer Scott says for those interested, there are seminars available to help you do your own forward price contracting.

Scott does his own contracting, instead of paying a broker. His advice, start small to test the waters, such as a 20,000-lb. mini-contract. And if you need to buy a lot of grain, also consider using grain option calls, to buy price protection. A grain shortfall could end up being worse than the hog price crisis, he warns.

Scott used a few short-term packer contracts in 1998, and they paid off for him. While the industry's average price in 1998 was $33/cwt., his was about $37/cwt., and about $3/cwt. higher than his peers on United Feeds records.

Scott explains in futures hedges, which he has also used, you buy the whole contract and can sell it again the next day on paper if the price warrants it. Or you can wait it out until its due date.

That contrasts with options, which he prefers, where the only cost is the insurance or premium amount you pay per hundredweight. With both, you market your hogs as you would normally to your packer and take the cash price offered.

In these tight times, even the futures market has taken its lumps. There is a narrow window of high-level profit and you have to time your move, warns Scott. Remember though, the goal of forward price contracting shouldn't be trying to hit the market highs, but rather avoiding the low prices which can bankrupt your operation.

As with Caldwell, Scott has built equity to weather the hog price storm. Scott's rule of thumb is, "If we don't make money, we don't spend money." All of their buildings are paid for, a collection of remodeled '60s and '70s barns and a complement of newer facilities.

The goal of your marketing plan should be to manage risk and protect profit potential, says Brian Buhr, University of Minnesota extension agricultural economist.

Develop a marketing plan that will help you manage price risk. Use these five steps:

* Collect information. It includes personal and business financial data and marketing information.

* Set price goals. These goals should be based on cost of production, financial information and personal risk tolerance. As well, they should take into account market conditions.

* Carry out your strategies. "This step often is the one that destroys a marketing plan," states Buhr. It is also called "pulling the trigger."

* Check performance of your marketing plan relative to your marketing goals.

"The biggest reason people fail to repeatedly use marketing plans is that their performance is compared to what might have been, which is typically the highest price alternative," he says, "which is probably an unrealistic goal."

Buhr says forward pricing contracts are common risk management marketing strategies. "No one strategy is best all the time. Each has its place under certain circumstances as risk-reducing strategies," he says.

New Swine Flu Strain Appears Widespread

The new strain of swine influenza virus (SIV) seems to be growing in prevalence. Diagnosticians predict as soon as testing capabilities are up to speed, much more of the new strain, known as H3N2, will be discovered. "We have found positive herds through

A conditional license has been issued by USDA for a new killed-virus vaccine against swine influenza virus (SIV), caused by the new strain of the virus, H3N2.

"If animals in an SIV-vaccinated herd run high fevers, abort and there are deaths, it may be a tip-off that the H3N2 strain is present," points out Rick Sibbel, DVM, technical service veterinarian for vaccine licensee Schering-Plough Animal Health.

"In these cases, testing for H3N2 should be arranged and all healthy swine should be vaccinated."

The conditionally licensed vaccine will be available only through veterinarians and where approved by state animal health officials. To date, 15 states have approved its use. Schering-Plough will pursue a full USDA license for the new vaccine.

Schering-Plough also produces MaxiVac-Flu vaccine, to protect against the H1N1 strain. The vaccine has been used successfully in sows and baby pigs since its introduction in 1993.

NPPC Votes to Explore Producer Ownership of Packing Plants

Packer ownership of hogs drew considerable attention from pork producer leaders prior to World Pork Expo.

In separate, but related announcements, the National Pork Producers Council (NPPC) reported its task force findings regarding packer ownership of hogs and membership concerns about the interpretation of the Packers and Stockyards Act. The NPPC Board of Directors then revealed a decision to pursue producer-owned packing, processing and marketing operations.

Packer Hog Ownership Cleared Pork producer delegates to the '99 NPPC annual business meeting in March voted to form a task force to study a motion (MT7A) calling for "implementation of state and federal legislation to prohibit packers or the packing industry from owning, operating, managing or financing captive supplies (of live hogs) greater than 5% of yearly slaughter, by company." The task force report was due to the NPPC Federation Council before World Pork Expo.

In turn, the Federation Council was directed to give the task force recommendations a thumbs up or thumbs down, thereby, giving the NPPC Board of Directors the authority to act on the proposal.

Chairing the MT7A Task Force, NPPC Immediate Past President Donna Reifschneider presented an extensive report of the groups' findings. Key amongst them was the interpretation of Section 202 of the Packers and Stockyards Act. The report stated: "The Packers and Stockyards Act does not prohibit the ownership of livestock by packers. Many have used the existence of packer ownership to infer that section 202 of the Packers and Stockyards Act (the section that bars practices used to manipulate prices) is not being adequately enforced. But Section 202 has never been interpreted by the courts as barring packer ownership (of hogs)." The task force report went on to note that the scope of the act's coverage could change as it continues to be tested. But for now the case history surrounding those challenges establishes legal precedent.

The task force interpretation was critical to the bold steps taken later by the NPPC Board of Directors as it announced intentions to explore the concept of producer-based cooperatives and to create enough slaughter capacity to have sufficient scope and size to be economically viable. If packer ownership of hogs was a restriction, producer-owned and operated packing plants could have hit a major snag.

Producer Ownership Of Packing In its announcement to explore producer-based cooperatives, the NPPC board explained its actions were aimed at preventing a recurrence of the devastatingly low hog prices pork producers faced this past year.

Additionally, its intent was to serve as a catalyst to explore producer-based efforts to operate packing, processing and marketing operations.

"Doing nothing was not an option," states NPPC Chief Executive Officer Al Tank. "We've been creating a vicious cycle with excess slaughter capacity and too few pigs, then we have too many pigs and too little slaughter capacity."

The self-described "bold step" Tank refers to is the NPPC's response to a need to "recreate a system where production and (slaughter) capacity are able to have some degree of ability to match." The proposal, he continues, "has the intended purposes of allowing pork producers access to shackle space by realigning themselves in the market chain" and leading to sales of branded pork products.

The Cooperative Concept NPPC President John McNutt, Iowa City, IA, says the cooperative concept is focused on helping independent producers who are "increasingly finding it difficult to find a market for their hogs; given the present situation, we are likely to continue to lose pork packing capacity."

What he refers to is the chance that higher hog prices and tightening of packer margins could force the closing of marginally efficient plants.

The producer-owned, packer/processing concept has been successfully undertaken by Ocean Spray cranberry growers, Gold-Kist, the second largest U.S. broiler producer and processor, and Danske Slagterier, the pork producer-owned cooperative in Denmark. These will be used as models to guide a newly appointed task force to work out other details.

High on the agenda is an economic analysis and developing of a business plan, including identifying the type of output and the end-user of the major products.

For the sake of discussion, Tank offered this scenario: three plants strategically located in key areas of the U.S., 8,000 head/day slaughter capacity, running 51/2 working days/week, 52 weeks/year. This would provide nearly 7 million additional head of slaughter capacity annually.

Financing The Venture Tank acknowledges there are several ways of capitalizing the producer-owned venture.

Federal and state grants may be available. "We believe there is significant interest from USDA and members of Congress in addressing the competition and capacity issues, and in allowing independent pork producers to reposition themselves in the (pork) value chain," Tank states.

"There may be some interest from end-users willing to capitalize this (venture). "And, if you form a cooperative, equity needs to be provided by pork producers," he explains. "Not only do they need to supply pigs, but (they) also need to supply equity."

It is unclear if checkoff funds can be used in this effort. Clarification will be sought from the USDA and the National Pork Board.

Mandatory price reporting legislation should clear both the Senate and House Agricultural Committees before the August recess, according to NPPC's Steve Cohen.

Cohen says the legislation probably will incorporate much of the NPPC-introduced Pork Industry Mandatory Reporting Act of 1999.

Put forth in late May, the act addresses five areas of concern, laying out specific suggestions and areas of responsibility:

1. Mandatory Price Reporting * The NPPC bill proposes the USDA publish by 8 a.m. each day all prices, volumes and terms of sale from the previous business day, grouped by purchase type. They also look for the USDA to report all hogs slaughtered the previous day, by purchase type, from all federally inspected packing plants that slaughter more than 250 hogs per day.

* The NPPC bill asks that prices reflect all premiums, discounts and carcass merit adjustments and that data be published in aggregate form based on geographic regions.

* In the bill, the USDA is also asked to publish a report at 11 a.m. (CST) and a report at 3 p.m. (CST) reflecting packer estimates for hog purchases and slaughter for that day. These reports will include volume, base market pricing, cash and spot market purchases, as well as contract sales and packer owned hogs.

2. Contract Reporting USDA would maintain an electronic library for each type of marketing contract being offered by packers who slaughter in excess of 250 hogs per day, under the bill's provisions. The contract listings would be plant specific and contain the price determination method being used for the hogs covered by the contract, including non-carcass meat premiums.

3. Monthly Retail Price Reporting A retail report that shows total sales volume in pounds and dollars is another provision requested in the bill.

4. Monthly Hogs & Pigs Inventory The NPPC bill would require the USDA to implement a new simplified monthly, instead of quarterly, hogs and pigs inventory reporting system in the 17 leading pork-producing states.

5. Report On Secretary's Power A new report from the General Accounting Office setting forth the Secretary of Agriculture's jurisdiction, power, duties and authorities as set forth in the Packers and Stockyards Act of 1921, and all other relevant laws and acts is requested in the bill.

"Information and knowledge are power in today's marketplace," testified NPPC President John McNutt before a Senate Ag Committee hearing. "Disclosure is critical to pork producers ability to grow, beprofitable and compete globally in the 21st century," said McNutt.

Judge A Lagoon By Its Cover

The saying: "You can't judge a book by its cover" is being shunned by some producers who believe the cover they use for their lagoons may, in fact, be the measure by which it is measured. In other words, you won't smell a lagoon if it's covered.

Under pressure from government regulation and encroaching development, producers are experimenting with ways to "cover-up" the smell of their lagoons.

A new cover system, the Bio-Cap, is being marketed by Baumgartner Environics Inc. (BEI), an ag environmental consulting firm based in Olivia, MN. The Bio-Cap is a synthetic, permeable material that floats on top of a lagoon.

The textile matting material is most commonly used in construction under roadbeds. BEI found that by heat-welding sections of the matting material together, an effective lagoon cover can be economically fabricated on-site.

BEI's Wade Jager says the cover reduces the release of gas in two ways. First, he says, the fabric prevents large volumes of odor-causing gases from being stripped from open storage structures due to wind, wave action and rain.

The second manner of control comes from the permeable material allowing oxygen to diffuse from the atmosphere into the surface of the fabric. The presence of oxygen allows aerobic bacteria to flourish and to break down malodorous gases before they pass through the Bio-Cap to the atmosphere, says Jager. In this process, hydrogen sulfide and volatile organic compounds (two of the primary components of odor) are reduced.

BEI has experimented with a number of ideas for covers and began testing the Bio-Cap idea in September 1998. The cover was installed at a facility near Renville, MN, that houses 7,680 nursery pigs, 2,880 grower/feeder pigs and 4,800 finishing hogs. The primary stage of the lagoon measures 402 x 687 ft. A secondary stage measures 232 x 652 ft.

The site, owned by ValAdCo, a producer-owned cooperative, had generated odor complaints from neighbors and was being monitored by the Minnesota Pollution Control Agency (MPCA). The MPCA set up a continuous ambient monitor at the property boundary to record the concentration of hydrogen sulfide emissions. In Minnesota, a 30 parts per billion (ppb) ambient air quality standard cannot be exceeded twice within five days. Frequent spikes above this standard had the MPCA putting pressure on ValAdCo to find a solution.

Fortunately for ValAdCo, the Bio-Cap did the trick. Compliance has been maintained since the cover went on. ValAdCo has since installed Bio-Caps at four different sites.

Iowa State University ag engineer Dwaine Bundy evaluated the odors coming from the two-stage, earthen, anaerobic treatment lagoon system at one new site and at a ValAdCo site with no cover. The lagoons at the covered site are 202 x 252 ft., 17 ft. deep with manure from a three barn, 1,200-sow, breed-to-wean set-up. The "control" site is a four barn, 2,100-sow set-up with two lagoons, each measuring 322 x 427 ft., 17 ft. deep. Both sites are run with similar genetics and nutrition.

Bundy collected bagged samples to present to a trained panel of human sniffers. Data from that panel shows a five-fold reduction in odor for the covered compared to the non-covered lagoons. The hydrogen sulfide data shows a 10-fold reduction.

Using an on-site measurement, Bundy showed the odor downwind was non-detectable at 370 ft. with the covered lagoon. The uncovered lagoon still had an odor threshold of 1.9 at 950 ft., the farthest distance measured. (Odor threshold is defined as the number of volumes of fresh air needed to mix with one volume of odorous air to just be detectable.)

Jager says the idea of the Bio-Cap is to keep it simple and take advantage of natural processes. "We've eliminated the need for flares and incur virtually no operating costs," says Jager.

"The use of floating, porous covers on waste storage systems is a successful modification to the idea of biofiltration," says James Zahn, Livestock Emission Solutions, Indianapolis. Zahn, a microbiologist, researched lagoon management at Iowa State. He notes that the processes of anaerobic decomposition that occur in the stored waste and the aerobic treatment of the gaseous pollutants evolved from the anaerobic treatment are decoupled in two separate processes. Thus, odor reduction is done without severely reducing the nutrient value of the manure, says Zahn.

The cover also limits wave action and the resulting erosion of basin sidewalls, notes Jager. And, the Bio-Cap covers the sidewalls, controlling weeds, he says.

The synthetic material performed well throughout the Minnesota winter, accommodating the freezing and thawing process, says Jager.

Bundy suspects water will evaporate more quickly from a Bio-Cap-covered surface than from an open surface. The cover material is black and generates some heat, enhancing the process.

Jager thinks the biggest challenge to the Bio-Cap will be durability of the material under sunlight. Ultraviolet light will eventually break down the cover, says Jager, but he expects the life span of the cover to be three to five years. At that point, the cover would be removed and burned, if local law permits, or brought to a local landfill.

BEI will install the Bio-Cap cover system for about $1.25/sq. yd., with some variation on size of lagoon and travel requirements. Installation is relatively simple as no framework is required for suspending the Bio-Cap. A six-man crew can cover 3/4 of an acre of lagoon per day. Based on a three-year amortization of the cover and average manure production figures, the cost is about 15-45 cents/pig.

Another cover system is being tried a mile west of Williamsburg, IA. Gary Boland's family has raised livestock there for three generations. Boland knows that if another generation is to farm there, odor concerns will have to be addressed, especially as plans for a new school and golf course are moving Williamsburg ever closer.

Boland has a relatively small, 120 x 120 ft., 700,000-gallon storage lagoon. "We've never had complaints. It's a pretty ag-minded community and our family has maintained good relations."

But Boland thought it best to be pro-active and, working with Iowa State extension, decided to develop a lagoon cover. He called Reef Industries, Houston, which markets a non-permeable, synthetic material called Permalon.

Boland and Mark Moser, Resource Conservation Management Inc., Berkeley, CA, designed a lagoon cover using the synthetic Permalon material. Floating foam "logs" keep the cover buoyant, raising and lowering with the lagoon level. Boland dug a U-shaped trench around the berm of the lagoon and laid the edges of the cover through the trench, burying it to anchor the cover.

A slit in the material provides a "door" for agitation and pumping access. The slit is closed tight with grommets and rope. A layer of water on top helps keep the cover from flapping in the wind. Since the material is not permeable, Boland had to put together a burner system to flare off the gases that collect under the cover.

Boland says he spent about $14,000 on the cover. With a fence around the lagoon, the burner, and some tiling the entire project cost should total close to $20,000. As part of a demonstration project, he received some cost share funds.

"My neighbors never told me the smell was bad, but when I got done a number of them commented they sure appreciated what I had done," says Boland.

His wife also appreciates the project. "She puts the laundry on the line now; she was never willing to do that before we put up the cover," he commented.

More Pigs Than Expected

The Hogs and Pigs report came in more bearish than the trade estimates and confirmed the industry's worst fears - more pigs in the production pipeline than expected.

The breeding herd was down 6%, the market herd down 2%, and the total herd down 3%. And, we believe there is a possibility that the breeding herd may be overestimated by USDA based on our gilt slaughter data.

We are killing ourselves with increased productivity both in numbers and weight. With a breeding herd down 6% - and possibly more - we only reduced the March-May farrowing by 3%. Hog slaughter for January-May was up 2.1%, but pork production was up 3.1%.

Total red meat production for January-May was up nearly 3% and broiler production was up 5.5% for the first five months of 1999. We are awash in meats with the total supply up 3.3% for January-May of 1999 compared to 12 months earlier.

We do not believe the change in structure of the production segment of the U.S. hog industry was a major factor in the record low hog prices of 1998. However, the change in structure is probably mostly responsible for the indicated continued low prices - below production costs for even the most efficient producers - now expected during 1999.

We will eventually reduce production of pork in the U.S. enough to give substantially stronger prices than in 1998 and 1999. However, these improved prices are not likely to occur quick enough to keep many producers - both large and small - from being forced to exit pork production as owner-operators.

We also believe the stressed financial conditions the production segment of the hog industry has experienced during the last two years of the 20th Century will contribute to more vertical integration. In other words, we're likely to see production and packing processes under the same ownership - as well as more vertical coordination with marketing contracts between producers and packers. The number of days left for independent, free-wheeling pork producers appears to be limited.

We do expect the reduction in the hog breeding herd to speed up but, unless we see some changes the industry doesn't appear to be positioned for, we will have burdensome supplies of pork for at least the remainder of 1999 and probably through most of the first half of 2000.

Total pork exports through the first four months of 1999 were off almost 12% in carcass weight equivalent pounds. However, the big reduction was in exports to Canada and the Russian Federation. Without these two countries in the mix, the January-April exports were up 17% from a year earlier.

Japan, our largest pork customer, bought about 9% more this year than last for the first four months of the year. The Republic of Korea showed a 365% gain for the above period, and Taiwan went from 155 tons to 9,504 tons and was our fourth-largest customer for pork for the first four months of 1999.

Of the 17 states with individual estimates of the breeding herd size, only Oklahoma and Pennsylvania showed gains and they were up 19% and 4%, respectively, from 12 months earlier. Of these 17 states, those with their breeding herds down 10% or more were Illinois, 21%; Indiana, 13%; Kansas, 16%; and Wisconsin, 20%.

The other states with a bigger decline in breeding herd size than the average were Iowa, 8%; Michigan, 8%; Ohio, 9%; and South Dakota, 7%. The Cornbelt states on average were down just short of 10%.

The demand for pork at the consumer level for January-April of 1999 shows a gain of between 1% and 2%. Our demand index shows pork demand at the consumer level working on the fourth consecutive year with a gain.

The market inventory shows the third quarter slaughter down about 1% and fourth quarter slaughter down 4-5%. This level of slaughter indicates 1999 hog slaughter will be above 100 million head, down less than 1% from 1998. With large cold storage stocks, larger imports, smaller exports and wide marketing margins, the average price for hogs in 1999 is likely to be below 1998.

Our slaughter estimates and prices for the next nine months are in Table 2.

Computer Program Simplifies Semen Buying

The explosive growth in use of artificial insemination (AI) in the pork industry causes Don Levis to get quite a few telephone calls.

When it comes to AI, producers often ask the University of Nebraska extension swine specialist the same basic question. Where should I obtain boar semen?

The choices are almost mind-boggling. There's the on-farm boar stud, the cooperative boar stud, a fee-for-service boar stud and the commercial boar stud. To help commercial producers make the best selection for their operation, Levis developed a computer program which is on the Internet at

Myriad Of Choices An on-farm boar stud is often a producer's first choice for obtaining boar semen, remarks Levis. But there are many roadblocks to success, chief among them are finding, training, motivating and keeping top help and biosecurity of farm and laboratory for semen processing.

If that doesn't pan out, a group of four to five producers may get together and develop a cooperative boar stud, he explains. Key problems include clearly defining the health protocol and the biosecurity procedures for bringing in boars.

"The fee-for-service boar studs are in a way like a commercial stud, except that they are just providing a service. The boars are still owned by the producers, but the management and the expertise are all handled by the stud," points out Levis.

If the commercial producer decides he's through messing with boars altogether, then he can choose from a growing number of reputable commercial boar studs for his AI needs, states the Nebraska swine reproductive expert.

Computer 'Help' Program To help producers wade through all the choices, and decide which is the most cost-effective means for obtaining semen, Levis elected to develop a computer spreadsheet utilizing Microsoft Excel 97. He assembled six workbooks. The studs workbook is composed of seven worksheets that are linked together. They are named: Production, OnFarmStud, Cooperative, FeeForService, CommercialStud, Summary and SEWModel.

The Production worksheet tallies animal inventories and productivity values to be used in the other worksheets.

The OnFarmStud worksheet lets the user enter data for boar isolation, AI equipment and supplies, construction of a boar stud facility, purchase price of boars, feed costs, and labor requirements to operate the stud. The output provides an estimate of the minimum cost to produce semen from an on-farm stud.

Levis explains the Cooperative worksheet lets the user enter the same type of data as for the OnFarmStud worksheet. The output is the estimated minimum cost to produce semen from a cooperative stud.

In the FeeForService worksheet, the user can input data for isolation fees, projected number of usable semen doses per month per boar and projected stud fee charges per dose of semen. The result or output is the estimated minimum cost to obtain semen from a fee-for-service stud.

In addition, the worksheet allows the user to estimate gross income minus AI cost if fee-for-service semen produces an increase in farrowing rate and litter size.

In the CommercialStud worksheet, the producer/user enters data for farrowing rate, litter size, semen delivery cost, feed efficiency, feed costs and carcass premium. The computer program estimates cost to obtain semen from a commercial stud. Gross income minus AI cost can also be determined if commercial semen provides an improvement in farrowing rate, litter size, feed efficiency and carcass merit.

The Summary worksheet summarizes the key factors for the four options of obtaining boar semen.

The SEWModel worksheet compares the four different semen sources when selling segregated early weaning piglets. A number of production variables can be added, including production parameters, feed costs, market prices, facility costs, labor costs and interest rates.

Other workbooks include: * Boarstud. Enter the estimated cost to construct and operate a boar stud. It does not include the cost of boars.

* ComSemen. Compare the cost of semen from an on-farm boar stud to a commercial boar stud.

* Equipment. Estimate the cost of AI equipment and supplies.

* INV-PROD. Calculate animal inventories and productivity.

* SEWModel. Evaluate various types of scenarios when operating an SEW system.

Levis stresses no one semen option will work in all cases. That is why all the workbook programs are necessary.

For more information on the boar stud template programs, Levis can be reached at UNL, Animal Science, C206k, Animal Sciences, 38th & Fair, Animal Sciences BL, Lincoln, NE 68583; phone, (402) 472-6445; fax, (402) 472-6362; e-mail, ansc307@

Tidy Tidbits For Cleaning Up Your Hog Operation

Hog farms across the world, including those in the U.S., are getting dirtier. And there are three reasons why.

First, routine cleaning and disinfecting is just that - routine. Because it is a boring, repetitive task, familiarity can breed carelessness in the best workers and contempt in the worst. Some European surveys asked workers why they left pig production and "a boring, repetitive job" was high on the list.

One of the reasons why pig-affecting viruses seem to be on a roll could be that the modern strains of such pathogens just love a rushed cleaning job. And there lies the second reason - workers. They are eternally chasing their tails on repairs which need urgent attention, tend to hurry through the vital job of regular biosecurity. We overstock pigs and under stock our workforce.

Careful preparation is a critical part of disinfecting. The third reason why we are seeing more diseases these days is that farmers place too much reliance on disinfectants (see Table 4).

Where a detergent or sanitizer was used before disinfectant, pigs grew an ounce a day more, up to 88 lb. This resulted in $2.43 more meat/pig.

Of the last 12 farms I've visited, only five were using a detergent in the pressure-washing process.

Precleaning is especially important with all-in, all-out (AIAO) (see Table 3). Economics

Some 1.4 ounces/day improved gain from 13 to 200 lb. results in an improvement in saleable meat/ton of feed used of 53 lbs. This is equal to a 15% reduction in cost of feed/ton at $33/pig. The extra cost of cleaning and the special biocide detergent used is equal to 5% of the cost of one ton of feed. Therefore, a payback or return to extra outlay (REO) of 3:1 is achieved, just from correct precleaning alone.

The benefits of using a detergent are shown in Table 2, where bacterial counts are shown at various stages of cleaning.

Washing with water reduces bacterial contamination up to 60% - well above the before-disinfection target level. When adding a good heavy-duty detergent, the contamination is reduced even more - to well below the target level. You can be left with 4,000 times more bacteria for the disinfectant to deal with if you don't use a detergent. A reduction in microorganisms to 0.001% of their initial value by the end of disinfection is the goal.

Ten points to consider when choosing a detergent: 1. It must be farm-specific. Industrial detergents may be insufficient to cope with the semi-porous surfaces (plastic, metal and worn concrete floors) you have to work with. Check that the detergent is specifically designed for farm use.

2. It should have good degreasing activity. Fat and grease protect microorganisms by long-chain fat molecules. Some manufacturers have special defatting detergents.

3. Is the detergent safe to both humans and pigs? Some powerful industrial detergents, while safe to machinery, are questionable for livestock.

4. Use it exactly to the manufacturer's instructions. Read the label. Then consider the circumstances of use. Are you using estimated dilution rates, or just roughly calculated and measured, or measured and calculated every time? Do a check-up audit periodically.

5. Does it interfere with the subsequent disinfectant's activity? Check this with the manufacturer if using a different firm for the latter.

6. Can it be applied through your existing equipment with minimal modification? Ask the manufacturer before choosing.

7. Does it leave residues? Residues can make the floor slippery and harbor microorganisms. Cumulative residues can be especially dangerous.

8. It should be alkaline. This helps dissolve fats and protein in built-up manure deposits.

9. It should work in hard water conditions.

10. Foaming can help. Foaming increases contact time and allows workers to see where the detergent has been applied. It also decreases the amount of water needed in presoaking and pressure washing.

Less water means lower operating costs and fewer washings going into any slurry to be removed.

Table 1 shows the value of an improved cleaning program. The economics show an improvement in saleable meat/ton of feed of 57 lb., equal to a 19% reduction in feed cost savings, yielding an REO of 3.8:1 after allowing for extra cleaning costs.

Pork Products With A Face

Sauer's Valley View Farms has been direct marketing, indirectly, for years. "We would sell a quarter (of pork) here and a half there," says Chris Sauer. But since becoming a partner in a unique new program called Branding Your Beliefs, their direct sales of pork have tripled.

"Before, people came to us. Now we're out there looking for business and that's what has made the difference," says Chris.

Chris, Heather and Jason Sauer are the team that makes up Sauer's Valley View Farms from Lewiston, MN.

Last year, the Sauers started booth displays at various events and home delivery of their farm-raised, branded pork. They've also been successful in placing their pork products in grocery stores and restaurants.

Marketing Plan "I don't think anyone could expect to build a successful direct marketing program in less than a year," says Chris. "There are so many little things to consider, from designing your logo to some of the legalities you need to take care of."

Legalities such as liability insurance and clearing brand names and logos are important to ensure they're not already in use. The Sauers are also in the process of writing a business plan and forming a Limited Liability Company, although that's not mandatory to the program.

"It took us a full year, but now we present a real professional image when we come to an account," Chris notes.

It was the aggressiveness of a local processor, Lorentz Meats, in Cannon Falls, MN, that got the Sauers involved in the Branding Your Beliefs program.

"Lorentz Meats pushed hard for this because they needed the business. They realized they needed to do something different in order to stay alive," says Chris. "They've done a good job of marketing themselves."

Mike Lorentz and his brother, Rob, own and operate Lorentz Meats. It's a custom processing plant that has been in the family for more than 30 years.

"We felt for our custom processing to survive, we needed to partner with the farmers that were direct marketing. We were growing as a business, but we were taking an increasing share of a decreasing market because more and more farms are going out of business," says Mike Lorentz. "With direct marketing we have nearly a limitless market."

Sauer's Valley View Farms marketing plan partners perfectly with Lorentz Meats. They each produce quality products and have the potential to improve profitability.

Birth Of Branding Branding Your Beliefs began in 1997 with grant money when Lorentz Meats teamed up with Land O'Lakes, the Sustainable Farming Association and the University of Minnesota. The program was designed for producers to market their own products, direct to consumers, using Lorentz's processing facility.

Lorentz can wholesale products anyway their customers want. As a state inspected facility for meat cutting and sausage making, they contract out to area processors who have inspected kill floors.

"We started with humble goals. Now there's more of a challenge to keep up," says Lorentz.

Lorentz's custom processing business has already grown 35% so far this year over last year's total sales. But unfortunately, due to facility limitations, they've had to turn some work away.

Lorentz is currently building a new $1.5 million facility with support from some local investors and area banks.

The new facility will be fully inspected and is set to be operational by the end of this year.

Direct To The Consumer The Sauers' goal is to provide a high-quality product from their farm to the consumer's table.

"It's amazing how many opportunities are out there. People are ready to take us on (as a supplier) as soon as we're ready to go the next step," says Chris.

But they are cautious about taking that next step. "We don't want to grow too fast because we bring a quality product and a quality service, and we don't want to jeopardize (either) by growing too quickly."

The Sauers pride themselves on building a relationship with each customer, whether it's a store owner or a shopper at a farmer's market.

"Our best salesman is word of mouth," says Chris. "You can put all the ads in the newspaper you want, but that isn't going to sell your meat. Somebody needs to try it and be confident that it's a good product before they recommend it.

"That's the challenge we'll have in the grocery stores. If consumers haven't seen our product before, why would they buy our meat label over the next one? We want it to be that eventually consumers go to the meat case and look for our label."

The Sauers plan to conduct in-store demonstrations where they will give out product samples.

Currently, the Sauers best-selling item is their bratwursts, but they anticipate an increase in pork chop sales this summer. They also offer a variety of combination packages.

"We feel we have a quality product, and are confident about going out and marketing it," says Chris.

The Sauers had their products tested at the Sioux-Preme Meat Testing Lab in Sioux Center, IA, and had one of the highest composite scores in the 11/2 years the lab has been open. The testing included nine different areas, including pH, marbling and water holding capacity.

It's a consistent product because it's the same genetics. "You're getting the same pork chop every time because we have a lot tighter grasp on quality control. We know which animal goes into the locker. We don't just open the gate and let anything run in," claims Chris.

The Sauers market about 900 pigs a month, picking the top end to direct market.

The top end are visually selected based on similar size, muscling and leanness. Chris also makes sure all the hogs are sound and not stressed.

The main thing the Sauers stress is direct marketing as an opportunity. But realistically it takes up-front investment, time and money; and it isn't for everybody.

"I think the small producer can do this if he disciplines himself to put time into it. If you look hard enough, there's an opportunity around every corner, you just have to figure out how to get at it," says Chris.

"If we hadn't found other ways to market our product, we wouldn't have survived this hog cycle," he says. "It's what has kept us excited about the hog industry," adds Heather. "The consumer is looking for the face of the farmer; they're looking for us."

In addition to direct marketing pork, Sauer's Valley View Farms also have 60 beef cows, 1,000 acres of cropland, a custom combining business, a grain-drying service and a trucking business.

For more information on Branding Your Beliefs contact Mike Lorentz at (507) 263-3617.

Iowa Farrow-To-Finish Farms Average Loss of $73,857 in '98

Iowa State University's swine business records summary for 1998 confirms what those involved in pork production already know all too well. The year made for very tough sledding.

The average producer in the summary of farrow-to-finish farms received $33.43/cwt. for a market hog. The average cost of production was $37.46/cwt. Average market weight was 254 lb.

Losses may be somewhat exaggerated as the records reflect inventory values as of Dec. 31, 1998. "That ended up being just about the very bottom," notes Tom Baas, Iowa State extension swine specialist.

The report also does not incorporate financial data such as gains from hedging accounts, says Baas.

The losses occurred despite some extremely low cost of production numbers, he notes.

The top 10% of operations posted a cost of production just over $30/cwt. Low feed prices helped keep production costs down. The top 10% used only $19.93 worth of feed per cwt. of pork produced.

The average herd in the summary had a 184-head breeding female inventory and weaned 16.6 pigs/female/year. These herds weaned 1.91 litters/female/year with an average of 8.69 pigs/litter.

Total pounds of feed per cwt. of pork produced was 351 lb. for the average herd. The average cost of diets per cwt. was $6.41.

This year's farrow-to-finish summary included numbers from 85 operations.

Iowa State also compiled summaries on wean-to-finish, breed-to-feeder pig, wean-to-feeder, breed-to-wean and feeder pig-to-finish operations. The full set of reports may be accessed at the Iowa Pork Industry Center's Web site at www.extension.