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Articles from 2008 In August


Facing Three Crop Challenges

Has there ever been a more dynamic time for grain and livestock markets? I don’t think so. The financial prospects of pork producers seem to change by the hour – or at least by the day -- and I’m not sure I can remember when long- and short-term situations changed so quickly, often in opposite directions! I feel whipsawed at every turn, and I don’t have nearly as much at stake as most of you. Let’s consider what has happened recently.

Last week’s discussion of (and surprise at!) a bullish response to what appeared to be a slightly bearish crop report was just a primer for what was to come. Corn futures prices are now roughly $1/bu. higher than they were on Aug. 11, the day prior to the August Crop Production report. Soybean meal futures prices are roughly $30/ton higher.

Why has this reaction occurred? First, the crop remains immature from an historical perspective and quite at risk for an early frost. But the trade analysts knew that going into the report. Perhaps thinking of the immature crop in terms of a forecasted 155-bu.-per-acre yield instead of a 148.5-bu.-per-acre yield provided a dose of cold water on this issue. Still, these early frost concerns are well founded and indeed persist.

Second, it has turned dry in some areas. Rain has been less regular in many areas and an immature crop needs all the help it can get.

Third – and I think this is the factor that has really come into play – this report provided a dose of absolutely frigid water concerning next year’s crop, and what it will have to be to meet all of the demands that will be placed upon it. The 2009 carryout is now forecast at 1.133 billion bushels, over 400 million bushels less than this year. The cost of planting an acre of corn next spring could well be over $700. That is a lot of money (borrowed?) to put at risk relative to the cost of planting soybeans.

The Renewable Fuel Standard will require another 1.5 billion gallons of ethanol, thus diverting another 535 million bushels of corn, regardless of the price.

There will be about 1 million acres coming out of the CRP (Conservation Reserve Program) this fall but a) some will be bid back in, b) some will be acres not suitable for corn and soybean production and c) it will be too late for much of it to be farmed in 2009 even if the owner wants to do so.

Expectations of future economic events count in economics and are critical to the process of discovering prices, rationing supplies, etc. It is a good thing that the market looks ahead, even when it costs us in the meantime.

Hog Futures Weaken
While corn and bean prices have rallied, hog futures have softened a bit even as cash markets have been excellent (Fig. 1). That makes sense for the deferred futures market as higher current hog prices and lower prospective grain prices likely caused some producers to scrap liquidation/reduction plans or at least put them on hold. I do not think the recent record-high cutout values and hog prices can hold in the face of seasonally higher slaughter, but higher values now could well mean higher values through the fall. The average national net price so far in August has been $84.96. A “normal” seasonal pattern tells us that December hog prices will be about 18% lower or just below $70/cwt carcass. But given the abnormality of the seasonal pattern thus far, just why should we expect a normal seasonal decline this fall?

Sow Prices Befuddle Economist
Little of our logic works. Like this one: Prices for big sows (see Fig. 2) have doubled in four weeks, are trading in the mid-$50s this week, and one sow buyer tells me he expects to see sow prices in the $60s next week. So, producers must have decided to quit selling sows, right? Wrong. We still slaughtered 68,410 head the week of 8/9, 7.7% larger than last year. Year-to-date sow slaughter is still up over 9% from 2007 and sow slaughterers report that sows are not in short supply. In fact, there seems to be more of them available at these higher prices. Okay, one piece of logic works. The driver on sows is demand, which is largely due to prices for trimmings and those are most likely being driven by exports.

Need Weekly Export Report
A big part of why the logic fails is that we cannot see the man behind the curtain, exports, on anywhere near a real-time basis. We do not have weekly export reporting like that of the beef industry because the writers (and I was one of them!) of the 2000 mandatory price reporting legislation believed that it would provide a strategic advantage to our competitors if they knew what was going on week to week. The U.S. beef industry did not have the same worries since, at that time, it was virtually the only exporter of grain-fed beef.

Times have changed. We are now exporting more than 25% of our production. Weekly information may provide some advantages to our competition, but this segment of sales is so important that we should not continue to learn its details two months after the fact.



Click to view graphs.

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

Veterinary Group Raises Issues Over California Ballot Initiative

In November, California voters will decide whether to enact Proposition 2, a ballot initiative backed by animal rights activists.

The stated objective is to require that egg-laying hens, veal calves and gestating sows have adequate room to lie down, stand, turn around and fully extend their limbs, effective 2015.

The California Veterinary Medical Association (CVMA) has supported the ballot initiative, Standards for Confining Farm Animals. Since some CVMA members disagree with that stance, they have formed the Association of California Veterinarians.

The American Veterinary Medical Association (AVMA) applauds efforts to promote animal welfare, but is equally concerned that negative consequences could occur if Proposition 2 is enacted.

Following is AVMA’s response to Proposition 2:
“The American Veterinary Medical Association believes Proposition 2, ‘Standards for Confining Farm Animals,’ is admirable in its goal to improve the welfare of production farm animals; however, it ignores critical aspects of animal welfare that ultimately would threaten the well-being of the very animals it strives to protect.

“The best housing environments take into consideration all relevant factors, including freedom of movement; expression of normal behaviors; protection from disease, injury and predators; adequate food and water; and proper handling. Proposition 2 would clearly provide greater freedom of movement, but would likely compromise several of the other factors necessary to ensure the overall welfare of the animals, especially with regard to protection from disease and injury.

“AVMA is the premier professional organization representing veterinarians in the United States. As such, we are not only a key medical authority on animal health and welfare, but just as importantly, we truly care about the animals we serve every day. It is in that mindset that we strive for continued improvement of animal housing systems through comprehensive, science-based evaluations with the expert input from veterinarians and animal welfare scientists.

“We are concerned that legislating isolated, arbitrary and emotion-based criteria to implement farm animal housing systems may actually do more harm than good for the well-being of the animals, while compromising the sustainability of production systems that are essential to ensure we continue to have the safest, most affordable and abundant food supply in the world.”

To find out more about AVMA’s positions on the housing of layer chickens, veal calves and pregnant sows, go to the AVMA Web site, www.avma.org under Animal Welfare and click on Animal Welfare Policy Statements.

Pork-Soybean Groups Unite For Research Collaboration

The rise in soybean meal prices and other protein products has driven livestock and poultry producers to work toward maximizing the nutrient value of those sources.

“Livestock and poultry are our number one customers, consuming 98% of the U.S. soybean meal used domestically,” reports Philip Bradshaw, United Soybean Board (USB) Animal Agriculture Team Lead and a hog and soybean farmer from Griggsville, IL. “The U.S. pork industry specifically uses about 25% of the domestically used soybean meal, so there is a strong partnership between soybean farmers and pork producers.”

That partnership has led to collaboration amongst the USB, the National Pork Board and Qualisoy to fund two research projects. Qualisoy is a collaborative effort of the soybean industry to help develop and make available healthier soybeans and soy oil, reduce environmental impacts of livestock production through improved soybean meal and improve competitiveness of the U.S. soybean industry.

The North American Swine Energy System is a two-year research program to evaluate the use of net-energy systems for U.S. feedstuffs. This project concludes this month, while the three-year Department of an AllergenicityModel in Swine project concludes next May.

“Net energy for swine becomes more important as corn becomes more expensive,” states Tom Brown, USB director and soybean and pork producer from Morral, OH. “Increasing energy from soybeans may provide added nutritional value, so the soybean checkoff is funding research to look at this issue.”

The alliance is very timely for pork producers. “Especially during this time of rising feed costs, net energy is a new look at how feeds can be formulated to meet the needs of pigs as well as a way to possibly save producers money. This research is going to help us be much smarter with our feed,” says Everett Forkner, Missouri pork producer and member of both the National Pork Board and its Animal Science Committee.

The soybean checkoff developed the Animal Nutrition Working Group in 2006. This group of 14 animal nutritionists prioritizes potential improvements in soybean traits to address environmental concerns, improve available energy, reduce allergens and improve the overall benefits of soy as a feed ingredient for livestock and poultry producers.

The soybean and pork industries have partnered before to publicize the importance of animal agriculture to both groups. To learn more about their interdependence, visit www.animalag.org.

“Success for America’s livestock producers means success for U.S. soybean farmers,” says Bradshaw. “Together we help build stronger rural communities.”

Futurist Predicts Next Decade Time of Great Change in Agriculture

Agricultural futurist Lowell B. Catlett predicts the next decade will see more change in agriculture than the last century, and bankers will find out why during the American Bankers Association’s (ABA) National Agricultural Bankers Conference, Nov. 16-19 at the Des Moines Marriott Downtown in Des Moines, IA.

Registration is $925 for ABA members and $1,225 for non-members.

ABA has held national conferences for more than five decades to provide rare access to industry experts, academics and peers who share proven strategies for success in the ever-changing world of agricultural banking.

This year’s conference will feature discussions about trends in the marketplace, business ethics and how to preserve them, predictions about the industry in 2025 and the national economic picture.

More than 40 experts will provide the latest tools for making good loans in the changing world of credit standards. They will also share strategies for immigration policy, margin calls, fertilizer prices and agricultural policy.

Other sessions will cover succeeding in today’s competitive marketplace, passing on the family farm, working to support rural America, the next generation of biotech crop traits and what the election will mean to the future of agriculture.

For more information or to register for the conference, call 800-BANKERS or visit www.aba.com.

Webinar Focuses on Manure Pit Safety

The topic of an Aug. 20 PorkCast webinar is Emergency Ventilation and Properly Ventilating Barns when Emptying Manure Storage Pits. The webinar is from 1-2 p.m. and there is no cost to take part.

The process of preparing to empty manure pits and apply manure to fields this fall raises concerns for the welfare of people and pigs. Producers must ensure pit-pumping procedures provide adequate ventilation. Ideally, barns are empty when agitating and pumping pits, but in most cases, this is not practical.

Mike Brumm of Brumm Swine Consultancy, Inc., North Mankato, MN, will address barn and ventilation management practices that can significantly reduce worker risk and animal asphyxiation.

To find out more about connecting via the Internet, along with accessing past programs, go to www.extension.umn.edu/swine/porkcast.

Webcast Reviews Mandatory Meat Labeling

With mandatory country-of-origin labeling (COOL) taking effect Sept. 30, 2008, Iowa State University livestock experts are presenting a webcast to help producers understand how they will be affected.

“There’s no need for producers to panic, but we should pay attention and be prepared,” says John Lawrence, Iowa Beef Center (IBC) director. “Sellers are likely to ask for an affidavit stating the origin of the animal, but buyers’ normal records should be sufficient to back up the affidavit.”

Lawrence and several other Iowa State livestock analysts will speak on COOL at a webcast Aug. 25 at 7 p.m. Host sites will be available so individuals can attend a nearby location to watch the speakers broadcast throughout the state.

Besides learning about COOL’s impact on beef producers from Lawrence, and its impact on pork producers from Iowa Pork Industry Center Director John Mabry, attendees will also hear about cattle, hog and corn market outlooks.

“In addition to COOL, there are other market uncertainties that producers should be prepared for,” says Lawrence.

To learn more about the COOL webcast, including information about local host sites, contact Taylor Gerling, IBC communications specialist, at 515-708-4133 or tgerling@iastate.edu.

Corn Crop Poised to Be Second Largest

Tuesday’s Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports from the U.S. Department of Agriculture (USDA) were welcome news for grain users. USDA increased its estimates of both harvested acres and yields to levels that, should they be realized, would result in the second-largest corn crop on record. Data from both of the USDA reports appear in Figure 1.

USDA increased estimated harvested acres from 78.9 million to 79.3 million after “resurveying” many areas in the aftermath of June’s flooding across the Corn Belt. Recall that the survey for the June 30 Acreage Report was conducted in the midst of those floods, and the survey’s timing led USDA to revisit those producers in order to ascertain the impact. USDA also raised its estimate of harvested soybean acres from 72.1 to 73.3 million.

The larger factor, though, for the higher projected corn crop is an estimated yield of 155 bushels, up from 148.4 bushels in the July report and above the long-term trend yield of 153.2. That yield would be the second-highest ever and reflects crop conditions that have steadily improved during July.

The combination of higher harvest acres and yield now pegs the 2008 corn crop at 12.288 billion bushels – 6% lower than last year’s record. Even with increases in forecasted ethanol and feed/residual usage (by 150 million and 100 million bushels, respectively), this estimated crop would increase 2009 carryout stocks to 1.133 billion bushels or just over 8% of total use. When combined with the mid-point of USDA’s forecast price range ($4.90 to $5.90/bu.), this stocks-to-use ratio indicates that USDA is working off the same corn demand curve they used in June – but a significantly higher one than was used for forecasts for the 2007 crop (see Figure 2).

Unease Remains over Corn Crop Maturity
Higher acres and higher yields mean more supply and lower prices, right? That’s what economic theory says, but the action of futures prices since Tuesday tells us something else is at work here. December corn futures have gained $0.56/bu. (over 10%) since Monday’s close. Why? Technical buying is one explanation, but another is widespread unease with that yield forecast relative to the maturity level of this crop. Only 17% of the acres were shown in the dough stage as of last Sunday compared to a five-year average of 32%. Immature crops, even if they look good, have proven to frequently produce a final yield that is lower than USDA’s August estimate. I think this week’s corn trade confirms those fears.

Pork Exports Stupendous
The good news this week was something that virtually everyone already knew – pork exports have been stupendous! June pork exports were 111% larger than one year ago, and brought year-to-date (YTD) total pork exports to just over 1.8 billion pounds, 67% larger than last year (See Figure 3).

The star market was once again China/Hong Kong with June shipments there totaling just over 96 million pounds, product weight, 552% larger than last year. June’s shipments put YTD pork trade with China at 427 million pounds, 483% larger than in 2007. Japan was the second-largest market again in June but remains our largest market, YTD, at 469 million pounds, 18% larger than last year.

U.S. exports to other markets have also performed well this year. Year-to-date shipments to Russia are up 138%, while trade with Mexico and Canada has grown by 29% and 25%, respectively.

The value of U.S pork exports through June has grown by 57%. China/Hong Kong also leads in this category with shipments there growing by 681% this year. The value of shipments to Russia has grown by 157% so far in 2008. Note that Russia’s percentage growth for value is larger than its volume percentage growth, indicating that this historically hyper-price-sensitive market is demonstrating a willingness and ability to pay more for pork products.

Pork Variety Meat Sales Also Rise
Year-to-date pork variety meat exports finished June at 69.1% higher in volume and 72.8% higher in value (see Figure 4). This growth has been a major driver of record by-product values, which have contributed roughly $25/head to hog values in recent weeks.

China/Hong Kong is also the leading growth market for U.S. variety meats and has, as of June, surpassed Mexico as the largest customer for pork variety meats. Mexico maintains a slim lead as the highest-value market for variety meats. Variety meat exports to Japan, South Korea and Russia have grown substantially this year as well, increasing by 198%, 162% and 135%, respectively.




Click to view graphs.

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

Near-Record Harvests Predicted

Despite severe flooding throughout much of the Corn Belt in June, crops have rebounded with yields expected to produce the second-largest corn crop and the fourth-largest soybean crop in history.

In its first estimates this year based on field visits and farmer surveys, the U.S. Department of Agriculture (USDA) sharply raised its estimate of corn production and said “nearly ideal” weather has helped crops recover.

That recovery could eventually lead to further drops in corn and soybean prices, helping pork producers reduce spiraling feed costs.

As it is, corn prices have dropped 35% from record highs of almost $8/bu., reached after floods devastated major corn-growing regions in Iowa and Illinois.

The USDA forecast that farmers would harvest 12.3 billion bushels of corn, up more than 570 million bushels from last month’s estimate of 11.7 billion. That’s down 6% from last year’s record crop of 13.1 billion bushels, but 17% above the 2006 harvest.

Average corn prices are expected to drop to $4.90 to $5.90/bu., down 60 cents from last m onth’s forecast of $5.50 to $6.50.

USDA is predicting average corn yields will reach 155 bu./acre, up from last month’s estimate of 148.4.

The USDA lowered its estimate for soybean yields to 2.97 billion bushels from 3 billion last month.

Soybean prices are expected to fall to $11.50 to $13/bu., compared to $12 to $13.50 last month, USDA said.

EPA Nixes Waiver Of Ethanol Mandate

The National Pork Producers Council (NPPC) was “deeply disappointed” by Thursday’s decision by the U.S. Environmental Protection Agency to turn down a waiver of the federal ethanol production mandate for Texas, says NPPC President Bryan Black of Canal Winchester, OH.

Easing the waiver would have steadied feed supplies and prices and helped bring long-term stability to U.S. pork producers and consumers, according to NPPC.

“Pork producers need more time to adjust to the volatility of the grain markets and to the government’s ethanol mandate, which this year is requiring the ethanol industry to use about one-third of the total U.S. corn crop. That has contributed to the uncertainty with regard to feedgrain supplies and prices,” says Black.

The federal Renewable Fuels Standard (RFS) mandates 2008 production of 9 billion gallons of corn-based ethanol. To reach that goal will require more than 3 billion bushels of an expected harvest of less than 13 billion bushels of corn this year.

A waiver of the 2008 RFS would have cut the production mandate to 4.5 billion gallons. In 2009, the RFS jumps to 11.1 billion gallons.

Higher feed prices have pork producers tightening their belts. Feedgrain prices were already climbing in the summer of 2006, in part due to the rapid escalation in ethanol production. Since then, increased global demand for crops, weather conditions and the ethanol mandate have sent grain prices even higher. A bushel of corn for September delivery is now priced above $5, compared to around $7 in mid-summer and $2.60 in July 2006.

From September 2007 to April 2008, corn prices skyrocketed 124% and soybean meal prices shot up 94%. During that period, pork producers averaged losses of $30/hog marketed.

In June, NPPC urged EPA to grant Texas a waiver of the RFS to reduce the adverse affects of the ethanol mandate. The Texas pork industry generates more than 3,100 jobs and nearly $200 million in gross state income.

“The RFS has helped create one of the most volatile economic situations ever to hit pork producers,” explains Black. “We need relief, and the RFS waiver was one way the government could have provided it. Now we expect to see increasing pressure on the domestic pork industry, with the hog herd continuing to be reduced, producers going out of business, jobs being lost and retail pork prices rising.”

Demand-Driven Rally Tied to Exports

The hog price rally that I wrote about two weeks ago has now carried U.S. farm-level hog prices to near-record highs (see Figure 1). This week will almost surely beat last week’s $82.04 national negotiated net price for the high for 2008. Thursday’s price was $84.04. The only prices between these and a clear-cut all-time record are those of the summer of 1990 when live prices reached a level just over $89 on a carcass weight basis.

At a meeting this week, a woman asked a very good question – one you will likely hear fairly often if these prices remain high. She asked: “How can we argue that higher corn prices due to ethanol are causing these higher hog prices?” The answer is: “We can’t.” And, I would add: “We shouldn’t even try!”

I firmly believe that we are headed for higher hog and pork prices in 2009 and beyond because our costs will be higher. Part of that increase is feed costs, but some of it is also higher costs for buildings and capital costs. The latter of those is not due to interest rates, but rather due to the dramatically higher amount of capital that will be required to raise pigs.

Ethanol is primarily responsible for the higher feed costs we see today and will continue to see in the future. Prices must rise to cover those costs. They simply have to.

But this price rally is not being driven by costs. Cost-driven price rallies are caused by lower production. Slaughter is still running 6% higher than last year with year-to-date slaughter still 10% higher than in 2007 (Figure 2).

This rally is being driven by demand, pure and simple. Further, it is being driven by export demand. University of Missouri professor Glenn Grimes’ index of domestic consumer-level demand was down again in June, falling to -2.3% from the 2007 level. (You might recall that May’s index was down 1.9%). This only leaves exports and by-products as possible sources of strength for live hog demand; by-product values are highly dependent on export trade.

We will get a more quantified read on this situation when June export data and July retail price data are released on Aug. 13 and 14, respectively. But I think wholesale pork prices clearly tell the story. Notice in Figure 3 that prices for the more “American” wholesale cuts (loins, butts, spareribs and bellies) have moved sideways or downward since hitting their seasonal peaks in mid-May.

On the other hand, the more “export-oriented” cuts, at least for this time of year, have kept rising steadily since that time. In fact, prices of these export cuts began a steady climb at the beginning of this year and the climb shows little sign of slowing. I do not recall ever seeing the prices of all of the major wholesale pork cuts falling within this tight of a price range. One of the benefits of trade is the ability to sell less-preferred cuts in markets that value them more. The beauty of the deal is that, in doing so, we offer consumers in those markets something they want and need. If not, they would not be buying.

RFS Waiver Request Nixed
Those are the good news items for this week and they are indeed good. The bad news item is yesterday’s announcement by the Environmental Protection Agency (EPA) that it has denied Texas Governor Rick Parry’s petition for a partial waiver of the renewable fuel standard (RFS) mandate for biofuels. In making the announcement, EPA Administrator Stephen Johnson said that the evidence did not support the claim that the RFS would cause “severe harm” to the economy or the environment. He did point out that EPA concluded that biofuels had been a cause of higher corn prices, but he also concluded that the RFS mandate, specifically, had not been a factor in those higher prices.

Technically, he is correct. The RFS has not actually caused fuel blenders to use more ethanol than they would otherwise have used. In economic-speak, “the constraint has not been binding.” Ethanol output has stayed ahead of the mandated level – sort of. This year’s production may actually be just short of the mandated 9-billion-gallon level, but blenders can apparently use credits (called RINs) they have received for above-mandate blending in past years to satisfy the shortfall this year. We may hear more about these RINs in the future.

Regardless, the RFS has contributed to the growth of the ethanol industry and, therefore, higher corn prices by guaranteeing a government-enforced growing market for ethanol. The RFS says that blenders will be required to use (translated: BUY) 10.5 billion gallons of ethanol in 2009, 12 billion in 2010, and then 0.6 billion gallons more each year until 2015, when the requirement levels out at 15 billion gallons.

What would pork producers and packers do if the government said that retailers and restaurants would be required by law to use 5% more pork each year for the next six years? Do you think that might spur a building boom for hog farms and processing plants? A guaranteed growing market is the stuff of business managers’ dreams. But government fiat does not necessarily make good economic sense. Let’s hope those dreams do not turn to nightmares.




Click to view graphs.

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