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November 9, 2009
Animal Welfare Groups Want To Change Your Production Practices
A year ago Proposition 2 in California was approved by voters and spelled the end to the California egg industry because it caused the abolition of common production practices. Voters in other states have spoken out, and in some caused significant changes in the way livestock are raised. Last week Ohio voters approved Issue 2 on the ballot, which was a pro-active move by the Ohio livestock industry to pre-empt an effort by the Humane Society of the US to change livestock production practices in that state. The public debate over what livestock producers should and should not do to raise their animals has barely begun.
The heavily financed Humane Society of the US (HSUS ) has been a strong proponent in the debate that has caught the public ear in many states, as well as the attention of lawmakers, and petition passers. Agricultural economists F. Bailey Norwood and Jayson Lusk at Oklahoma State University believe the livestock production industry has not taken enough of a role in the debate and the industry has suffered from that reluctance. Writing in the current issue of Choices Magazine, Norwood and Lusk believe the debates will “play out in the ballot box, state and federal legislatures, and courtrooms.”
The economists say the animal welfare groups have focused on farm animals and how they live, and the livestock industry has focused less on the farm, and has said the activists want to convert everyone to veganism and that the activists have not used scientific evidence but are waging the debate to elicit public emotion. And the economists contend those latter issues are “red herrings.” The Oklahoma State researchers say the claims of the activists “are carefully documented by scientific studies while also appealing to emotions with pictures and videos of miserable-looking animals in small cages. These publications go into great detail documenting and articulating practices that they believe the public will deem undesirable. Although some of these pictures and videos do not represent the average farm, they are real events and that matters.”
Economists Norwood and Lusk point to the United Egg Producers, which have defended their welfare standards are based on “sound” science whereas the farm practices sought by HSUS are not. They say the UEP standards for egg production are based on recommendations of an independent scientific committee, but the HSUS has presented other scientific studies saying cage free eggs are superior to cage eggs in terms of animal welfare. The economists say their own research found that “consumers believe confining animals to small cages is inhumane and that they believe cage-free systems provide higher levels of well-being.” Labeling the livestock industry arguments as “the red herring strategy,” the economists contend that consumers are asked to disregard those beliefs and accept that “science” shows animal do not suffer in cages. They acknowledge that any change will cost money and rhetorically ask if consumers will pay the cost, which they say is the real debate that should be held.
Interviewing consumers across the US, they asked if animal feelings were important and if so, should they be considered. The statistics indicated 29% of consumers found animal welfare to be of little importance and 69% said animal should not suffer, but society has no obligation to ensure animals are “content and happy.” Those same consumers were also asked if government has a role in regulating animal welfare. Given five choices and the option for multiple answers, the survey found 58% supported anti-cruelty legislation, 25% would ban farm practices the majority of citizens oppose, 55% would allow firms to voluntarily label their food as “animal compassionate” if they adhere to high welfare standards, 49% would force all food companies to indicate the level of animal care on their product labels, and 9% chose none of the above.
Norwood and Lusk suggested the agriculture industry engage HSUS in an effort to promote food differentiated by animal welfare, then the groups could save money now being spent to catch the public attention. The economists say it is unlikely to assume the groups will agree, but say there apparently is no common ground at present.
Is there a public good in the debate over animal welfare? Norwood and Lusk say the issue is one of public ethics of how animals are raised, and that affects social norms. And since there are conflicting views, they do not believe the matter will be resolved very soon, and will not be resolved without a bitter battle that will be in the public, legislative, and judicial arenas. They say there is a general support for laws banning “cruel” practices, but there are arguments about what constitutes cruelty, even if one third of consumers do not care about the feelings of animals.
The bottom line, Norwood and Lusk believe, will be for the HSUS to introduce new referenda, target food retailers, file lawsuits and appeal to public sympathy for animals. And they say animal agriculture will fight back by introducing legislation prohibiting such referenda, all of which will result in “a patchy, incoherent set of laws and court rulings to emerge.”
Summary:A handful of states have taken legislative action to control livestock production practices, as the result of efforts by the Humane Society of the US to appeal to consumers and voters about how animal agriculture should conduct its business. Both sides present their scientific arguments, but the expensive debate is expected to continue unabated in the press, the courts, and in legislatures. Currently there is no common ground between the two sides.
Posted by Stu Ellis at 12:46 AM | Comments (0) | Permalink
October 21, 2009
A Profit Opportunity For Cowboys? Really!
Is there a turnaround occurring in the cattle market? Apparently, cowboys see some opportunities for profitability and their recent actions to increase feedlot inventories indicate a light at the end of the tunnel for the beef industry. Is that a glimmer of hope or is that an approaching train wreck?
Last Friday’s Cattle on Feed report indicated September feedlot placements were up 5% while marketings were down 4%. The difference shows a 1% increase in the feedlot inventory. Looking back at history, that is the first month in the past 16 that inventories have increased. They have all decreased since the spring of 2008. With the reports of a good corn crop and adequate supplies of feed, cattle feeders apparently see the potential for profits next summer.
At Iowa State, livestock economist John Lawrence puts it in terms of a “crush margin” and says that is the return remaining after accounting for the feeder steer and corn that is used to cover the other more constant expenses. His crush margin for feeder steers put on feed now and sold in March provide a crush margin of $178. That increases to $219 for November placements marketed in April, and $204 for December placements marketed in May. While his calculations decline, the crush margin remains between $100 and $160 for the next 12 months.
At Purdue, livestock economist Chris Hurt says he sees “a host of economic indicators suggest the recession has ended and the economy has more positive signs than negative.” In his latest newsletter Hurt lists those indicators as “the rise in the average length of work week, rising building permits, falling numbers of new claims for unemployment, and of course the rising stock market.” While he thinks inflationary investing has underpriced cattle, he says the fundamentals are positive for the beef industry.
Hurt saw the same numbers as Lawrence and projects a rise for Nebraska finished steers through the end of this year with cattle moving into the mid to higher $80s early next year. He does not expect the typical summer softening of the market and says summer 2010 should bring prices in the low to mid $90 range.
Hurt looked back on the impact of the recession, which took cattle prices from an average of $92 in 2008 to $83 this year. With a $10 climb anticipated, Hurt says cattle producers can “ride the recovery” as the US climbs out of the recession. But he is quick to suggest the need to grab a strong hold on reality and manage your potential risks. He says the recovery could be an anemic recovery, or there may be a second recessionary dip.
Hurt suggests cow-calf operators “stay long cattle at least for now.” He says retain ownership of calves for a longer period and consider feeding them out rather than selling them this fall. For feedlot operators, Hurt suggests, “waiting a bit to forward price the finished cattle in order to give inflation investors a little time to locate the cattle futures trading pit.”
Summary:
The beef industry is beginning to see the opportunity for an economic recovery with higher cattle prices in the coming year and changes in the cattle inventory. Feedlot placements are up more than marketings, and there is more money to be made with cattle placed in feedlots in the next several months than any time in the past 16 months. Livestock economists suggest that risks be managed to avoid unseen economic challenges, but they may be able to benefit from the recovery of the US economy.
Posted by Stu Ellis at 12:09 AM | Comments (0) | Permalink
October 15, 2009
Hog Marketing: Is There Any Way To Really Predict Prices?
The nation’s pork producers have seen deeper losses over a more prolonged period than the price collapse a decade ago. And it goes without saying any light on the horizon is seen as a glimmer of hope that the end is near and profitability will soon be restored in the pork industry. Many producers will look at futures prices for that hope, and others will depend on market forecasts by land grant university livestock economists. But is one more accurate than the other?
Livestock price forecasts are issued by marketing specialists to help producers reduce the risks they have in making production decisions. Those forecasts are developed from USDA reports, the historical relationships between price and supply, the current supply and demand, and a look at future supply and demand. Iowa State University livestock economist John Lawrence has issued a series of reports evaluating those market outlooks, the futures market, and the seasonal price cycle to determine which is a better forecaster of hog prices at the time producers are ready to sell.
Lawrence initially looked at a 10 year history of the futures market and the seasonal index. His results were calculated by subtracting the forecast price from actual price. He says the forecast errors ranged from $0.99 per head to $3.46 per head which implies the market price was usually underestimated. Lawrence reports there is a 68% chance that prices three months in the future will range above or below his forecast price by $5.33 per head. But he says, “When looking four quarters into the future, the time necessary to make breeding decisions, the 68% range grows to over $14.84 for the least variable forecast.” He says the seasonal cycles have the smallest errors, regardless how far in the future the forecast is made, however it also has the greatest variability.
Lawrence’s quarterly forecasts took on some personalities of their own, regarding their accuracy. He notes, “On average, all forecasts did a fairly good job predicting hog prices in the volatile markets. As shown by the average errors, the January Forecast itself was best at predicting one quarter into the future, and worst at predicting three quarters into the future. The April Forecast was best at predicting four quarters into the future and worst one quarter into the future. The July and October Forecasts were best at predicting two quarters into the future, and worst four quarters into the future.”
When Lawrence analyzed the weekly prices of the lean hog futures contract, and compared it to the expiration price, he found that some months trend above the expiration price, others trend below it, and some are on both sides of it. His study of those contracts over the past 10 years found, “The contracts for April through October tended to have more years where the weekly prices were below the expiration price on average, indicating positive errors, or under prediction by the weekly prices. February varied widely, and December had more years with weekly prices above the expiration price on average, indicating over prediction.” He says the most accurate month on average was February and the least variable month was August. He says, on the whole, the Lean Hog Futures contract is very accurate in predicting the price at expiration, and is a good tool to help traders make accurate and profitable decisions.
Finally, Lawrence looks at the significance of errors that the futures contracts make in predicting the expiration price. Over the past 18 years he says, “There is not a consistent pattern across the contracts. February, April, and October vary widely on average. June (with the exception of 8 weeks out) and August tend to under forecast on average. December tends to over forecast on average. On average, all contracts have a slight tendency to over forecast.”
Summary:
For pork producers wanting to make better marketing decisions as a means of improving their potential profitability, the use of market outlooks, futures prices, and seasonal cycles can all provide significant assistance, but it is important to know the potential for errors. Each have the tendency to err on one side or the other of the eventual market price when a futures contract expires. However, some months are typically over estimating the market and others underestimate, and it is also possible to know how much the error is expected to be. A study of those trends and errors can create profitable marketing plans for pork production
Posted by Stu Ellis at 12:31 AM | Comments (0) | Permalink
October 13, 2009
Ohio Livestock Interests Preempt Humane Society's Livestock Production Restrictions.
Ohio voters in three weeks will consider a statewide referendum spurred by the Humane Society of the US in its effort to radically change livestock production practices. However, the referendum, known as Issue 2 on the November 3 ballot, is something that the Humane Society is advocating a “no” vote, and agricultural interests are urging a “yes” vote. In other words, the agricultural interests in Ohio, knowing that the Humane Society had targeted their state, stepped ahead of HSUS to get a pro-livestock production issue on the ballot instead.
The Humane Society has taken credit for ballot initiatives in California, Arizona, and Florida where certain livestock production practices have been banned. And in California, the initiative will have closed down that state’s egg production industry by 2015 according to political analysts. In Michigan, a new law took effect Oct. 12 that phases out chicken cages and sow gestation crates within 10 years and veal crates for calves within 3 years, which was pushed by Humane Society lobbyists.
Taking preemptory action, Ohio agricultural groups convinced the state legislature to approve a ballot initiative to create a livestock care standards board to advise the Ohio Department of Agriculture. Ohio State University economist Brian Roe the board would establish standards for governing the care and well-being of livestock and poultry in Ohio.
The Humane Society had intended to propose its own set of rules which Roe says could result in laws similar to those in California and other states which have severely restricted livestock production. That is the reason the HSUS is urging rejection of the referendum, which would be composed of representatives of farms, farm organizations, veterinarians, food safety experts, the dean of an ag department at a university in Ohio, and a representative of a county humane society organization. The purpose is to: 1) maintain food safety, 2) encourage locally grown and raised food, and 3) protect Ohio farms and families.
Roe says if Issue 2 passes, there are several possible scenarios, although none is guaranteed to occur.
1) There would be no change in agricultural practices in Ohio.
2) There could be some additional paperwork for livestock producers to report their production practices, but changes would not be required.
3) There could be public pressure to force changes in production practices.
Roe is quick to say that passage of Issue 2 does not preclude the Humane Society in returning to the legislature and seeking a “California-style” ballot initiative to radically change the way livestock are produced in Ohio, but it would likely decrease the odds of that happening. But Roe says if Issue 2 fails on Nov. 3, there may be an initiative in 2010 to pass a wide ranging law to ban a variety of typical livestock production practices. He says lawmakers and farm groups may try to negotiate a deal, similar to Michigan, which gave the HSUS what it wanted, but delayed the bulk of the changes for 10 years.
The OSU economist says if a California-style law is approved in Ohio, farmers will have to spend money to change their practices, which are 20% more costly for poultry production, or they could alter their marketing strategy to not require the purchase of meats produced with the altered practices, or they could move their operation to another location where policy issues were not as threatening, or they may exit the livestock production business.
Summary:
With the expectation the Humane Society would seek to radically change livestock production practices in Ohio, agricultural interests there will seek voter approval next month for establishment of a livestock care standards board, made up primarily of pro-livestock interests. They fear that Ohio would be the target for new rules that would ban chicken cages, sow gestation crates, and veal crates, which have been banned in several other states. There is no guarantee the referendum will pass or that opponents will seek restrictions on production in another year.
Posted by Stu Ellis at 12:05 AM | Comments (0) | Permalink
October 1, 2009
Is There A Benefit To Livestock Producers For USDA Food Assistance Programs?
Livestock producers know it, and most other farmers are well aware that profitability for beef, pork, and dairy operations has been lacking for many months. That precipitated a call by dairy organizations for Congress to provide a $350 million aid package, which has now reached the point of agreement and may soon be called for a vote. The details include $290 million for producers and $60 million for purchase of surplus dairy products. But from that launching pad comes a request by the National Association of State Departments of Agriculture for a program to support meat producers and give it to domestic food assistance programs. If that happens, is there any long term benefit?
Advocates for a “Meat the Need” program say livestock producers did not get any benefit from economic stimulus funds that many industries have received from the US government, and it is hard to keep livestock operations going. The proposal would establish a federally funded buying program to deal with the oversupply of dairy, pork, and poultry industries. An example given by advocates sets the goal for the target weight of cheese to reach the $16 per cwt cost of production. Another example would call for pork to be purchased by USDA in 100 million pound segments until a target of $.49 cents per pound is reached in the pork market. Those stocks would then be channeled to food banks.
Would such a plan work and provide a long term benefit to the livestock industry? Several members of Congress wanted to know. Senators Bob Bennett of Utah and Kay Hagan of North Carolina and Representative Larry Kissell of North Carolina asked the opinion of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri for an economic analysis of the long term impact of such a program. With the livestock sector suffering from near record low levels of financial returns, several suggestions are being debated.
FAPRI economists looked at the displacement of commercial sales, which should be considered when federal donation programs are implemented. They additionally looked at the extent to which recipients of food donations cut back on their actual purchases. While there is known displacement of retail products, FAPRI says there is little information on how much demand is actually created. USDA economists report that in the early 1980’s they calculated that one dollar of donated cheese was estimated to lead to an additional 65 cents of cheese demand. Another economist found that food aid results in an increase demand that is 30% to 60% of the amount of the food aid, but a lot depends on the targeting of the aid.
The FAPRI economists evaluated the “Meat the Need” program, which involved USDA purchases of 225 million pounds of cheese over 4 months, a one-time purchase of 25 million pounds of nonfat dry milk, the purchase of 300 million pounds of pork over 6 months, and a one-time purchase of 100 million pounds of whole turkeys and turkey meat.
FAPRI says its calculations indicate that pork, turkey, and dairy products would all rise in price. Turkey would see a 9.2% price increase initially before prices fade over the next year. Milk prices would rise 9.4% as purchases continue and pork prices would increase 8.2% as purchases of pork continue. FAPRI says the positive effects of the proposal only last for the periods of late 2009 and the first three quarters of 2010 when the various purchases are scheduled.
Coincidentally, other commodities, such as beef, become beneficiaries of the program. FAPRI says fed cattle prices would rise 1.7% when the turkey purchases would be made by USDA. The increase in livestock and dairy production would increase feed prices, based on the premise that corn prices drop 35 cents and soybean meal drops $26 per ton when there is a 10% decline in feed use. FAPRI says the proposal results in a less than 1% change in the supply of meat and dairy products. However, USDA will be spending slightly more than $900 million to purchase that volume of meat and dairy products.
FAPRI says the bottom line is that, “Purchasing products from the market will increase prices for these products in the short run. However, in the long run, these programs will have little to no effect.”
Summary:
Advocates for the livestock and meat industries have called by Congress and USDA to purchase surplus products, donate them to food banks, and help raise the market prices for livestock and dairy. An economic analysis of the benefit indicates pork prices would initially rise 8%, turkey prices would rise 9% and milk prices would rise 9%, but would then fall back to prior levels after the commodities were purchased. There would be no long run benefit for commodity prices.
Posted by Stu Ellis at 12:02 AM | Comments (1) | Permalink
September 29, 2009
If The Hog And Pig Crop Is Diminishing, Does That Lead To Pork Profitability?
About three years ago the average pork producer saw his last profit. Since then it has been red ink because of low pork prices, low demand, and high production expenses. But there was a glimmer of hope that brightened the pork industry after Friday’s quarterly Hogs and Pigs Report from USDA. Instead of production numbers that exceeded those from a year earlier, there were some significant 3-5% drops, and some of the cutbacks were more than what the market anticipated. We’ll let you decide if it is good, but here’s the news…
Purdue economist Chris Hurt in his latest newsletter says the September 25th report indicated that producers are cutting back more than expected:
• The breeding herd was down 3.1% over the past year compared to an anticipated 2.5%.
• The number of pigs weighing less than 60 pounds was down 3.7% compared to an anticipated 1.5% reduction.
• The market herd was down 0.7% more than pre-report guesses.
While the cuts were small, Hurt believes an increased demand will compensate, helped by a general recovery in the economy which will “free up” consumer spending money. And he expects exports to strengthen as well with the help of the weaker dollar, since USDA is forecasting a 9% increase in pork exports over the next 9 months compared to year ago levels.
Chris Hurt expects prices to shift from the high $30 range into the low $40 range this winter and into the mid $40 range next spring. He thinks prices in the summer of 2010 could touch $50. While market prices are needed, profitability will be helped by lower costs for corn and soybean meal which should be in the $44-47 range during the coming 9 months. That means the current $15 loss per head should slowly reverse to a $12 profit by next summer.
The USDA forecast may come to fruition in the fourth quarter of this year when hog slaughter may decline for the first time since 2000, says Iowa State livestock economist Shane Ellis. His analysis of the Hogs and Pigs Report says, “A declining pork supply may not be the only reason to be optimistic about hog prices. Consumer confidence and spending habits have regained some strength as the brunt of the economic recession has passed. Any improvement in economic conditions both domestically and globally will lead to improved demand and prices.”
In 2008 hog prices were buoyed by global demand and the export trade kept prices as high has it could with one out of five hogs going overseas. While year to date exports are down 19%, the trend began to turn at midyear, and Shane Ellis says, “Exports volumes are back on track with what a traditional year over year increase would have been without last year’s exception.” The only challenge to the trend seen by Shane Ellis is the 2% growth in pigs per litter to 9.51.
At the University of Missouri livestock economists Glenn Grimes and Ron Plain observe that the trends reported by USDA and the pre-report estimates of the market have been engaged in an interesting dance of reconciliation of their respective and joint numbers. In their latest newsletter they say, “In recent reports the USDA has estimated numbers a little below the trade estimates but actual marketings on average have been above the trade estimates. We must remember the USDA estimates are based on a sample and the trade estimates are based on other statistics and opinions. Therefore, both estimates are subject to error. We certainly hope the USDA’s September estimates are the more correct ones.”
Grimes and Plain are not at bullish on the pork market as is Purdue’s Chris Hurt. They say there is “some chance” that both consumer demand and live hog demand going into 2010 will be positive. “This hope is based on a stronger general economy and a weaker U.S. dollar which is positive for exports. There are also some potential storm clouds. What will be the reaction of consumers and importers if we get some swine herds developing H1N1 flu this fall and winter?”
While producers have been losing money, Grimes and Plain say the retailers have been making money for the first eight months of the year, with retail prices 1.8% above 2008 levels. Their forecast for farmgate prices of pork in a declining supply is for 51-52% lean hogs to average in the low to mid-$30’s live weight and non-packer sold hogs to average in the upper $40 based on carcass weight early in 2010. They are pushing their carcass prices into the low $50 range for the first quarter of next year.
Summary:
The USDA’s recent Hogs and Pigs Report provided some hope for pork producers that production will soon decline to a point where the supply will diminish and prices may begin to climb again toward profitability. Several Cornbelt livestock economists are forecasting $50 prices early in 2010. In addition to supply adjustments downward, the economists all expect domestic and foreign demand to increase as the global recession subsides.
Posted by Stu Ellis at 12:56 AM | Comments (0) | Permalink
September 22, 2009
Livestock Production: Are There Any Positives?
If it produces meat, milk or eggs, and you produce it with the intent of profitability, it will be spotlighted today. USDA’s new reports on livestock, meat prices, and the feed outlook are all the focus for livestock producers who have had a tough time lately making ends meet. Is there anything to be encouraged about?
Hog prices are forecast to average $38-39 per cwt in the third quarter of 2009, 33% below year ago levels, fade to $35-37 in the fourth quarter, which would be 14% under 2008 levels. USDA's latest Livestock Outlook says demand is lackluster, both from domestic and foreign consumers, and will not support the market at profitable levels. Returns turned negative 2 years ago, and have only been positive for two months in 2008. Sow slaughter is rising, which would reduce the breeding herd. The export market had carried many producers, but exports have been lower and imports higher than year ago levels.
Poultry production is level to slightly down, with broiler meat production about 3% lower than last year, and chick placement is down 2% from the same period in 2008. Broiler stocks are also down 7% under year ago levels, but are running counter to wholesale prices. Broiler exports are also down 13% from last year, and that has reduced wholesale prices of leg quarters. While broiler exports are down, broiler meat exports are up about 1% over last year. Additionally, turkey production is down about 10% from year ago levels, despite the fact cold storage holdings have increased, putting downward pressure on prices.
While beef imports are up 13% over year ago levels, beef exports are steady from last year, and a primary reason is the value of the dollar versus the Australian currency where most of the imported beef is originating. USDA says exports are expected to fall 8% this year and increase 7% next year. Live cattle imports currently are 16% less than last year, compared to USDA’s earlier forecast for a 12% drop in imported calves. Most have been coming from Mexico, where moisture has been insufficient to sustain pastures. For the US beef producer, grain prices are more favorable than the past two years and the weather has extended the grazing season. Cow slaughter has increased due to dairy prices, feedlot placements were up 13% over year ago levels, but fed cattle prices in the low to mid $80 range will barely cover costs for feeder calves place on feed this month.
Dairy cow slaughter has removed 145,000 head, but US milk production remains virtually unchanged from August of 2008. But low prices have not brought a decline in production that would balance supply and demand, in part because of lower feed prices that have kept up the interest of dairymen in continuing to produce milk.
Lower feed prices have encouraged many livestock producers to stay in business, and large US new crop yields are expected to support that trend. USDA’s Feed Outlook says, “With larger feed grain production, all 2009/10 feed grain prices are projected lower.” Total feed grain use will reach a record this month, in part because of a higher number of grain consuming animal units compared to last month, but down 1.7 million from year ago levels. For the livestock feeder, the best news is a record corn yield forecast and corn prices half of what they peaked at in early 2008. Additionally, sorghum production will be more than previously forecast, but still down from last year.
Global feed production is down, despite the larger US production. There is a reduction in Chinese and Canadian corn production due to growing conditions, and a reduction in Brazilian corn production because of stronger soybean prices. Argentine corn production is also down because of prices and government policies. Globally, increased use of feed grains will trim projected ending stocks. USDA says, “The combination of increased world corn trade and reduced ompetition boost prospects for U.S. October-September 2009/10 corn exports 3.0 million tons this month to 56.0 million. As of September 3, 2009, outstanding export sales of corn reached 12.1 million tons, up from 11.9 a year earlier.”
Summary:
US livestock production will continue at high levels for the foreseeable future. While dairy cow slaughter is up, milk production is steady due to higher production per cow. There is a start on the increased slaughter rate for sows, but production of pork remains high. Beef production is also steady, but imports are up while exports are down due to currency values. Domestic feed supplies will be abundant with a large corn crop, giving producers less incentive to cut back on production.
Posted by Stu Ellis at 12:28 AM | Comments (0) | Permalink
September 8, 2009
What Would Proposition Two Do To Your Operation?
Proposition Two—as it was known to California voters—is alive and well and moving through the states of Ohio and Nebraska, potentially forcing a change in the way livestock is produced. A phase out of commercial egg production in California is one change attributed to the referendum initiative, and Nebraska is examining its potential impact.
Economist and agricultural law specialist David Aiken at the University of Nebraska seems to think his state would undergo similar changes that have occurred in California as a result of the ballot-driven “Animal Welfare Initiative.” His report in the Cornhusker Economics newsletter says the concept would end the use of veal calf crates, swine gestation crates, and poultry cages, known as battery or laying cages. He says the main supporter of Proposition Two in California was the Humane Society of the United States, aided by consumer and environmental groups and opposed by agricultural and food processing groups. During the November 2008 election, it passed nearly two to one, and imposed a fine and jail time for violators.
The new California law, which takes effect in 2015 and is being proposed in Ohio and Nebraska, would require that confined sows, veal calves and laying hens be able to stand up, lie down, and extend their limbs without touching another animal or a side of the enclosure and to turn around freely within the enclosure. The battery cage ban applies to chicken, turkey, duck, geese or guinea fowl kept for egg production. Exceptions to the law include sows within seven days of farrowing, transportation, veterinary treatment, 4-H and similar exhibitions and humane slaughter.
Aiken says swine gestation crates also have been banned in Florida, Arizona, Oregon, Colorado, and Maine. Veal crates have been banned in Florida, Arizona, Colorado, California, and Maine. However, California becomes the first state to ban the use of cages for laying hens. He says the potential impact on Nebraska agriculture remains to be seen, but Nebraska is one of three states allowing such ballot initiatives which are among the top egg producing states. The others are California, where it is now law, and Ohio, where advocates are trying to add it to the 2010 general election ballot. Aiken says a favorable vote there would likely lead to a similar effort in Nebraska in 2012.
The trend seems to be gaining momentum, which began in 1999 with a European Union law that banned laying hen cages. US-based laws began with a gestation crate ban in Florida in 2002 and an Arizona ban on both gestation crates and veal crates in 2006, followed by similar initiatives in Oregon in 2007, and Colorado in 2008. On a parallel path, several members of the food processing industry adopted policies that reduced their purchases of livestock which may have been raised in confinement facilities.
Among the commercial entities were Cargill’s 2004 decision to phase out gestation crates, followed by Smithfield in 2007. The Smithfield decision established a ten year timeline. Fast food vendors also became involved with a Burger King policy to buy 5% of its eggs from non-caged hens, Wendy’s setting a similar goal for 2%, and McDonalds agreeing to study the use of cages for laying hens. Ice cream makers Ben and Jerry went cage free for their egg purchases in 2006.
Summary:
Nebraska livestock producers are being that ballot initiatives, which were successful in California is underway in Ohio and may be in gaining acceptance in Nebraska. The proposal would ban the use of gestation crates for sows, crates for veal calves, and cages for laying hens.
Posted by Stu Ellis at 1:46 AM | Comments (0) | Permalink
July 27, 2009
Are COOL And "Swine Flu" Really Acts Of God When They Reduce Pork Profits For Integrators?
Row crop and small grains producers are familiar with “Acts of God” that can devastate fields with either too much or too little water, and that is why crop insurance is popular in territories with great vagaries in the weather. But on the other side of the fence is the livestock producer, whose insurance opportunities have been limited to changes in revenue that are more manmade than “Acts of God.” But are there “Acts of God” that can be brought into livestock production contracts that benefit the integrator?
“Acts of God” are included in a more broad legal term called Force Majeure, a French term meaning a greater force than which can be reasonably controlled. And Force Majeure defenses are designed to get one party out of a contract requirement. With the increasing amount of pork production that is under contract, integrators usually retain title to the livestock, and contract with livestock producers to raise the hogs and prepare them for delivery to the market. But agricultural law specialists Roger A. McEowen and Erin C. Herbold at Iowa State University report that some integrators with Force Majeure clauses in their contract have been using that to protect themselves against adverse market conditions, such as “swine flu” or Country of Origin Labeling. Their recent newsletter reports that some hog integrators have claimed those factors have affected the market and have attempted to terminate or renegotiate their contracts with farmers.
Over time, typical examples of Force Majeure have included, flooding, earthquakes, volcanoes, acts of war, riots, crime, and other factors of similar serious ilk. The writer of the contract is usually the integrator, and rarely are any parts of it negotiable. Sometimes the company which has written the contract has used a Force Majeure clause to get out of a contract that has not been as profitable as they anticipated. McEowen and Herbold report a frequently used Force Majeure clause in Iowa pork contracts ends with the phrase, “or change in governmental regulations or laws making this agreement illegal.” But they question whether swine flu or COOL is really included.
Pork profits have been non-existent for nearly everyone in the industry due to high feed costs and the decline in the export market connected to the swine flu (H1N1) outbreak. Iowa State livestock economists report monthly losses for the past 18 months on many types of pork operations, which began prior to the COOL law being implemented, as well as the outbreak of swine flu. And the ag law specialists say “It is not an “act of God” that constitutes a force majeure event.”
The Mandatory COOL program, which covered many types of meat other than pork, became effective in mid-March of 2009, and market observers indicated the reduced flow of Canadian origin pigs impacted pricing and availability. McEowen and Herbold say termination letters, sent by integrators refer to the new law as resulting in a situation where the integrator is forced into a contract that is impossible to implement from their side. McEowen and Herbold say the integrators appear to be trying to renegotiate pork contracts that would pay farmers a lower rate, which they add does not fit within the definition of a Force Majeure event.
What does a producer do? While McEowen and Herbold address the laws of Iowa, beware that the growth of popularity of production contracts in the past ten years to manage risk has resulted in several Cornbelt states taking proactive positions to address contract production. Farmers with specific questions may find helpful information from their attorney general or consumer affairs agency, as well as attorneys well versed in agricultural production and contract law. In some states, the farmer who has been raising hogs for the contractor is in a position to file a lien, as a building contractor or mechanic would for unpaid work.
Summary:
Many contracts allow one party to escape their required performance with an “Act of God” clause, which is a portion of Force Majeure that frees a party of a contract from performance because of forces out of their control. However, the long running unprofitability of pork production has resulted in some integrators claiming Force Majeure to escape their obligation to farmers, or at least forcing renegotiation of contracts at lower prices paid to the farmer. Ag law specialists are advising farmers that such practices may not fit the legal definition of Force Majeure.
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
July 20, 2009
The Dairy Herd Buyout Has Tax Implications.
Dairymen who plan to participate in the buyout program, organized by Cooperatives Working Together, should consult with a tax advisor as part of the process and beware of the various tax liabilities that could result. Dairy herd liquidation is a life-changing event, and without consultation with your farm’s financial advisors, you may not control the changes as you intend.
The dairy herd liquidation program is a cooperative effort with 70% of the US milk supply paying 10¢/cwt to help fund the program. Producers submit a bid per cwt of milk that would take them out of production, and their dairy herd moves to market. More than a quarter million head of dairy cows have previously been retired, taking out more than 5 billion pounds of annual milk production. The latest program is generally parallel to prior programs, but Philip Harris of University of Wisconsin’s Center for Dairy Profitability reports the payments to producers will have tax consequences that should be clear before going into the program.
Producers submit bids, based on hundredweights of milk, will be accepted by the CWT based on a formula that will minimize the cost of reducing production. The regional “safeguards,” which were designed to limit geographical impact, have been eliminated that all producers have the same opportunity for their bid to be accepted. If your bid is accepted, 90% of it is paid when your herd has gone to slaughter. Since 1987, the IRS has been treating the dairy herd retirement programs similarly, and looks to ensure the payments are less than the value of the cattle as milking dairy cows. That value is regularly reported by USDA in its “Agricultural Prices” bulletins. The gross sale price is reported on IRS form 4797.
The balance of 10%, including interest, is paid 12 months later if the producer has not engaged in any commercial dairy production and has not sold any milk commercially. Harris says there is some uncertainty about how the IRS will handle the 10% balance, since the prior program had a 5 year limitation on re-entering production, and this program only has a 12 month limit. He says, “The IRS could take the position that if the total of the CWT payments and the amount received from the
sale on the slaughter market exceed the “Agricultural Prices” value of the herd, then the excess (limited to the 10% deferred payment) must be reported on Schedule F (Form 1040) as ordinary income that is subject to self-employment income.” He suggests that if the 90% plus 10% remains below the USDA’s Agricultural Prices chart, then nothing would be reported on IRS form 1040 regarding ordinary income.
Another element is the program to eliminate bred heifers. They are treated equally in the program, but since they have not been held for the 24 month minimum required in Section 1231 of the IRS code, their sale is considered ordinary income, but not subject to self-employment tax. Harris says the proceeds from the sale of the livestock, plus the bid from the herd liquidation program may put the total beyond the Agricultural Prices quotation provided by USDA. Dairymen and their tax advisors have to decide whether the entire amount should be reported as ordinary income, or whether the payment should be excluded from that with the thought that selling the heifers did not require a 12 month hiatus in production.
Summary:
Dairy operators, who have suffered from low milk and high feed prices, are considering stepping out of the dairy business for the 12 months required by the dairy herd termination program. However, the prices received for selling their dairy cows, plus the payment received for liquidating their herd, may create tax complications. The incentive payments come in two installments and the second may result in additional IRS tax liability issues. The key is whether the total is more than what USDA reports as prices for the sale of dairy cattle.
Posted by Stu Ellis at 12:44 AM | Comments (0) | Permalink
July 6, 2009
Increase The Value Of Your Livestock Manure
Manure. Every livestock operation deals with it and depending upon the nature of the operation, manure can either be an asset or a liability. The 2008 Farm Bill directed USDA to evaluate the role of manure as a fertilizer resource, its environmental impact, and its potential as a feedstock for bioenergy. If your operation is producing manure, will it have more value as a fertilizer or energy feedstock?
The environmental and controversial impacts of manure are well known to all livestock operation managers as well as neighbors, both urban and rural. Application limits to cropland, water pollution, odors, and similar issues increase the liability factor exponentially. However, USDA economists say there is an increasing interest in capturing the methane from manure and converting it to electricity. But when that is done, is manure being lost as an inexpensive form of fertilizer? The USDA study found that manure is applied to less than 16 million acres of cropland, about 5%, and corn receives about half of the manure applications, primarily from dairy and hog operations.
Recent high prices for commercial fertilizers make manure more cost effective, except for transportation costs. For large operations, Nutrient Management Plans require time and resources to develop and implement. Once the manure is applied, the primary issue is the nutrient value which can vary and will likely not be in the correct ratio for crop requirements. Handling and stockpiling are always health and environmental concerns.
The USDA economists determined that livestock production costs would rise 2.5% to 3.5% if manure was not applied nearby and had to be hauled any distance. However, as livestock operations enlarge and costs are controlled, the economists doubt that consumers would ever feel the impact of any change in whether manure was diverted from cropland nutrients to energy feedstocks.
Among the potential energy benefits and potential uses of manure are:
1) Dry manure has been a fuel for heat and cooking for millennia.
2) Methane can be captured from biogas and burned for electricity generation, either on farm or fed into the electric grid.
3) Manure can be shipped to a central conversion facility.
4) Methane can be upgraded to natural gas for insertion into a pipeline.
Currently, there are only a handful of energy plants operating at livestock facilities. Less than 3% of dairies have them and less than 1% of hog confinement facilities have them. One Minnesota-based commercial plant uses 6.6% of turkey litter in the US. But on-farm facilities may allow livestock farmers to produce their own electricity and reduce their overall energy costs, with the help of state grants to reduce capital construction costs.
A lactating dairy cow will produce about 150 pounds of manure daily, and if applied to cropland at a rate of 125# N per A, 2.64 acres would be required per cow. But with many dairies expanding in western states without cropland, manure has to be hauled at great expense. Hogs will each produce 1,200 lbs of manure in a finishing operation, and although hog production is widespread in the western Cornbelt, it is also widespread in many states where cropland is insufficient to dispose of the manure as a fertilizer. A broiler will produce 11 lbs of manure, and few poultry operations also have cropland, but the relatively dry manure can be transported at minimal expense. Two-thirds of cattle are fed at operations without cropland, so the 4.9 tons of manure produced per head have to be transported to cropland.
While nearly 16 million acres of cropland depends on manure for a partial nutrient supply at least, the normal process may be interrupted, or the nutrient components changed, if the manure is initially processed by a methane digester. Bacteria in the digester breakdown the manure and emit methane, which is siphoned off for use. The USDA economists say farmers may qualify for carbon credits if they capture methane and prevent its flow into the atmosphere, and those credits would be valued about $5 per ton of manure. But once the methane is produced and used to heat mini power plants, what about the rest of the nutrients? They are still there, and available to supply N, P, and K for crop production. The digestion process reduces pathogens, neutralizes weed seeds, and greatly reduces odors, which may increase the value of the manure.
Summary:
Livestock operations, particularly dairies and hog operations with substantial volumes of slurry manure may be able to benefit by processing the manure in a methane digester. The methane can be used to fuel on-farm electricity generators or upgraded into natural gas for sale. Farmers would be able to obtain carbon credits at a $5 per ton rate. The processed manure can still be utilized for cropland, with little loss in nutrient value, but since the odor has been removed, the manure may take on a greater value.
Posted by Stu Ellis at 12:56 AM | Comments (0) | Permalink
June 15, 2009
Livestock Feeds Will Not Be At Bargain Basement Prices This Year.
Livestock producers trying to get as close to breaking even as possible have received a setback with the latest analysis on feed grain supplies and prices. Production will be lower because of planting delays that will retard yields, and subsequent prices will be higher because of demand. Additionally, the protein meal market continues to rise because world supplies are down and Chinese demand for US bean meal is up. So profitability in livestock production may not be rooted in feed costs for some time to come.
USDA’s June Feed Outlook followed the latest USDA grain supply and demand report, which pointed to a lower national corn yield because of planting delays in the Eastern Cornbelt and that pushed corn production under the 12 billion bushel mark, well short of expected demand for the year. Since the shortfall has to come from unused old crop corn, the reduced surplus means higher prices can be expected.
At the same time feed grain production is declining, so is demand from the livestock sector. USDA says the demand for the four feed grains plus wheat has declined about two and a half million tons from last month, based on lower projections for red meat and poultry production and lower residual use from the lower corn yield. The USDA economists believe higher forecast feed prices will reduce prospects for pork and broiler production. Grain consuming animal units are project at 91.1 million, down slightly from May, and feed use per animal is also down slightly from last month.
Domestic corn production is about 97% planted compared to intended acres, but many unplanted acres will either switch to soybeans or to short season corn that will have a smaller yield capacity. With the wide variation in crop maturity across the Cornbelt, expect wide variations in harvested yields. Through September 1, USDA is projecting average corn prices at $4.10 to $4.30 per bushel, with the new crop ranging in price from $3.90 to $4.70 per bushel. An estimated 19% of old crop corn remains unpriced by corn growers.
When USDA raised the expected price for new crop corn, it also raised the price projection for new crop sorghum to a range of $3.30 to $4.00 per bushel, with the old crop remaining in the $3.20 to $3.40 range. An estimated 18% of the old crop sorghum is still available from producers. Barley prices are well below levels of last year because of export weakness, and are in the range of $3.85 to $4.55 per bushel. However, livestock feeders are competing with the malting industry, but the overall supply is growing, as is the supply for distillers’ grains where feed demand is also increasing. Oat prices remain steady from last month in the range of $2.30 to $3.10 per bushel.
US livestock producers also know they compete with the global market for feed grains, and internationally, feed grain production abroad is up slightly. Overall, a decline in US corn production and a lower foreign barley crop are pulling down the totals for global feed grain production. With the supply cut, stocks will be down, and that forces up the volume of US corn being exported.
US livestock producers looking to buy soybean and other protein meals will find a tighter market and a 3 decade low in US soybean supplies at the end of August which is a 3.6% stocks to use ratio. That is the essence of USDA’s latest Oilseeds Outlook and is underpinning the old crop price range of $8.45 to $10.45 and has raised the farmgate range of the new crop to $9 to $11 per bushel. And the carryover in August of 2010 is not expected to be much larger because of continuing world demand by China. Whether the new US soybean crop will have a reduced yield because of delayed planting is an uncertainty. Most of the Eastern Cornbelt is catching up on its planting, and soybeans may be planted with a reasonable chance of maturity. USDA’s Supply and Demand Report did not forecast a reduced yield or production for soybeans, but used the acreage number from the March Planting Intentions report.
The business for domestic soybean crushers has picked up with global demand for meal and oil. Estimates have been raised for soybean meal exports. USDA says, “Soybean meal values in central Illinois, which averaged $292 per short ton in March, surged to $380 in May. The higher price outlook prompted a $15 increase in the season-average price forecast to $320 per ton. Soybean meal prices should ease somewhat in 2009/10, but the June forecast was raised to $275-$335 per ton, versus $260-$320 last month.”
Summary:
US livestock producers needing feed will probably find their needs, but at a higher cost than in recent months. Both feed grains and protein meals are climbing in price, putting a further pinch on profitability, when the latest USDA estimates for crop production and prices are evaluated. US corn production will be down because of planting delays, and higher corn prices will also push sorghum higher. The US soybean crop is still being planted, but global demand because of low production in Argentina and high demand in China will draw US soybean supplies to minimum levels both this year and likely next. Soybean prices are climbing as a result, pushing soybean meal prices higher as well.
Posted by Stu Ellis at 12:50 AM | Comments (0) | Permalink
June 9, 2009
Will Politics And Social Agendas Phase Out US Livestock Production?
How would you react to non-farm folks imposing rules on your livestock production? It is one thing if those rule makers were from your own state, but what if they did not even live in your state, much less have no economic interest in livestock production? That is what has happened in some western states, and may well happen soon in Ohio and in the not-to-distant future in other Cornbelt states.
Methods of livestock production, honed over the years by enterprising farmers and university researchers, have become controversial with the help of the Humane Society of the United States which has turned to the political route to pursue its agenda. Noted Ohio State University economist Luther Tweeten says the HSUS plans a referendum in 2010 that will impact the Ohio laying hen industry and its 27 million birds. In the June issue of the OSU Ag Manager newsletterTweeten says Ohio agriculture has a major stake in the outcome of the HSUS effort.
The threat of a referendum, if Ohio agriculture does not cooperate with HSUS plans to change livestock production, is backed up by forced changes that occurred with Proposition 2 in California. That new law makes it a misdemeanor for anyone to confine livestock in ways that are typical of 21st Century production.
Tweeten says it is important to recognize that nearly everyone supports humane treatment of animals, but at issue is what constitutes humane treatment. He says the HSUS proponents believe legislation will enhance animal welfare, provide healthier food because animals will contract fewer diseases and will reduce soil, water, and air pollution. On the other hand, confinement philosophies are associated with protection of animals from temperature extremes, predators, soil-borne diseases and parasites. He believes the general public has looked to science-based research to narrow the differences, but only with partial satisfaction.
The Ohio economist says market forces have dictated animal production practices, forcing producers to ensure animals are well treated. And he says, “Socially acceptable production practices for animal welfare ultimately rest on the public's values and attitudes and not just on science. Such values range from indifferent observers to animal rightists who object to animal confinement and would end use of animals as sources of food, clothing (leather), fiber, draft-power, or companionship (pets).” To satisfy consumers with those preferences, Tweeten proposes, “to label animal products by production practices. Preferred animal welfare practices may be more costly to producers, but consumers can “vote” their preferences with dollars in the market.”
Tweeten says the proposal pending in Ohio is similar to what was approved by voters in California, where economists calculated that, “variable costs of production [for eggs in California ] would rise by at least 20 percent and perhaps substantially more. Underlying these higher costs per dozen eggs are higher feed use per bird, higher cost per pullet, lower average productive life of a hen, higher mortality rates, fewer eggs of premium size or acceptable marketability, fewer birds per facility, and higher labor costs.” He says Ohio poultry producers would no longer be competitive with the 24 million laying hens in Indiana and the 21 million laying hens in Pennsylvania. And he says California economists believe the poultry industry in that state will disappear during the six year phase-in of the new rules.
Tweeten says the losers in the process will be a loss of nearly 8,000 jobs associated with poultry production, along with a diminished demand for corn and soybeans, since poultry consumes 22% of the Ohio production. He doubts Ohio consumers would face higher prices for eggs, since supplies would come from neighboring states. However, he expects the Humane Society to pursue national legislation to impose regulations on all US livestock producers, resulting in consumers obtaining replacement livestock products from Mexico, Canada, and other countries where current production practices are often inferior to US standards.
Summary:
Political initiatives may change many US livestock production practices, rather than the marketplace or science-based research. Those efforts may cause massive changes in the livestock industry, including how livestock is produced, or even result in a phase-out of US production and transfer to foreign nations.
Posted by Stu Ellis at 12:01 AM | Comments (4) | Permalink
May 20, 2009
The Pork Market: Thumbs Up Or Thumbs Down?
Prepare yourself for USDA’s latest message to the pork industry: “Hog prices are expected to recover in June.” When you are finished with the euphoric celebratory dancing and the high fives with your spouse, let’s pull ourselves together, restore the decorum at home, and ask, “Recover from what?”
The latest Livestock Outlook from USDA’s Economics Research Service teases producers a bit with the headline, and begins by saying, “USDA revised second-quarter hog prices downward, to reflect price weakness in April and negative effects of H1N1 flu virus in May. June prices are expected to recover from May lows.” Recovery is a good thing, but USDA is not projecting a return to the profitability of recent memory.
The weaker demand for pork, resulting from the H1N1 flu virus took about $5 per cwt from the lean hog market. US consumers and foreign demand withered from the flu outbreak. Domestic buyers were cautious and foreign governments backed away from imports on the disease concerns. USDA believes foreign and domestic consumer confidence will increase as reports of the disease decrease. ERS economists think prices of US pork and hogs will adjust upward as demand returns to normal and seasonal product flows are restored.
For the first three months of the year demand was healthy, weighing in at 1.03 billion pounds, 72 million under 2008, but 30% ahead of 2007. The shortfall this year resulted from a fading demand from China, since it has moved beyond a domestic shortfall and will increase its own production. Economists believe China will increase its pork industry by 6% this year, with a 17% drop in pork imports. For the second quarter of the year USDA believes exports will remain steady with the first quarter at 950 million pounds. Ironically, the export projection remains steady, despite great volatility in purchases among importing nations.
A significant dynamic in the US pork industry is the fading involvement of Canada. Compared to last year:
• Live swine imports from Canada are down 40%
• Slaughter swine imports are down 67%
• Finishing animal imports are down 28%.
This drop is attributed to the contraction of the Canadian hog industry due to lower profitability, and the marketing uncertainties due to the Country of Origin Labeling program.
In addition to the live hogs southbound from Canada, pork cuts are not flowing into the US as rapidly as last year by a 5.5% margin. Low quality pork from Mexico is not being demanded by immigrants in US cities, and high quality pork from Denmark is not being sought because of the recessionary economy.
Meats that compete with pork present a rather mixed bag:
1) Broiler meat will rise 1.6% in 2010 compared to the current year as expansion is restricted because of high feed costs. Weights will remain steady, but the number of birds slaughtered will increase.
2) Turkey production will be up 2% in 2010, after falling in 2009. Higher prices will be an incentive for increased production. However, most of the increased production will be exported, and much of it to Mexico.
3) Retail beef prices have increased in 2009 over 2008 by 4%, indicating that grocery demand is steadier than restaurant demand. Cattle feeders have recently seen margins that are closer to breakeven than any time since 2007. That is a result in lower prices for both feeder calves and feed, but USDA does not expect positive margins to last beyond the summer. The impact of H1N1 virus was difficult to analyze on the cattle industry, since two opposite marketing forces may have offset each other.
Summary:
Pork demand suffered from the H1N1 flu virus, wrongly named the swine flu. As a result both domestic and foreign consumers reduced their consumption of US pork, and $5 per cwt was lost on market hogs. As reports of the flu decline, demand is expected to rise for US pork. The export market for the second quarter is expected to parallel the first quarter. In other meats, both poultry and turkey production are expected to show marginal growth into 2010, and the beef market will see some brief profitability for cattle feeders as the result of lower input costs.
Posted by Stu Ellis at 12:17 AM | Comments (1) | Permalink
The Pork Market: Thumbs Up Or Thumbs Down?
Prepare yourself for USDA’s latest message to the pork industry: “Hog prices are expected to recover in June.” When you are finished with the euphoric celebratory dancing and the high fives with your spouse, let’s pull ourselves together, restore the decorum at home, and ask, “Recover from what?”
The latest Livestock Outlook from USDA’s Economics Research Service teases producers a bit with the headline, and begins by saying, “USDA revised second-quarter hog prices downward, to reflect price weakness in April and negative effects of H1N1 flu virus in May. June prices are expected to recover from May lows.” Recovery is a good thing, but USDA is not projecting a return to the profitability of recent memory.
The weaker demand for pork, resulting from the H1N1 flu virus took about $5 per cwt from the lean hog market. US consumers and foreign demand withered from the flu outbreak. Domestic buyers were cautious and foreign governments backed away from imports on the disease concerns. USDA believes foreign and domestic consumer confidence will increase as reports of the disease decrease. ERS economists think prices of US pork and hogs will adjust upward as demand returns to normal and seasonal product flows are restored.
For the first three months of the year demand was healthy, weighing in at 1.03 billion pounds, 72 million under 2008, but 30% ahead of 2007. The shortfall this year resulted from a fading demand from China, since it has moved beyond a domestic shortfall and will increase its own production. Economists believe China will increase its pork industry by 6% this year, with a 17% drop in pork imports. For the second quarter of the year USDA believes exports will remain steady with the first quarter at 950 million pounds. Ironically, the export projection remains steady, despite great volatility in purchases among importing nations.
A significant dynamic in the US pork industry is the fading involvement of Canada. Compared to last year:
• Live swine imports from Canada are down 40%
• Slaughter swine imports are down 67%
• Finishing animal imports are down 28%.
This drop is attributed to the contraction of the Canadian hog industry due to lower profitability, and the marketing uncertainties due to the Country of Origin Labeling program.
In addition to the live hogs southbound from Canada, pork cuts are not flowing into the US as rapidly as last year by a 5.5% margin. Low quality pork from Mexico is not being demanded by immigrants in US cities, and high quality pork from Denmark is not being sought because of the recessionary economy.
Meats that compete with pork present a rather mixed bag:
1) Broiler meat will rise 1.6% in 2010 compared to the current year as expansion is restricted because of high feed costs. Weights will remain steady, but the number of birds slaughtered will increase.
2) Turkey production will be up 2% in 2010, after falling in 2009. Higher prices will be an incentive for increased production. However, most of the increased production will be exported, and much of it to Mexico.
3) Retail beef prices have increased in 2009 over 2008 by 4%, indicating that grocery demand is steadier than restaurant demand. Cattle feeders have recently seen margins that are closer to breakeven than any time since 2007. That is a result in lower prices for both feeder calves and feed, but USDA does not expect positive margins to last beyond the summer. The impact of H1N1 virus was difficult to analyze on the cattle industry, since two opposite marketing forces may have offset each other.
Summary:
Pork demand suffered from the H1N1 flu virus, wrongly named the swine flu. As a result both domestic and foreign consumers reduced their consumption of US pork, and $5 per cwt was lost on market hogs. As reports of the flu decline, demand is expected to rise for US pork. The export market for the second quarter is expected to parallel the first quarter. In other meats, both poultry and turkey production are expected to show marginal growth into 2010, and the beef market will see some brief profitability for cattle feeders as the result of lower input costs.
Posted by Stu Ellis at 12:17 AM | Comments (1) | Permalink
May 6, 2009
Why Did Hog Markets Crash So Hard Because An Influenza Strain Was Blamed On Swine?
At $25 per head, the pork industry has suffered the worst from the fall out of the H1N1 influenza problem. At the outset it was mislabeled Swine Flu, and both the media and governmental health authorities convinced the public that hogs had something to do with the health issue. Consumers quit buying pork, foreign countries began banning US pork exports, and the bottom dropped out of the cash and futures markets for hogs. Although a hog was never found to have the virus until some caught it from a Canadian farm worker, the damage was already done. But how did the news translate into falling market prices.
Over the years there have been many scares that public health would be jeopardized by animal health maladies. Subsequently, the livestock futures traders manage their risk by selling contracts and the price plummets. It is not quite as simple as that say agricultural economists Amy Hagerman and Yanhong Jin who coincidentally published a research paper on the market impact of foot and mouth disease at the same time livestock futures were impacted by the H1N1 virus. Their research examines the market volatility and the rationality of traders to the uncertainty about the spread of an animal disease.
The economists use the rumor of foot and mouth disease that originated in a Kansas Sale Barn in early 2002, which turned out to be false, but took $50 million out of the cattle industry overnight. The parallels with the alleged swine flu can be closely compared. Hagerman and Jin report that uncertainty plays an important role in futures prices and trading volumes and those increase the implied volatility of the stock. While the reactions may not be irrational they suggest, it can lead to over or under reaction by traders. At that point herd mentality sets in, traders think other traders have very accurate information and will follow their lead. Hagerman and Jin say that leads to price distortions, in part from foreign investors moving in and out of US markets.
The economists say that once the information uncertainty has cleared up, such as dispelling a rumor, then the herding disappears and prices adjust. But if prices continue to fall, then the market has shifted into a new mentality of momentum trading. Hagerman and Jin label the traders as “newswatchers” who trade with current or past information and “momentum traders” who rely on prior trades to set their forecasts. They believe the momentum in the market results from traders looking at the overall market direction instead of fundamentals based on supply and demand information.
Looking at the timing of how the foot and mouth rumor got from the Kansas Sale Barn to the Chicago trading floor, authorities are uncertain, but believe an Iowa radio station had reported the potential outbreak of foot and mouth disease and when that got to the traders, the market nose dived. It could also have been conveyed by a cattle buyer to a floor broker. While some market manipulation has been speculated, there was no confirmation following governmental investigations.
The economists say lean hog futures were the most volatile, followed by pork bellies and live cattle, with feeder calves the least. All moved together during the rumor period, and although feeder cattle and lean hogs continued to fall after the rumor was dispelled, they soon recovered. They say the pattern indicates herd mentality, and while momentum trading does not imply herding, it may aggravate the effects of herding. Their analysis indicates “The incident may well have been a trigger for the downward price cycle earlier in the year than expected. However, the incident was not found to have a significant impact on prices of pork bellies contracts.” And they go on to say, “analysis would seem to reveal herding behavior in feeder cattle, live cattle and lean hog livestock futures and momentum trading for live cattle and lean hog livestock futures. A more formal econometric analysis of herding behavior leads to evidence of herding behavior in live cattle and lean hogs.”
The economists say, “It could be argued that the rumor of FMD gave traders a reason to sell; however, even if the market was primed for a seasonal downturn the rumor appears to have caused the downturn to be steeper than expected or reasonable under ordinary circumstances.”
Summary:
The current drop in hog futures and cash markets is the result of the influenza strain erroneously blamed on hogs. Nevertheless, the marketplace loss tens of millions of dollars in value, which can be explained by research based on a 2002 rumor of foot and mouth disease in US cattle. Some traders sold the market short based on what they saw other traders doing that they thought was the right thing to do. Once the market momentum headed down, other traders also sold, because that is where the market was moving. Some contracts prove to be more resilient than others, but market volatility will spread to many related contracts.
Posted by Stu Ellis at 12:06 AM | Comments (2) | Permalink
April 30, 2009
Fundamental and Technical Dynamics Are At Work In The Hog And Cattle Markets.
The US pork industry has grown substantially over the past 23 years, but one dynamic, termed as “impressive” has been the growth in exports of US hogs and pork products. Today the pork industry is 27 million head larger than it would have been in 1986 without export demand from overseas customers hungry for US pork.
Actually, the growth in the pork industry has been due, not only to outward bound pork, but to a substantial decline in imported pork products. That is the contention of livestock economists Glenn Grimes and Ron Plain at the University of Missouri. Their analysis indicates US exports were at 86 million pounds in 1986, but had reached 3.1 billion pounds by 2007. When comparing imports and exports, the economists say the US had a pork trade deficit of 1.036 billion pounds in 1986, but a positive trade balance of 2.169 billion pounds in 2007.
The export business contributed substantially to the value of pork, climbing from $1.97 in 1986 to $41.49 per head in 2008. That money ended up in the pocket of producers, say Grimes and Plain, who said pork promotion programs, funded by producers made it possible, as well as the US meat packing industry. However, they also attributed part of the growth to government efforts to liberalize trade, as well as the economic growth around the world pushing demand upward.
The economists said it is difficult to calculate how much credit should be given to any one of the three, however the Pork Check-off has invested $69 million over the past 23 years to promote exports. They said total income for all pork producers would be $12.2 billion attributable to pork exports.
Grimes and Plain say the pork industry has grown substantially without lowering prices. They said they assumed producers increased the herd enough to offset any price benefits from net export growth in years when both prices and exports grew.
Increases in the size of the swine herd have long been the subject of discussion, and recent calculations by ag economists Jeffrey Dorfman and Myung Park of the University of Georgia may have clarified the lengths of the hog and cattle marketing cycles. Using data about the size of hog and cattle herds for the last 140 years, the economists attribute part of the complexity to the biological lags in accumulating breeding stock as a limitation of producers being able to more quickly respond to markets. Their effort eliminates the economics of production and marketing, and focuses solely on the inventory levels to determine the length of the hog and cattle cycles and the growth rate of cattle inventories.
Their survey begins with 1866 data on livestock numbers and continues through 2009. They found 141,981 cycles in the cattle data, with a minimal chance there were three different repeating cycles. However, they found a 37% chance of four repeating cycles, a 52% chance of five repeating cycles, and an 11% chance for six repeating cycles. Their characterization of the cattle cycle was “a very complex dynamic process.” Ultimately, they identified the cattle market as having cycles with lengths of 4.5, 6, and 11 years.
The hog market is dominated by five different cycles, according to the Georgia economists. Those have lengths of 4.5 years, 5.4 years, 6.8 years, 10.2 years, and 13.3 years.
Dorfman and Park say a better understanding of the cycles could lead to better risk management and higher profitability for both producers and processors. Additionally, they acknowledge references to a single multi-year cycle, but say there are a number of smaller cycles that are actually at work in the cattle and hog inventory. Both have a short cycle of 4.5 years and an 11 year cycle.
Summary:
A significant dynamic in the US pork industry in the past 23 years is a substantial shift from imports to exports, which has allowed the swine herd to expand substantially without lowering producer prices. This marketing effort has been jointly accomplished by USDA, the meat packing industry, and the pork check-off.
Marketing of livestock is frequently dominated by cycles that indicate herd expansion and contraction, and using data from the past 140 years of livestock herd numbers, there are similarities in the short and long cycles for both hogs and cattle. The cycles may be due more to biological lags in the development of breeding stocks, instead of economic-driven issues.
Posted by Stu Ellis at 12:43 AM | Comments (0) | Permalink
April 27, 2009
Is EPA's "Cow Tax" Real Or Just A Good Rumor?
We’ve all heard the coffee shop rumors that EPA will impose a cow gas tax on every livestock producer to reverse global warming. That is great fodder to chew, but what are the real proposals, what would they do, and who would be affected? Once those issues are clear, agriculture can make an appropriate response.
The issue involves greenhouse gases, abbreviated as GHG, and there are many, but for the purposes of livestock producers, the major ones are carbon dioxide and methane. Agricultural and Biological Engineers Ted Funk and Randy Fonner at the University of Illinois offer their analysis, saying the US EPA proposes a reporting requirement of facilities with manure management systems that have annual emissions exceeding 25,000 metric tons of carbon dioxide equivalent. Funk and Fonner say, “No other GHG emission source associated with agriculture is proposed to be covered.” Frankly, few farmers have the knowledge and equipment to have calculated GHG emissions at their facility. Funk and Fonner say EPA’s method of calculations indicates, “that 40 to 50 of the largest livestock facilities would be required to report at the 25,000 mtCO2e per year threshold level.”
If you are not managing one of the 40 to 50 largest livestock facilities, you probably are going to quit reading and think it does not concern you. However, this issue is like any dairy herd, and once the gate is open, the other cows will follow the leader through the open gate. In other words, all livestock producers may want to become familiar with the issue, since there may be subsequent regulations that would impact their operation.
Funk and Fonner believe the EPA regulations stopped where they do because of the challenges to estimate GHG emissions. They say measurements with current technology produce uncertain results at smaller facilities. At this point, the only gas being measured for reporting requirement is carbon dioxide; and methane produced in the digestive process is not included. That will upset some of the late night TV comedians.
According to the proposed EPA rule, the reporting requirement is applied to a “manure management system or facility.” Funk and Fonner list those as:
· Digesters
· Storage pits
· Liquid/slurry systems
· Uncovered anaerobic lagoons
· Feedlots and other drylots
· Manure composting
· Solid manure storage
· Other poultry production with litter
· High-rise houses for poultry production
· Deep bedding systems for cattle and swine
Such facilities include “physical property, plant, building, structure, source, or stationary equipment. Even if an access lane or even a township road separates them, the issue is who controls it and does it emit any GHG.
If you have no livestock, you are exempt from the reporting requirement. So if you are burning off crop residue, composting, or raising row crops you are not covered by the rule. If you have a large incinerator for some reason on your farm, and produce more than 25,000 metric tons of carbon dioxide equivalent per year, you would have to fill out the require paperwork. Funk and Fonner compare that level of emission to 2,200 homes, or burning either 58,000 barrels of oil or 131 railcars of coal.
So if you are one of those that have to comply with the reporting requirement, what has to be done in addition to paperwork? Funk and Fonner say there are no taxes or fees proposed at this time. Anyone uncertain if they are producing more than 25,000 metric tons of carbon dioxide per year is required to obtain the measuring equipment and determine if they must comply, which would cost about $900 per facility. The ag engineers also indicate there are ways of estimating, based on calculations that the EPA can provide, before having to spend the money. Data collection would begin next January, and the annual report would be due in March of 2011.
Summary:
Proposed regulations by the EPA would impact the largest 40 to 50 livestock operations by requiring them to annually report emissions of more than 25,000 metric tons of carbon dioxide. Taxes and fees are not proposed, however there would be a cost of data collection. Smaller livestock facilities and crop agriculture are not included in the reporting requirement. The specific point of carbon dioxide emissions would be manure management facilities, not individual animals.
Posted by Stu Ellis at 12:56 AM | Comments (2) | Permalink
April 16, 2009
What Is A Hog Worth These Days? That Depends On How It Is Sold!
With Mandatory Price Reporting now in effect for livestock marketing, producers have the ability to compare their livestock sales receipts with the rest of the industry and determine if their sales arrangements are more or less profitable, and how they are performing. And with that yardstick available, how did you measure up?
An annual survey conducted by the University of Missouri has provided valuable information for 15 years. Livestock economists Glenn Grimes and Ron Plain have tallied the results of several pricing tools in their January report on marketing contracts for hogs. Recent federal legislation makes the comparisons easier, since the price reporting by slaughter plants is required, but Grimes and Plain say their statistics for 2009 are quite comparable to recent years because the same plants have been reporting prices to them under a voluntary system.
Their research covered over 9.1 million hogs, out of the total hog slaughter of 9.8 million under federal inspection. All of the hogs in the Mandatory Price Reporting system were barrows and gilts, and represented over 95% of those slaughtered in January.
As an indication of how hog market pricing has changed in a relatively short period of time, 62% of hogs in 1994 were sold on the spot or cash market with a negotiated pricing structure. However, in 2009, that defined only 8.1% of the hogs sold. In the 1990’s the change amounted to about 10% of the hogs per year that switched away from the cash market to a contracted price. During the current decade, the change has been much more gradual, losing about 1% each year since 2001.
If only 8% of hogs are sold on the cash market 92% are sold with a variety of other pricing formulas. In January 2009, over 41% were sold on a hog or meat market formula, which is tied to the spot market, negotiated hog market, or meat prices. That has been a consistent share over the past 10 years, usually varying less than 3-4% from year to year.
In January of 2009, the next largest group was packer-owned, which represented nearly 26% of hogs sold. That share has steadily grown from 16% in 2002. Grimes and Plain define that group as being produced by the same packer that slaughters them. They say integrators use formula pricing to determine what they will allocate to their hog production divisions. Grimes and Plain also report that some hogs owned by packers may be sold, without going through slaughter plants owned by those packers. Those hogs sold by packers without processing make up only 5% of the volume, but that has been a growing trend, and two years ago comprised nearly 7% of hogs slaughtered.
The economists say that hogs sold on the cash market and hogs sold under a swine or pork market formula make up 49% of hogs, or nearly half that are sold by a negotiated price. Analyzing the marketing agreements, Grimes and Plain say nearly 20% of hogs were purchased from a producer with a formula that reduces price risk for the producer, such as the nearly 8% of hogs tied to a futures contract. However, they indicate that the vast majority of hogs are sold under agreements that put the producer at more risk than the packer. They say the Mandatory Price Reporting system does not allow them to determine the extent of the use of ledger agreements that put individual producers at increased risk.
Grimes and Plain say they believe the 8% of hogs sold on the spot market represents a true supply and demand volume and determines a fairly accurate price for hogs. They say that is based on the fact that packer margins indicate they are buying hogs based on supply and demand.
Summary:
The significant changes in the livestock packing industry over time has lead to more hogs being owned by packers, and fewer hogs being priced with the spot or cash market. While the bulk of hogs are priced with a formula paid by packers to producers, producers seem to be taking more of the pricing risk than are the packers. With less than 10% of hogs sold on the open market, it may still be a sufficient number to actually determine hog values, since packer margins have been parallel to those few hogs sold for slaughter on the open market.
Posted by Stu Ellis at 12:30 AM | Comments (0) | Permalink
April 15, 2009
With Low Profit Margins, Will Livestock Producers Have To Compete For Feed?
As many Cornbelt farmers prepare for spring fieldwork, they are hoping for stronger grain prices to ensure a profit margin. But as livestock producers continue to cut production to ensure profitability, will they have to compete with ethanol and exports for feed? Will there be any "winners" in this market, or will it be a year of survival?
As noted in the April 14 edition of the farm gate planting intentions indicate a limit to acreage, and consumption may require 12.5 billion bushels of corn to supply demands of the livestock feeders and the ethanol market. With feed grain stocks declining, will there be sufficient feed for livestock feeders and will it be affordable? USDA economists have released their latest Feed Outlook following the recent supply demand report, which indicated the corn carryover would fall to 1.7 billion bushels. They are looking to identify that delicate balance desired by corn growers, livestock producers, and where it fits into the international demand for US grain. Compared to last year, the economists say overall feed grain demand will be down this year. US supplies will be down by 15 mmt compared to last year, but feed grain use will be down slightly more than that on a calendar year basis. On a marketing year schedule, feed grain and wheat use will be up reflected in heavier weights of feedlot livestock.
Projected corn use for the year will be down due to lower exports, feed, and residual use, partially offset by ethanol and other industrial uses for corn. Feed use will be up to 5.350 bil. bu., compared to 5.938 bil. bu. last year. The ethanol and industrial uses will be an estimated 4.990 bil. bu., with a fade in starch and sweetener use in addition to less ethanol refining. Ethanol will consume 3.700 bil. bu. which is still up 31% over the same period a year earlier. Exports will be 1.700 bil. bu., down 732 mil. bu. from the year earlier. Comparatively, sorghum is selling at a discount to corn, versus the premium price it demanded last year due to strong export demand. Barley and oat use will also decline as part of the lower livestock feed demand receding.
Internationally, the demand for US corn has been soft from burdensome supplies of low quality feed wheat in many foreign markets. USDA’s Wheat Outlook says there has even been a decline in feed wheat use in foreign countries because of the abundance of feed grains and non-grain feed ingredients. That has depressed the potential for corn exports and has made more US corn available for domestic feeders. The USDA economists say global production of coarse grains will reach 1.097 mmt, down from last months estimate due to changes in the way production is counted in some countries, and a cut on Chinese production.
Factors that will impact the global demand for US corn and what US livestock feeders have to pay for it, come in part from a decline in Argentine crops, where corn production has been cut by nearly one-third. USDA says global carry-in of stocks were down, but historical revisions in Chinese feed grain supply and demand will raise internal use. Globally consumption of coarse grains is down, with lower foreign use more than offsetting higher US use of corn and feed grains. Some of the lesser feed grain demand is the result of lower demand for meat. While global ending stocks are down, most of the reason is the lower US carryover.
The positive note for grain producers is USDA’s projection for increased world trade in feed grains, but most of the grain will come from ample supplies in eastern European countries. Brazil will export less corn, but only because more soybeans will be shipped out before the marketing year ends. US corn export projections of 1.7 bil. bu. remain in place, and USDA is not expecting that to increase, keeping US corn supplies available for domestic livestock feeders. However the pace of exports is expected to pick up in the later part of the marketing year due to the diminished crop in South America.
The positive note for livestock feeders is the apparent strong supply of all types of feed grains that are available at stable prices devoid of the volatility seen in the past two years. With slack demand from exports and ethanol refiners, the livestock industry should have ample supplies.
Summary:
For the livestock feeder, who is facing slim profit margins, the availability and cost of feed may be welcome news. Both domestically and internationally, the economy has reduced demand for meats and in the US, there has also been a weakness in demand for ethanol and exported grain, which reduces the competition for feed grains. Reduced production of grain, both here and abroad will not lead to burdensome supplies and low grain prices, but supplies will be more in line with demand in many nations, including the US. The reduced opportunity for grain price volatility may be the best news for livestock feeders.
Posted by Stu Ellis at 12:40 AM | Comments (0) | Permalink
March 19, 2009
Will Livestock Production Ever Return To Profitability?
The pork and beef industries have worked to reduce the swine and cattle herds over the past couple years to restore some degree of profitability. In fact, the beef herd at the end of 2008 was the lowest in a half century. But there is still red ink on balance sheets for livestock operators and the reason is not the supply, but the demand, and that is a factor of the economy.
The object of cutting back on production was to raise prices to the point of profitability, but all of those efforts have been negated by the diminished desire of the consuming public to spend money on high value meats, says Nebraska livestock economist Darrell Mark in the recent edition of Cornhusker Economics. Mark reels off the achievements in the recent past that have gone unrewarded:
· 50 year inventory low in cattle and calves
· Swine breeding herd reduced.
· Canadian feeder cattle, feeder pigs, slaughter cattle and hog imports have declined.
· Never before seen drop in broiler production in recent months
Darrell Mark says the US livestock industry has both a domestic and foreign market. And for the most part exported US meat has been a growth market with a 32% increase in beef and veal exports and a 49% increase in pork exports during 2008. In fact foreign buyers took 1 hog out of every 5 that went to market. But the reliance on the foreign consumer began to fail late in 2008 and the global recession curtailed the foreign taste for US red meats.
The exchange rate did not help any either, when the dollar began climbing in value the demand dried up. Banks became less interested in extending credit to companies engaged in the meat trade and customers turned away from the higher priced products. That deflated the beef and pork exports for not only steaks and chops, but also for hides and variety meats, which are typically popular in many developing nations. Even the hide market has softened because people are wearing their shoes longer and buying outerwear that is less expensive than a leather coat. Mark says steer hides that sold for $68 last August are now worth $30. Another kick on the shin is even the lower value of inedible products, such as tallow and greases, which are valued with the energy market. Mark says the record high of $12 per cwt for those products is now $6 per cwt.
In the US the consumer market is dominated by disposable income, and the millions who have lost jobs have opted for lower value meats, which not only shifts preferences from steak to hamburger, but also from beef to pork and poultry, or away from red meats completely. Last year, beef and pork consumption slipped nearly 4%, in part from fewer meals eaten away from home, a trend that has hurt the restaurant industry. Such a trend that cut fine dining by 80%, and casual restaurants by 50% also saw those dollars shift to fast food restaurants.
Darrell Mark says the outlook for beef and pork in 2009 remains uncertain, and it will take an improvement in the general economy and consumer outlook to increase the demand for animal proteins. But when that happens, Mark says the livestock industry is in a good position because of the reduction in supply. He says when the demand begins to grow, the market will not be over saturated with meats and prices will rise with the demand for pork and beef products.
Summary:
Despite the efforts of livestock producers to cut the supply in an effort to raise prices, the economy caused the demand to soften, both for domestic and foreign markets. Prices for the entire spectrum of livestock products have declined, and simultaneously, consumer preferences have shifted to lower quality products in an effort to conserve disposable income. Livestock producers will still face unprofitable prices until the economy improves and demand eventually increases with resulting higher prices.
Posted by Stu Ellis at 12:36 AM | Comments (0) | Permalink
March 4, 2009
Hog Prices: Are They Headed Toward Profitability?
Will 2009 restore profitability to pork producers, or will their balance sheets continue to be printed with red ink? Not long ago, 2009 appeared to bring a better day. However, demand has softened and supplies remain strong. There are some mixed thoughts about the potential for pork profits and we’ll offer those and let you decide.
In his March newsletter, Iowa State University livestock economist John Lawrence says 2009 will not be much of a recovery from 2008, which was the worst year for hog returns since 1998. He says since USDA’s last quarterly report, feed prices have decreased, but so has demand, and he is forecasting a loss of $15 per head for 2009.
On the other hand, Purdue livestock economist Chris Hurt’s latest newsletter says producers may be on the verge of returning to profitability, and he believes that will come with a decrease in feed costs and rising market prices in coming months. His calculation is a modest profit of $2 per cwt.
Where do these two eminent researchers diverge? While both expect lower production costs, Hurt seems to anticipate a bit less supply of pork than Lawrence expects, who sees about the same demand as Hurt.
The Lawrence crystal ball. Based on the latest Hogs and Pigs Report, he says market hog slaughter rates declined in the past 10 weeks, but a portion of that is accounted for by a reduction in Canadian hogs slaughtered in US plants. However, Lawrence says US finished hogs being slaughtered continues at the same rate as last year. He believes’ “Canadian imports mask sow slaughter even more than barrow and gilt slaughter.” And Lawrence says US producers are building the breeding herd according to his estimates and those of Glenn Grimes at Missouri. Interestingly, Lawrence attributes the decline in southbound hogs from Canada to the Country of Origin Labeling requirement. He says unless the Canadian consumer increases pork consumption or the exchange rate turns around, there will be significant shipments of hogs and pork entering the US market.
Regarding demand, Lawrence says the recession has reduced global purchasing power; all the while per capita supplies of pork are building in the US as exports decline. And he says that will result in lower prices. Lawrence acknowledges that supplies of competing meats will be smaller and that will be supportive of pork prices. He says if Americans, who have begun saving, will get to the point of using some of their cash to buy pork, then demand will rise.
The Hurt crystal ball. Chris Hurt agrees with the increased per capita supply of pork in the US, particularly with the slowdown in Chinese purchases of US pork. He estimates that at a 6% increase over last year. But on the supply issue, Hurt says domestic production will drop 1%-2% this year and the market thinks the supply will result in a first quarter live weight price average of $42.50, rising from there, and reaching into the low $50’s by summer and gradually declining into the end of the year.
Chris Hurt’s analysis of the corn and soybean market may push down production costs further than Lawrence. Hurt is using a $3.36 average price of corn and $261 per ton of soybean meal. Based on those costs, he estimates farrow to finish operations would lose $11 per head in the first quarter of 2009, with profits of $12, $15, and $6 in the following quarters. Hurt says that depends on a continuation of the decline in the breeding herd, and he suggest pork producers focus their management on a survival strategy, rather than looking for big opportunities.
Summary:
Pork profitability may still be a challenge for many producers in 2009. Despite lower feed costs, and lower pork prices in the meat counter to attract demand, margins may be slim to none. While the herd has been shrinking, there are indications of expansion in the near future. Feed prices are lower, but production costs will nibble away at profitability.
Posted by Stu Ellis at 12:54 AM | Comments (1) | Permalink
February 26, 2009
The Strong Trade In US Meat Will Resume With A Stronger Economy
The world loved US beef until a wayward Canadian cow with BSE wandered into a Washington state feedlot and destroyed the US beef export business on her own. Then the world discovered US pork, and ate so much of it in the past year that export demand pushed pork producer revenue up to almost the level of profitability. Of course a recession-scared global economy sudden does not have the money to buy meat. But will international meat trade recover to the benefit of the US livestock producer?
Red meats crisscross the world, connecting producers and consumers, if governments can agree on prices, product quality, and lower trade barriers enough to feed hungry consumers. And that is a mouthful as explained by USDA economists in the latest Meat Trade Outlook.
As grain producers know, the value of the dollar has had a lot to do with export trade, and when it was weak the past several years, meat exports were relatively high. Since 1970, US consumption of meat has grown 20%, but most of that has been consumption of imported meats. US consumers have consumed gradually less domestic meats in the past 10 years. But since 1970 the quantity of US red meat to be exported has increased more than 3,200%, including beef and veal by 2,700% and pork by 3,500%. USDA says 75% went to just Canada, Mexico, Russia, South Korea, and Japan.
The growth of meat trade depends on the type of meat and USDA says there are different dynamics that control demand.
US Beef enjoys the reputation of a high value product and exports increased steadily until the BSE issue in 2003. Lower quality, grass fed beef is used in processed meats which is a significant import, primarily for hamburger.
US pork exports are a function of cost and concentration of the industry has reduced production costs to the point that pork exports are competitive in many global markets. Currently, Canada supplies many imports of live hogs coming into the US for immediate or later slaughter.
Lamb exports are minimal, and usually of lower quality meats. However, the domestic market consumes high quality lamb produced in the US, along with a substantial amount of imported lamb meat.
Some of the export volume can be traced to the presence of trade agreements, such as the 1988 agreement with Japan that eliminated quotas on US beef. NAFTA expanded US meat access to the Canadian and Mexican markets by reducing tariffs and phasing out other barriers to US red meat.
Another incentive or barrier to foreign demand for US meat is the exchange rate, as well as the exchange rate for US competitors in the global meat markets. For example, prior to 2006 the currencies of Canada, Australia, and New Zealand were fairly stable in relation to the US dollar. Then the Canadian dollar depreciated in value, allowing US consumers to buy more for less and Canadian beef imports were in an uptrend. As the Canadian dollar appreciated in value the past several years the meat trade leveled off.
Pork is another story. US pork imports are primarily from Canada, and to a lesser amount Poland, Denmark and Hungary which are in the European Union currency system. The Euro is tightly controlled, but has strengthened in recent years against the US dollar. The USDA economists say when the dollar recently weakened pork imports became more expensive, but the European changes in the exchange rate may be a “significant determinant in fluctuations in trade of pork products.”
A detriment to meat trade is disease, and the BSE issue eliminated about one billion pounds of US beef that would have been sold abroad. On the other hand, pork exports have expanded in part due to the beef issues, as well as with concerns about Avian influenza in poultry meat.
The USDA economists conclude that expanding global economies will result in a robust income growth that will expand consumer demand. They report that the US is exporting more and importing more as well.
Summary:
The overall growth of US meat exports has approached 3,000%, which have been high value cuts of beef and a variety of pork meat. However, the strong business is dependent upon consumer perceptions of value and prices, staying away from disease issues such as BSE, and food safety concerns.
Posted by Stu Ellis at 12:58 AM | Comments (1) | Permalink
February 9, 2009
How Does Your State Score On Environmental Restrictions On Hog Operations?
As a new federal Environmental Protection Agency begins to examine its policies, will it find that its regulations are more lax or more stringent than current state regulations on large swine operations? They seem to be the lightening rod for agricultural environmental complaints, but how do federal laws compare to state regulations on pork producers, and for that matter, how do major hog states compare to each other?
Over the past several decades there has been a substantial change in the complexion of the pork industry, and producers who were marketing a couple thousand head per year as “mortgage lifters” have given way to large operations that have their own strata of specialization. Along with the transformation has come a variety of regulations, which the January 28 edition of Cornhusker Economics reports as focused around zoning and environmental restrictions.
The Nebraska economists report that the regulations have caused increased expenses, which could not be borne by the smaller producers, yet heavy restrictions in some stations have caused producers to become more concentrated in other states, which lead to the explosive expansion in the North Carolina pork industry.
Federal regulations, which began with the Clean Water Act in 1972, have continued to become more stringent over time. Recent revisions have required Nutrient Management Plans and identified Best Management Practices, which all states must adopt by the end of this month. But many states have also imposed regulations on non-point source pollution. State level regulations have been widely variable, particularly in the top 10 pork production states:
1) Waste Management Plans are required by each of the top ten.
2) Facility Design Approval is required in the entire top ten.
3) Construction and Operation Permits are required by all ten.
4) Mandatory Record Keeping is required in all ten.
5) Odor Abatement Plans are required by all ten
6) Zoning is required in NC, MN, NE, and KS
7) Carcass handling is controlled in all ten states.
8) Hydrogen Sulfide is controlled in MN and IL.
9) Reports on Waste Spillage are required in all ten states.
10) Nutrient Management Plans are required in all ten.
11) Cost Share Programs are offered in all ten.
12) The federal location setback requirement is more restrictive in IA, NC, IL, MO, OK, and KS.
13) The federal manure application setback requirement is more restrictive in IA, IL, IN, and OK.
Based on an index of 2008 requirements, all of the top ten pork producing states either met or surpassed the restrictions set by the federal government, which had a score of 9. States with a score of twelve, included NE, MO, and OH. States with a restriction score of 13 included, IA, MN, IN, OK, and KS. NC and IL were the most restrictive with a score of 14.
The Nebraska researchers make the observation that the environmental regulations have the effect of protecting small hog operations, and any tightening of those regulations will be seen as an effort to save small hog producers. The impact of any regulation is felt in the cost of meeting the regulation for both large and small producers.
Summary:
A wide variety of environmental and zoning regulations are in place both within federal law and within the statutes of the states with the larger volumes of pork production. While many of the states have similar types of regulations, not all states address all of the issues and there is little duplication between states. Regulations are seen as a means to protect the smaller pork operation and any tightening of the regulations will be seen as an initiative in that direction.
Posted by Stu Ellis at 12:24 AM | Comments (0) | Permalink
January 5, 2009
Can Livestock Consume Enough DDGS To Prevent An Adverse Impact On Ethanol?
Cornbelt agriculture has benefited from the ethanol market that will consume an estimated 3.7 billion bushels of corn this marketing year, and has created a premium pricing environment for the corn grower. 2009 will produce an estimated 11 billion gallons of ethanol, enroute to the 2015 mandate of 15 billion gallons. But along with the explosive growth in ethanol has been a similar growth in production of distiller’s dried grains, expected to reach 40 million tons this year. But what is the market for this commodity?
At the typical dry grind corn mill that produces ethanol, the fuel flows into tank trucks and tank cars and the distillers dried grains (DDGS) is shipped out at the other end of the plant to trucks and railcars headed to feed lots. For the ethanol refining industry to be profitable, there must be a market for both ethanol and DDGS. But the question of the potential market size for DDGS is addressed by Purdue economist Frank Dooley.
Dooley and other economists have offered potential market estimates based on maximum amounts of DDGS that can be included in livestock rations, multiplied by the estimated number of head that would potentially be fed DDGS instead of the prime alternative, corn. The consensus of use has focused on dairy cattle consuming 12.7%, all cattle consuming 66.4%, swine consuming 7.3%, and poultry consuming 13.6% of the DDGS that are produced domestically. The various economic studies find that 100% of the DDGS will never find a livestock feeding operation and be consumed, and that the current volume of DDGS being produced should not become burdensome in the near future. Researchers found that not all farms would feed DDGS, and larger operations would be more likely to use it.
The rate of DDGS inclusion in the ration depends largely upon price relationships with other feed, as well as nutrient composition and availability. Interestingly, inclusion rates vary from one economic study to another. University economists and livestock specialists usually have smaller amounts of DDGS included in livestock rations than does the National Corn Growers Association, particularly for dairy cows, swine, and poultry.
Livestock feeding practices have been tracked by USDA’s National Ag Statistics Service, which indicates livestock producers are feeding less than could be fed. Of the 1,276 livestock feeding operations using ethanol co-products:
• Dairy cattle were consuming 61% of the potential.
• Cattle on feed were consuming only 36% of the potential.
• Beef cattle are being fed 55% of the potential
• Hogs were being fed 28% of the potential.
Ten different classes and species of livestock may be markets for DDGS are counted by NASS, but Dooley says, “The growth of the ethanol industry and the resulting availability of DDGS in the Cornbelt may influence state level populations for cattle on feed, dairy cattle, and hogs.”
Dooley says the lack of consumption of DDGS stems from class of livestock and availability, although the expansion of the ethanol industry will resolve the latter issue. However smaller farms may not have the equipment to handle it, shelf life may be limited, and transportation may be an issue. He says 25% to 40% of farms may find it difficult to feed DDGS.
Using the average number of head of livestock per specie, Dooley says a 24 ton truck of DDGS would last 64 days at an average sized dairy and 10 days at an average sized hog operation, all based on differing inclusion rates in the ration. For some operations, spoilage of the DDGS would become an issue. Given a 60 day shelf life, it would take require a dairy operation to have 178 cows and a poultry operation would have to have more than 80,000 pullets to consume the single truckload of DDGS in two months.
Based on the potential consumption, Dooley says 24 million tons of DDGS would have been consumed in 2008, with an upper limit to 55 million tons for the long term expansion potential. At this point, he says dairy farms have nearly reached their peak rate of consumption with 96% market penetration. Swine operations have reached 35% of their potential use, but only 15% of cattle operations are using DDGS to the maximum and less than 10% of poultry operations are at potential consumption.
But ethanol expansion and more DDGS production are occurring daily, and Dooley says, “The amount of DDGS available for consumption will rise sharply from 13.49 million tons in 2007 to 20.62 and 30.03 million tons in 2008 and 2009, respectively. Compared to 2007, this represents around a 50 percent growth rate in both 2008 and 2009.” He says unless DDGS exports expand rapidly, DDGS consumption can only increase if more livestock producers feed it, and they feed it at higher rates in their ration.
Summary:
The expansion of the ethanol industry has increased the amount of DDGS available for livestock feeding operations, and if the feed is not consumed, the ethanol economy will be adversely impacted. The current rate of DDGS production will saturate the dairy and hogs markets by the end of the 2009 and the beef and poultry markets must triple their use of DDGS.
Posted by Stu Ellis at 12:21 AM | Comments (1) | Permalink
December 31, 2008
Hogs: Fewer Numbers, More Exports, Fair Demand, All Mean Potential Profitability.
Pork producers will be glad to see 2008 in their rear view mirror, and got a glimpse of the future with the Quarterly Hogs and Pigs Report released by USDA on Dec. 30. The bottom line: smaller inventories that give rise to the potential for better prices in 2009.
“Retraction” is the word that livestock economists are using to describe the pork industry following months of devastating red ink on balance sheets. Low prices because of expanding herds and high costs because of feed have pinched many producers right out of business. But Iowa State economists John Lawrence and Shane Ellis say the latest USDA estimates contain the news that many producers needed to hear. Their analysis shows that nearly all classifications within the hog industry are on the decline. Total numbers are down 2.2% to 66.7 million head, but the breeding swine inventory is down even more at 2.4%. Market hogs are down 2.1%; all compared to the same report last year.
One of the major statistical drops was the feeder pig inventory, which was down 5%, the result of a reduced domestic pig crop and reduced southbound pigs from Canada. Lawrence and Ellis say, “With farrowing intentions down in the next six months the retraction of the industry continues.”
As an indication of the financial bleeding, Lawrence and Ellis say the final quarter of the year recorded average monthly losses of $21 per head for farrow to finish operators, with December losses at $40 per head. That would be the largest since the 1998 financial meltdown in the pork industry.
Looking ahead, the Iowa State economists say hog prices will be “slightly higher” in the coming year, but the declining cost of corn and other feeds will provide more of an opportunity for a few months of profitability. Their break-even estimate is for $53 per cwt for live hogs on farrow to finish farms, and based on current grain prices.
In addition to the smaller inventory, there are other dynamics at work in the pork market.
• Declines in exports would shift more meat to the domestic meat case. Exports had consumed 21% of production, but the economic upheaval puts a question mark on foreign demand.
• Prices of beef and poultry and consumer demand are generally predictable, and pork prices are expected to be favorable, since beef and poultry supplies will be lower.
• Sow slaughter has decreased, which indicates the contraction is slowing down. It had exceeded 5% earlier in the year, but has declined in the last quarter.
Lawrence and Ellis underscore the importance of the export trade to the pork economy, with the anecdote about Mexico briefly refusing to buy pork from 30 US packing plants. Twenty have been re-certified and 5 more are expected to be re-certified. Although the Christmas incident had little impact on overall trade, it points to the potential for a sudden drop in exports that would impact the 21% of hogs ending up on foreign dinner tables. For the first 10 months of the year, over 4 billion pounds of pork was exported and that is a 60% increase from 2007. Lawrence and Ellis say exports have become a major factor in the pork market with a strong positive influence on prices. A loss of that dynamic would depress pork prices, since 2007 only saw 8% of pork exported.
Summary:
The pork herd continues to get smaller, with a more than 2% decline in numbers for the final quarter of 2008. The latest USDA report indicates a drop in nearly all categories of hogs, including breeding stock. While sow slaughter has also increased, the rate has slowed. The smaller number of hogs indicates a potential toward profitability in 2009, with the help of lower feed prices. For the average farrow to finish producer, the break-even point is expected to be near $53/cwt for live hogs. One of the major positive influences is the strong foreign demand for US pork.
Posted by Stu Ellis at 12:11 AM | Comments (0) | Permalink
December 8, 2008
Will 2009 Bring Profitability To The Livestock Producer?
The supply of meat in the grocery store is being trimmed, a fundamental long sought by the livestock industry because of the potential for a return to profitability. The declines are being seen in the beef, pork, and poultry sections of the meat counter. But with the consumer cutting back on expenditures, how will the livestock producer be affected?
The “big picture” indicates that supplies of meat are beginning to be less than the same month a year earlier. This year over year reduction will remain throughout 2009, says Iowa State livestock economist John Lawrence in the December issue of the Iowa Farm Outlook. But Lawrence says the profitability for a livestock producer will not only be the result of the meat supply, but also domestic consumer demand and whether the stronger dollar will drive off foreign customers.
Poultry is 40% of US meat production, and Lawrence says production at all points of measurement is less than the prior reporting period. What began with a 6.3% increase in chicken production at the first of the year compared to 2007 has faded to a point 4.2% lower than late in 2007. Turkey is on a similar trend. And USDA’s forecast is for a 3-4% decline in 2009 production compared to 2008. High feed costs hit hard at poultry producers and Pilgrim’s Pride is on the verge of bankruptcy as a result. But the higher value of the dollar has hurt export business and Russia, which took 32% of US poultry exports last year plans to reduce its purchase, in part because of the exchange rate.
Pork production was supposed to remain above 2007 production through the end of 2008, but it slipped below comparable months beginning in October. Lawrence says the early decline in production started the trend that should continue through the fall of 2009. A decline in hogs from Canada has also benefited the US market, but instead of the stronger dollar pulling in more hogs, Lawrence attributes the reduction to Mandatory Country of Origin Labeling (MCOOL). He says Morrell and Farmland will buy only US hogs, and discount prices will likely be offered for Canadian hogs which may reduce the imports. Lawrence says there may be some pricing variations because of MCOOL, “It is important to recognize that unless MCOOL results in lower total supplies or increased demand, prices are not likely to change in the long run. In the short run price differences will probably exist as packers acquire the hogs they want.” However, exported hogs and pork are 66% more than 2007, despite the stronger dollar and weaker global demand. Lawrence believes hog prices have seen their seasonal low, and should increase 25% by June, with current hedging opportunities that should be profitable. Hog futures and lower feed prices point to profitability from April to December 2009.
Increased cow slaughter points to lower beef production in the future, with current steer and heifer slaughter equal to 2007 rates. In fact, beef cow slaughter is 21% higher than last year, meaning a smaller calf crop and fewer head for slaughter in 2009 and 2010. Beef supplies should decline for the first six months of 2009, which Lawrence says means higher prices. The number of cattle on feed has been lower than 2007 since mid-year. In addition to higher feed prices, pasture rental rates have doubled since 2003 and hay prices are substantially higher, all of which reduce profitability. Lawrence says demand is a concern because the recession has curtailed restaurant traffic and demand for food service products. The stronger value of the dollar means beef exports to South Korea and Mexico will decline and beef imports will increase.
John Lawrence expects lower livestock production to support prices in 2009, with cattle and hog prices averaging higher in the coming year than in 2008. However, the economy will dampen demand for higher value cuts of meat and the strength of the dollar will dampen export demand for meats. He says a reduction of exports could shift more meat to the domestic market, increasing the supply and lowering prices.
Summary:
The livestock industry, which has recorded financial losses due to high production costs and abundant supplies, has begun to reduce beef, pork, and poultry production. Herd liquidation across the livestock sector is expected to help producers return to profitability during 2009. Lower feed prices will help most producers, but record exports may soften as a result of the stronger dollar.
Posted by Stu Ellis at 12:00 AM | Comments (0) | Permalink
November 11, 2008
Have You Fed DDGS, And If So, Have Loads Varied In Quality?
Many livestock producers have found distillers’ dried grains (DDGS) to be an economical replacement for higher priced corn. But many of those have also found variability in the nutritional quality of DDGS, not only from one ethanol plant to another, but also variability from one load of DDGS to another from the same plant. Quality standards would not only help livestock producers with pricing, but also help managers of ethanol plants create their own quality controls for premium pricing.
USDA has established precise grain quality standards, helping merchandisers and traders know exactly what is being bought and sold. The same could happen with one of the fastest growing livestock feeds suggests Jacinto Fabiosa of Iowa State University. He is co-director of the Food and Agricultural Policy Research Institute (FAPRI). His research on the quality of nutritional variations of DDGS from 40 different ethanol plants presents challenges to the users. Fabiosa says corn used to have a 58% share of the feed market, but that has declined 11% due to the entry of DDGS into the market.
Over time, researchers have found that DDGS will vary in fat content from 4.3% to 18.7%, vary in crude protein content from 25.9% to 36.3%, Lysine will vary 11.2% and even will vary 4.6% within the DDGS output from an individual plant. Part of the reason may be the variation in grain entering the ethanol plant, which could be a blend of corn and other feed grains. Other potential reasons for variations in nutritional content stem from the alternatives used in the processing of the grain into ethanol.
Fabiosa says it is important for feed compounders to account for the variability. Nutrients could be oversupplied in a formulation upsetting the digestive balance within an animal. Subsequently, nutrients could be inadequate and negatively impact the growth and performance of the animal. Ideally, the DDGS would come from only one plant, but even then variability will occur. Using the DDGS with the lowest feed ration cost, the other 39 samples ranged from two-tenths of a cent more expensive per 100 lbs of feed to 42 cents more expensive per 100 lbs of feed.
Fabiosa said livestock producers could realize that some animals were being well-fed on the least cost, and others were getting short-changed on nutrition at a higher cost. He says, “These results strongly suggest that not all DDGS are created equal….Without a pricing mechanism that can reflect product quality differentials, above-average (in terms of nutrient profile quality) DDGS products will not gain any premium, and below-average DDGS products will not be discounted, so there is no incentive to improve quality.” Fabiosa says the yardstick that might be used to measure the quality of DDGS products could be Internet-based so both users and suppliers can estimate the value of a specific lot of DDGS.
The research also looked at the variability of nutrients and the effect on feed cost savings. An ethanol plant, wanting to optimize the quality of its DDGS product, would be able to place a value on metabolizable energy, crude protein, 5 amino acids and eight minerals. Subsequently, the feed compounder would know the nutritional component content and be able to balance the feed, from either one plant, or a group of plants to supply a homogenous DDGS product to livestock producers. The ultimate value of this process is to supply a livestock operator, such as a pork producer, with a DDGS product that has the optimum nutritional components for feeding the maximum amount of DDGS and benefiting from the least cost for the ration. Fabiosa works through an example that shows a potential $7.51 per cwt savings. That can either be realized by the feed compounder, the livestock producer, or both. He says that amount of savings would represent a loss of $1.11 million per year for the ethanol plant, if it were not selling DDGS based on nutritional content.
One of the big questions is the cost of the analysis to determine the nutritional content, and Fabiosa says that would be about $5 per ton, and he rhetorically asks if it would pay to test DDGS. He says that depends if the actual level of the nutrient from the test is high enough to produce a feed cost savings of more than $5 per ton.
Summary:
The popularity of DDGS as a livestock feed has rapidly expanded, but the nutritional content of the DDGS can vary widely, not only from plant to plant, but within a single plant. Ethanol plants which are producing a high value DDGS product could be pricing it based on its quality, and increasing plant revenues. Feed compounders could realize significant savings with the information about nutritional components and price their product based on its quality.
Posted by Stu Ellis at 12:41 AM | Comments (1) | Permalink
October 20, 2008
Profitability In The Beef Market: Are We There Yet?
Juggling tennis balls or beanbags is easy compared to juggling a variety of objects which are not uniform in size, shape, or weight. But that is the current challenge in the cattle market as livestock operators evaluate a variety of fundamentals which are all pushing and pulling on prices. A month ago cattle feeders were still faced with high feed prices, but a lot has changed in the past several weeks.
The fundamentals in the cattle market are nearly all in various stages of transition and going in different directions. But USDA’s latest Livestock Outlook helps with the understanding necessary to make needed adjustments in marketing plans.
The value of the US dollar has been at relative low levels for a number of months, which has helped with the beef export trade, which reached 221 million pounds in August when Korea recorded a full month of US beef imports along with some Russian business. Total exports were up 33% as a result of the more liberal trade and the currency rate.
But the value of the dollar has been increasing in the wake of the global financial upheaval, and that will create a pair of negative fundamentals. The stronger dollar will slowly dampen exports of US beef and slowly strengthen imports of foreign livestock and meat products, which have been at reduced levels lately. Imported beef is down 18% from last year, but USDA expects it to rise in 2009 to 7% more than 2008 levels.
However, when the value of the dollar is compared to the currency in our foreign markets, there are still some advantages for our export market. US beef in Japan is still relatively inexpensive, and demand is rising in Korea, despite the currency issue.
At the same time currency issues are impacting the beef market the cattle herd continues to decrease and domestic cow slaughter continues at a high rate, continuing the downtrend in herd numbers in future months. Calf slaughter, both for dairy calves and beef calves, is also at a high rate, in part due to the cost of both grain and forage in some areas.
Feed costs are causing some producers to put calves on feed later. USDA’s analysis indicates May of 2007 was the last profitable month, and as late as September 2008, there was a $10/cwt loss. Because of the shorter periods on feed, the market is expecting marketings to be more bunched, and that causes price volatility.
As corn harvest begins, the prospect is for increased supplies of livestock feed, according to USDA’s latest Feed Outlook USDA has increased its estimates for acreage, yield, and production from last month, causing some decline in grain prices. Livestock feeders, who have been competing with the ethanol and export industries for grain, will see more corn available for cattle feed as exports hold steady and ethanol production declines. The farmgate price for corn was lowered 80 cents per bushel from the September to October crop reports. Hay, sorghum, and barley production are up as well.
While agricultural credit has been minimally impacted by the global financial problems, USDA reports that some banks are requiring higher levels of equity in feeder operations for lending. That will have a negative impact on some operations, and some may be forced into higher interest financing or suspend operations. Reduced profitability or fewer operating feedlots will also be dynamics impacting the market.
The beef market is in a seasonal decline with product values lower due to slower demand from the restaurant hotel trade and increasing competition from pork and poultry.
Summary:
The cattle market is being driven by a large number of different fundamentals, all working at odds with each other. The increasing value of the dollar will dampen exports, but not to all countries, and will allow a small increase in imports. Feed supplies are increasing and costs are dropping. The cattle herd continues to decline, with cow slaughter increasing along with calf slaughter. Feeder calves are being kept on pasture longer in an effort to reduce feed costs, but that can cause some volatility in market prices. Profitability is still not here yet, but may be getting closer.
Posted by Stu Ellis at 12:38 AM | Comments (1) | Permalink
October 1, 2008
COOL: Ready Or Not, It Is Here!
COOL has arrived, after 6 years of debate over implementation of the 2002 Farm Bill, and more than 10 years of debate over whether or not to have mandatory country of origin labeling on food products. September 30 starts the process, although the USDA says there will be a six month grace period for affected livestock producers and sellers to learn the requirements without fear of prosecution. So what requirements should be learned in the next six months?
Hog and cattle producers can watch an Internet based presentation from Iowa State University. If technical issues will not allow you to view that, the Iowa Beef Center provides a numerous other resources.
Country of origin labeling (COOL) initially became law in 2002, but implementation was delayed for many commodities covered by the legislation. It was re-adopted in the 2008 Farm Bill and USDA developed the regulations. In addition to fruits, vegetables, and nuts, COOL covers muscle cuts of beef, pork, lamb, chicken, and goat meat, as well as ground meats, and both wild and farm-raised fish. Exempt are processed meats and food products, and products produced before Sept. 30. Although there is a grace period, retailers are being urged to adopt the program immediately. Since the retailer is responsible for labeling the product, they can require suppliers and their suppliers to provide information on the origin of the product, and that goes all the way back to the farmgate.
Any animal that is born, raised, and slaughtered in the US would be a “product of the US;” however ground beef could come from several geographical sources, and would be labeled as such. To verify the origin at the demand of the retailer, the meat packer must have legal documentation, and will require a producer to provide satisfactory paperwork. Identification for individual animals is not required, but producers may find that to be easier to handle. Also, paperwork must be kept for 1 year from the date of the transaction. Any animal born or imported before July 15, 2008 is considered US origin.
The primary paperwork that producers will likely handle is an affidavit, which is a legal document that, when signed, certifies the authenticity of the information. Anyone signing an affidavit is required to have first hand knowledge of the origin of the animal. Along with the legal requirements come verification audits, which can be conducted to trace an animal. Acceptable papers which can be used in an audit include: birth records, receiving records, purchase records, animal health papers, sales receipts, inventory documents, feeding records, segregation plans, branding records, breeding stock information, etc. To comply with the requirements, producers will have to be able to trace animal movement one step back and one step forward.
The affidavit does not have to be written by your attorney, since a variety of them are available without charge. They only have to be completed and either kept on file or submitted to a livestock purchaser when requested.
Iowa Beef Association affidavit
National Cattlemen’s Beef Association affidavit
Chicago Mercantile Exchange affidavit
USDA’s COOL website
Within the USDA’s COOL website, a lengthy question and answer section addresses several issues that will be pertinent to a livestock producer about the affidavit process:
1) It should contain “Evidence that identifies the animal(s) unique to a transaction can include a tag ID system, information such as the type and sex of the animal(s), number of head involved, the date of the transaction, and the name of the buyer.”
2) When an animal may be transferred from one producer to another, such as a farrowing operation to a feeder pig finisher, the finisher can rely upon the affidavit from the farrowing operation.
3) There are also “continuous affidavits” that can follow the animal until cancelled.
Summary:
The country of origin labeling system is now being implemented by USDA to indicate the national origin of meats, fruits, vegetables, sea foods and other non-processed products. The Cornbelt livestock operator will have an integral involvement in the process by certifying the US origin of livestock that will eventually be slaughtered. Most of the certification process will be accomplished through legal documents that can be transferred between buyer and seller and remain with the animal.
Posted by Stu Ellis at 12:18 AM | Comments (0) | Permalink
September 30, 2008
Would You Barter Corn For Manure To Cut Your Fertilizer Cost?
With commercial fertilizer prices soaring, some corn growers may consider bartering their corn for manure from the neighboring hog farm they fought against locating there some months back. Manure is “the other fertilizer” and its value has increased as prices for N, P, & K have doubled in price over the past several years. If you have a source of manure in the neighborhood, that livestock producer may become your best friend.
Liquid swine manure used to be a commodity that had more cost than value, but with increased value of its components, the attitude toward manure has changed. That is the contention of Minnesota Extension economist William Lazarus and Extension specialists Robert Koehler and Mindy Spiehs in their research on the changing economics for manure. They say, “The increasing price of commercial fertilizer has heightened interest in the use of livestock manure for supplying crop nutrients and has significantly increased the value of manure as a nutrient source.” The first step is determining the value of the manure.
The basic challenge is to relate the manure components to the value of the commercial fertilizer they would replace, and the researchers provide a worksheet to accomplish that. Unfortunately, the manure is going to have a different ratio of elements than the dry bulk fertilizer you had spread on the field last year. While the greatest impact will be in the first year, there will be some carryover benefits to the second year, and even some savings on application and benefits related to tillage and weed control. The key to success according to the Minnesota specialists is to maximize nutrient utilization efficiency, by not wasting available nutrients and only placing a value on the nutrients that will be used by the crop as well as not placing a value on the nutrients which a soil test indicates will not be required.
Expectations may be that manure may be applied at concentrations less than what is needed, with commercial fertilizer blended to achieve the target of a soil test. Other choices may be an application at the maximum phosphate rate, with nitrogen and potash supplied from a commercial dealer. Application costs will be higher per acre, when lower rates are applied.
The Minnesota researchers calculated the economic benefits and published them in their research, however, readily acknowledge that commercial fertilizer prices have substantially changed since the research began, along with the value of the grain being produced on the land where the manure was applied. Both of those factors will change the economic outcome.
Economic tests were taken on 47 sites over a three year period where liquid swine manure was being applied. Nitrogen averaged 43 lbs per 1,000 gallons and phosphate averaged 18 lbs, but there were wide variations. Applications were made primarily to corn ground, but also to beans and alfalfa fields, and some with varying crop rotations. From 2005 to 2007 the application rate declined from 5,723 gallons per acre to 4,975 gallons per acre, with costs from 1 cent to 1.28 cents per gallon.
Based on 2008 prices for commercial fertilizer, the Minnesota researchers calculated a per acre manure value of $54 in 2006 and $44 in 2007, with the best case scenario at a $101 per acre manure contribution over the three years of application.
Summary:
Manure has long been used as a fertilizer for crops needing N, P, & K, but erratic nutrient ratios caused it to give way to commercial fertilizers. However, the recent doubling of fertilizer costs has caused some farmers with available supplies of livestock manure to consider using it to reduce the cost of commercial fertilizer. Research has demonstrated the success of doing that, and potentially saving substantial investments in fertilizer costs.
Posted by Stu Ellis at 12:47 AM | Comments (0) | Permalink
September 29, 2008
Lower Feed Costs And Increased Feed Value May Be Available From New Generation DDGS.
Ethanol-blended fuel at the gas pump is sold as a higher octane motor fuel, and now some of the distillers’ grain co-products from ethanol refining are being sold as a higher value livestock feed that could have marked benefits for pork and beef producers who feed it. Just like burning super regular in your engine, feeding a “super regular” DDGS feed to your livestock may provide better performance that will pay off at market time.
The advent of ethanol production throughout the Cornbelt has not only increased the demand and value of corn, but also provided a feed alternative for the livestock industry. Distillers’ Dried Grains with Solubles (DDGS) have been sold at a lower price than corn, but have had their limitation in the amount than can be added to a feed ration. That provided some help over the past two years as the price of corn doubled, and the price of soybean meal nearly doubled. Iowa State University economist Jacinto Fabiosa directs the research at the Food and Agricultural Policy Research Institute (FAPRI) at the Center for Agricultural and Rural Development. He says the use of DDGS is governed by the proportion livestock feeders use, which depends on pricing, as well as the maximum amount an animal can digest, and how much corn and soybean meal can be replaced by DDGS. His analysis focuses on the latter, but evaluates the nutrient content in traditional DDGS versus the nutrient content in a new generation of DDGS called “Dakota Gold.” The new product is priced 2.11% above the traditional DDGS.
The benefit of the new generation DDGS has 39.9% higher metabolizable energy, 5.7% more crude protein, and 19-58% higher specific amino acids, which are more digestible than in the traditional DDGS product. Compared to a corn-soybean meal ration for hogs, Fabiosa says the inclusion of traditional DDGS in the ration is $0.29 per cwt of feed lower than the base ration or 2.6% which would save $2.17 per head in feed costs.
Use of the new generation DDGS product, which was included in the swine ration at a maximum 20% rate, would replace 18.54 lbs of corn and 4.59 lbs of soybean meal in a 100 lb. feed ration. The cost is $1.08 lower than the basic ration or 9.88% which saves $8.13 per head in a feeder-finishing operation. Fabiosa says there are a couple limiting factors, compared to the base diet of corn and soybean meal. He says there is a surplus of the amino acid threonine and available phosphorus, but a need for added lysine. Based on the content of the new generation DDGS, 20 lbs of it would replace 18.54 lbs of corn and 4.59 lbs of soybean meal.
Fabiosa says the price of DDGS will parallel the price of the feed ingredient that it primarily replaces, either corn or soybean meal, and he says the results of his analysis is that it will track both of them. But he says DDGS prices will be based on corn prices until the new generation DDGS product is more widely available, and then it will be more closely priced to soybean meal. Currently, a traditional DDGS product will save pork producers about $2.17 per head in feed costs, and $8.06 per head if the new generation DDGS product is purchased. One additional benefit of the new generation DDGS product is an unwinding of the debate over the food, feed, and fuel trade offs that go along with biofuel production.
Summary:
A higher quality of distillers’ dried grains not only contains more beneficial nutrients for livestock rations, but may be more digestible than traditional DDGS products. Of great importance is the added savings in feed costs for pork producers that can occur with the use of the new generation of DDGS, which could exceed $8 per head.
Posted by Stu Ellis at 12:39 AM | Comments (0) | Permalink
September 24, 2008
Profitability For Livestock Producers: Is There Any Hope?
High input prices, marginal to poor market prices, distant prospects for price improvement, all paint a drab picture of the livestock industry. Pork and beef producers have tried to remain afloat while production cycles put more meat into the market and spoil the prospects for profitability. With the seasonal shifts in livestock production and feed availability, let’s take a look at the near term economics for the US meat production industry.
Beef
The beef production cycle had just been expanding when high feed prices hit, and following a static period in production rates, higher slaughter rates for beef cows and fewer heifers being retained have marked a downtrend in the beef herd. And USDA economists say that points to the likelihood for higher cattle prices in 2009. USDA’s monthly Livestock Outlook indicates that pressure may ease a bit on producers. Part of the help came from the hurricanes that brought moisture to pastures and fields where winter wheat could be grazed. Recent rains mean feeder calves can be kept on pasture longer than expected and that will keep costs down. USDA prices have stayed in the upper $90 range, despite lower values for meat. However, selling prices remain below break-even values. One glimmer of hope is the growing beef export market, helped by the lower dollar and higher overseas demand.
Dairy
The dairy herd continues to grow from the high milk prices of the past several years, but a slight contraction is expected by USDA next year, resulting from high feed costs and low milk prices. While overall milk production will be slightly higher next year, the increased production per cow will be relatively small, and economists say that indicates larger dairies are lowering their breakeven points. Demand growth is slowing for dairy products because the slowing economy has curtailed restaurant needs for butter and cheese. Large export demand ignited the dairy market two years ago, but that has slowed. USDA believes the slower growth in milk production should limit declines in prices.
Poultry
Broiler meat production is up slightly, but from heavier birds and not increased inventory. However 2009 production is expected less than 2008. USDA says chick placements are sharply lower than year ago levels, and the growth in numbers of broilers slaughtered has been from very heavy birds. Those trends point to reduced production. Broiler integrators are looking at a slowing demand for meat and higher feed prices. Exports, however, are up 13% over last year, but exports to China are expected to slow with the conclusion of the Olympics. Turkey production is up 9% from year ago levels, due to the increased number of birds slaughtered, but prospects are down for 2009 due to weaker demand and higher feed costs.
Pork
The pork market is a picture of strong export demand, causing strength in hog prices and keeping retail pork prices up. Despite lower domestic consumption, prices remain competitively priced with ground beef and chicken. July exports were 86% above July of 2007 with 23% of US pork being exported. Helping the pork economy is a 17% decline in imports because of the low dollar value. Similarly live hogs from Canada are down 5% from year ago levels.
Feed Outlook
Supplies of feed grains will be down for the coming year, the function of dry weather in the Cornbelt during August. USDA’s Monthly Feed Outlook says along with the lower supply is a reduced demand for domestic feed grains. The index of grain-consuming animal units is forecast by USDA to be down by 1.51 million over last year, spread over all animal groups. Additionally, grain consumed for feed will be down, but will be replaced, in part, by distillers’ grains. USDA is forecasting the season average corn price for 2008 corn at $5-$6 per bushel and sorghum at $4.45-$5.45 per bushel, with barley and oat prices unchanged from last year.
Summary:
Challenges to profitability remain ahead for US livestock producers. While feed costs may be slowly stabilizing, domestic demand is softening, which will curtail price strength for many meat products. Surprisingly, prices will remain relatively strong, helped by the low value of the dollar that will continue to spur export demand, particularly for pork. Beef production is beginning to decline, and with less beef and poultry on the market, consumer prices will not fall quite as fast as if production had remained at high levels.
Posted by Stu Ellis at 12:08 AM | Comments (2) | Permalink
September 18, 2008
Adjust Your Variables In Your Swine Operation To Move Toward Profitability.
Pork producers who have been operating in the red for some months may be grabbing at any idea that comes around to reduce their expenses or increase their revenue. Within the pork industry many different practices have been developed in recent years, some of which may provide additional margin, but others may not. So what experiments are worth trying in today’s pork economy?
Feed is certainly the largest expense in livestock production, and many aspects of pork production revolve around feed. Which of those aspects will have an impact to the point of being worthwhile, but not sacrifice animal performance. The proceedings of the Midwest Swine Nutrition Conference offer a number of feeding practices that were analyzed by Richard Coffey of the University of Kentucky. Knowing that it has become difficult for pork producers to remain profitable, Coffey says there may not be a “silver bullet” for everyone, but several options should be on the table for consideration.
1. While nutrient requirements are the basic minimums, nutrient allowances are considered the rations over and above the minimums. During times of high feed and mineral costs, examine the nutrient levels to ensure against excess that means paying too much for feed.
2. There is a considerable difference in lean gain potential between a fast growing animal with a high amino acid need and a slow growing fat pig. But it may be difficult to adjust without knowing the pig’s genetic capability.
3. Pigs with different genes can vary their feed intake 20% - 30%, influenced in part by temperature, energy density of the feed, its freshness, and the presence of mycotoxins.
4. Phase feeding will allow a producer to create a feed budget that may better accommodate the needs of the pig and the financial needs of the operation. This will allow differences among operations, animal genetics, facilities, and overall management to be addressed.
5. Split-sex feeding will allow gilts to demonstrate more efficiency in feeding, but so far less than 30% of producers utilize the practice.
6. As feed costs climb, more attention may be given to the removal of expensive nutrients for a period of time before slaughter. Vitamin pre-mixes and similar nutrients can be withdrawn in the final few weeks of feeding without affecting performance, but with a financial savings.
7. While smaller particles of feed are better absorbed in the pigs digestive system for greater feed efficiency, there is a higher cost of milling involved. Research has shown that particles should be 600-800 microns, and 3-8% of feed that was more coarsely ground would be wasted.
8. Pelleting feed improves performance, but does increase the cost of the diet, so that becomes an issue that needs on-farm consideration.
9. On-farm feed grinding and mixing can save money and ensure that diets are blended properly, but a slight mistake that throws off nutrient levels even by 5% can sacrifice as much as $5 per head in performance.
10. Alternative ingredients can provide a savings in ration costs; but is it suitable for swine, does it include any toxins, and does its inclusion actually save money?
11. An optimal market weight can become critical to profitability. Packers may want a heavier hog, but will feed costs justify the additional days on feed. The most profitable weight is that at which the cost of adding one more pound is equal to the revenue from that pound.
12. Wasted feed can have a negative impact on profitability, and that can be controlled from the delivery process to feeder design and feeder adjustment.
Summary:
High feed and fuel prices have pushed pork profitability into the red for most producers, but with the dozens of variables that can be adjusted in any given swine feeding operation, minute adjustments to many may provide a greater opportunity to reduce cost and increase revenue. However, each should be adjusted with the consideration that it will not affect performance of the hog.
Posted by Stu Ellis at 12:23 AM | Comments (0) | Permalink
September 10, 2008
Prevention Of BSE, Yes, But Has The Loss Of Animal Protein In Livestock Feed Been Worth The Risk?
When the 9/11 terrorists climbed aboard US airplanes, the ease and enjoyment of traveling changed forever. Federal, state, and local policies about citizen identification would never again be the same. Responses to a single event have long tentacles that reach many facets of society, and just like the 9/11 event, the advent of BSE or mad cow disease in the US changed the livestock feed industry forever.
USDA economist Kenneth Mathews, Jr., says policies are designed to prevent future animal disease outbreaks, but the outcome will have economic impacts that affect producers, processors, and consumers; and the long term result will be much longer lasting that the immediate economic effects of the disease. In his analysis of the BSE impact on the use of animal protein in livestock feed, Mathews says the impact spread far beyond the cattle and beef industries, “Affected industries include the cosmetic and pharmaceutical industries (both of which use byproducts, such as gelatin and collagen), feed manufacturing industries, and numerous service and manu¬facturing industries (which use other animal byproducts, such as enzymes, triglycerides, and other compounds in the manufacture of fatty acids, paints, varnishes, rubber goods, plastics, and lubricants).”
Bovine Spongiform Encephalopathy, which affects animals, and its human variant form, Creutzfeldt-Jacob Disease, quickly awakened the livestock industry in 1986 and researchers quickly identified the spread of the disease from the use of animal protein and bone meal in livestock feeds. While the disease ravaged the British livestock industry which was forced to burn the carcasses of hundreds of thousands of animals, only a handful of cases have been found in the US, mostly originating from other countries. Early on, the USDA and Food and Drug Administration banned the use of meats and bone meal (MBM) in livestock feeds. MBM had contributed an alternative protein to livestock feeding, and it continues to be fed to non-ruminants such as swine and poultry. The protein element in a ruminant ration is primarily from vegetable sources, such as soybean meal, DDGS, and other protein meal seeds.
When the US banned the use of animal proteins in ruminant rations in 1997, only small amounts were being fed because of the high costs. In Europe, where there is an inadequate supply of soybean meal, a greater amount of MBM was being fed until 2001. Economists determined that “the 2001 EU ban against MBM in any animal feed would cause the EU to import an additional 1.5 million more tons of soymeal per year to replace meat and bone meal in livestock feed rations.”
Economist Mathews says following the US ban in 1997, MBM declined in price from $431 per ton to $187 per ton in March 1999. The loss of a product to sell was estimated to have cost the rendering industry between $24 and $48 million. Since, USDA has calculated a $53 million impact on private industry, $171 million in lost value of products to the rendering industry, and a gain of $163 million to producers of non-ruminant animals from lower feed costs. Then prior to the FDA’s new rules in 2004, prices recovered to nearly $400 per ton; but fell again to $187 after the new regulations were issued. Those required slaughter houses to find new uses or disposal for the nerve tissues banned from consumption. That lead to a reduction in revenue for producers and processors of beef products and by-products. Mathews says if all MBM were banned from livestock feeds, prices for other protein feeds would increase by 100%.
Currently, very little MBM is being used in any livestock feed. While the original 1997 ban on MBM reduced availability of protein feeds by 13%, MBM use only constitutes about 8% of protein meals currently, so a complete ban would not likely result in a 100% rise in costs for animal protein feed users. Mathews estimates the increased costs for a beef steer to be as high as $23.61, but when the final rules were released earlier this year, the cost was expected to be lower.
In addition to feed costs, other impacts of the rule include charges by renderers for picking up carcasses, and a nearly $20 per head cost of disposal of unusable carcasses from animals that die at or approaching the slaughter plant.
Mathews reminds not to forget the benefits of the ban on MBM use, which is a reduced incidence of BSE and its human variant form. However he says there have only been some marginal benefits and questioning the trade off is a question that is asked more frequently.
Summary:
BSE or mad cow disease caused government policy makers to ban the use of animal proteins and bone meal in the rations of ruminant animals, but they can remain as part of a non-ruminant ratio. Increasing restrictions of MBM has caused higher costs of animal feed with the loss of a competitor, and the loss of products made from MBM by many industries.
Posted by Stu Ellis at 12:57 AM | Comments (0) | Permalink
September 3, 2008
The Export Market Is Hungry For All US Meats.
Last Wednesday, August 27, you only got part of the story about the phenomenal impact that exports have on US livestock prices. Niche Markets, The Olympics, And The US Pig indicated that pork exports are more important than corn exports at the current time. But pork is not the only US livestock commodity in global demand, and the whole story gets the spotlight today.
The pork, poultry, and dairy sectors of US agriculture have benefited from expansion of exports, primarily resulting from the currency exchange rates. Iowa State University livestock economist John Lawrence says this added marketing opportunity has allowed producers to grow their business beyond what would be possible if the US consumer was the only market. In his monthly newsletter, Lawrence says meats, dairy, and poultry products totaled $7.87 billion for the first six months of the year. Currently, the US imports more beef than it exports, but that could change by the end of 2008.
Pork has a nearly $1.5 billion net export surplus for the first half of the year, compared to nearly $1.6 billion in a comparable period last year. Poultry had a $3.6 billion trade surplus in 2007 and carries a $2.1 surplus in 2008 so far. Dairy products are $633 million ahead for 2008, compared to $156 million last year. Including a small trade surplus for eggs, livestock product exports exceed imports by well over $4 billion in value for the first half of the year both this and last year says Lawrence.
The Iowa State economist also reminds farmers that “if they live by the sword, they die by the sword,” in that exposure carries increased risk if trade is disrupted for some reason. Beef export trade was abundant in late 2003 when a Canadian cow with BSE caused a nearly complete halt in beef exports from the US. Cattle prices were $112 before and $75 after that incident, as a result of loss of export demand. A similar drop in poultry exports to Russia occurred when export channels backed up and meat prices were depressed in early 2002.
Current market dynamics include the fact that 63% of US beef exports go to Canada and Mexico; China is an emerging market for US pork; and Russia announced August 27 that it was lowering its imports for pork and poultry which will have a negative impact on US meat prices. South Korea has been a problem for the US beef industry, after once being a large importer, it has frustrated exporters and trade negotiators working to restore that status following the Mad Cow issues.
The export market has outbid the domestic consumer market so far this year, resulting in less beef and pork finding its way to grocery stores, along with broiler meat equal to 2007, and only small increases in turkey compared to last year being available for the domestic market. The issue here is the value of the US dollar, and since it is relatively cheap compared to many other international currencies, those countries are eating up US meats. Lawrence says, “In July 2008 compared to January 2005 the US dollar was approximately 15% cheaper in Canada, Russia, China, and Europe, 10% less in Mexico and 5% lower in South Korea.” That means it only takes 683 Chinese Renminbi to buy a $100 box of US meat compared to 827 Renminbi in January of 2005.
US livestock producers have benefited from the economics in the marketplace that have expanded trade. However, the risks are greater because trade issues can change without much warning and little can be done about it. Lawrence says those include policy changes by trading partners, governmental disagreements that disrupt the flow of meat, disease concerns and export rules, currency values, and energy prices. Lawrence says livestock producers should recognize the benefits, but have risk management protection in place.
Summary:
While a large amount of pork goes into the export market to help support pork prices, the same is true of all other livestock products currently except for beef, and that may change by the end of the year. Primarily, the value of the dollar has allowed many foreign buyers to outbid US domestic markets for meat, just as grain markets have benefited. However, export markets can be fickle and disappear as quickly as they appear.
Posted by Stu Ellis at 12:38 AM | Comments (0) | Permalink
August 27, 2008
Niche Markets, The Olympics, And The US Pig.
Thousands of farmers who have tired of producing a commodity for minimal return and ventured into specialty crop production have found a niche market to fill. Surprisingly, pork producers across the Cornbelt have found a niche market for their product and may not even realize it. Today’s pork producers are benefiting from a surprising development.
Pork producers are well aware that record high slaughter rates and record high corn prices have collided in a sea of red ink on their balance sheet. But several prominent livestock economists have cited a significant increase in pork exports that has pointed toward a recovery of profitability. Purdue economist Chris Hurt in his weekly newsletter says cheap US pork, subsidized by producer losses and the weak dollar have made the pork export market more important than the corn export market. To prove his point, Hurt says 19% of US corn was exported last year, and 16% will be exported next year. Pork producers exported 23% of their production last year and 22% next year.
Missouri livestock economists Glenn Grimes and Ron Plain, in their latest newsletter, say, “For the first six months of 2008, pork exports are up 193% from the same months of 2003 or a growth of nearly 39% annually on average.
The interesting phenomenon pointed out by Hurt is that US pork production continues to increase, but less pork is available for the domestic consumer market. He says production has increased 9% since the first of the year, but there is 6% less pork available at the meat counter. It is being shipped abroad with the help of the exchange rate that makes US commodities relatively cheap. Likely to continue is the decreasing availability of pork. Hurt says supplies will be down 8% in the current quarter and 9% in the next quarter, with 2-3% less pork available in 2009, supplies will be tight for the US consumer over the next 18 months.
What does this say about pork values? Grimes and Plain say, “In the first six months of 2008, pork exports in value have amounted to $35.14 per hog slaughtered. Pork variety meat exports added another $5.10 per hog slaughtered. Total exports amounted to $40.24 per head for January-June of 2008.” That is significant for a $55 hog price, which Hurt predicts for this year based on lean hog futures.
Will this trend continue? When Hurt looks at one of the primary reasons for the increase in pork export trade, he’s not certain that it has a long tenure ahead of it. Much of the business has come from China, which has not only suffered disease within its pork industry and lost that production, but has made significant political purchases in connection with the Olympics. More pork in Chinese grocery stores makes the citizenry happy and more pork in restaurants makes visitors happy. Additionally, Russia has also been a significant buyer by making 13% of the US purchases. Hurt says Russia shops for values, which the value of the dollar has provided. A stronger dollar or a competing market would shift the Russian purchases away from the US.
Will profitability return to pork? Hurt says yes, with an asterisk. He says hog producers can compete if high corn prices hold. He calculates that hog producers will be able to pay about $6.25 per bushel for corn in 2009 and still breakeven compared with only $4.00 in calendar years 2007 and 2008. However, pork production must decline, foreign demand must continue, and the price of crude oil must hold steady and not push ethanol and corn prices much higher.
Summary:
The pork industry has received significant benefits from foreign demand that have helped keep pork prices as high as they are. The value of the dollar has been attractive enough for importers to purchase US pork to the point that domestic supplies are expected to tighten up next year if the trend continues. Profitability in the pork industry will depend on continued strong exports, curtailing production, and stability in the price of crude oil.
Posted by Stu Ellis at 12:48 AM | Comments (0) | Permalink
August 18, 2008
High Livestock Feed Costs: The Message To Congress
As Congress debated and passed a new Farm Bill, Members curtailed grain price supports because of current record high market prices. But they were also constantly reminded that the high grain prices were eroding profitability for livestock producers. In fact, the Congressional Research Service provided Members of Congress with a detailed analysis of livestock feed costs and offered suggestions for resolving the problem.
The CRS Report for Congress on Livestock Feed Costs indicating competing demands for corn and soybeans, along with higher energy costs were hitting hard at livestock producers and options were available for Congress to provide relief if desired. The impact results from the fact that 60-70% of the cost of livestock production is feed cost and that should reach a record $45 billion this year, up 18% from last year. CRS economist Geoffrey Becker says the higher prices for corn and soybeans are “a boon for farmers who grow the crops, but bane for animal producers who must buy them.” And he adds that many producers are unable to cover higher production costs.
CRS quantified the losses as $22 per head for every hog marketed between November 2007 and April of 2008. Additionally, the Livestock Marketing Information Center estimated per head cattle losses at $134 since June of last year. While high milk prices have kept the dairy industry out of the red, nearly all livestock areas are suffering from high feed costs.
Among the reasons cited by CRS in the report to Congress are:
1) A strong economic growth in developing countries like China and India, where consumers are demanding different forms of meats and high value food, and the shift means more demand for animal feeds.
2) Weather problems in Australia, Canada, European Union, Eastern Europe, and other grain producing areas have curtailed production. Additionally, the Cornbelt may have lost 3 to 5 million acres of productivity this year because of flooding.
3) The lower value of the dollar spurred exports of US feeds because their costs were much higher in other nations, with an 18% boost in export sales of corn.
4) Other factors that contributed to the problem was a high number of animals in the US which increased domestic demand; increased production costs for US grain, foreign nations curtailing exports to typical buyers, and subsidization of their own production.
One factor not among the initial reasons was the US biofuels policy, which generated nearly 6.5 billion gallons of ethanol in 2007 and is supposed to reach 9 billion gallons in 2009, with the help of a tax credit on US domestic blended ethanol and a tariff on imported ethanol. CRS says the rapidly increasing demand for corn has sparked higher corn prices, and bid them away from other users, such as the livestock industry. Those higher corn prices were estimated by former USDA Chief Economist Keith Collins at 25% to 60% due to the ethanol industry. The Food and Agricultural Policy Research Institute estimated the ethanol impact at a 20% increase in corn prices.
So what should Congress due to make life easier for the livestock producer? CRS says there are several options:
1) Domestic ethanol incentives can be reduced, despite agriculture economists who say that will not have any immediate impact on corn prices, and would be overshadowed by higher oil prices and continued production problems in other countries.
2) Return up to one-third of the 35 million acre conservation into row crop production with little environmental harm. Opponents say the loss of environmental benefits would outweigh any gains in animal agriculture.
3) Financial assistance could be distributed to livestock producers in the form of emergency agricultural aid that would help cover the high cost of feed.
4) Other options that have been mentioned include a harder push to dismantle trade distorting actions by other nations or to increase ag research investments in developing foreign nations to increase productivity.
Summary:
Livestock producers have been losing money on each head sold because of high grain prices that have destroyed budgets for feed. Causes have included a variety of issues, including trade, energy, and overall increased demand. Solutions to the problem include reduction of domestic ethanol incentives, produce more crops with the help of the CRP, and to provide financial help to producers with livestock.
How would you solve the problem, if you think there is a problem?
Posted by Stu Ellis at 12:56 AM | Comments (0) | Permalink
July 28, 2008
Making Money Feeding Cattle? You're Kidding Aren't You?
Livestock producers have been consuming a lot of red ink lately. Not that they want to corner the market on that commodity, but it has taken a lot to print their income statements, P & L sheets, cash flow projections and the like. In cattle country, the only person lonelier than the Maytag repairman is the fellow who sells black ink. We got to this point with high corn prices, but since they have backed off $2 from the June highs, let’s find out if any cowboys are having fun yet.
Along with the $2 drop in corn futures, Nebraska livestock economist Darrell Mark says fed cattle prices have dropped about $8 in the past month also. His monthly newsletter give cattle producers a bit of encouragement that the cheaper corn is a result of higher ratings of the corn crop and the market’s belief that a trendline yield and production is still a possibility for 2008. Livestock producers want nothing more than to see an abundant corn crop that will feed their herds and the ethanol plants also. Mark says that would be a 13 billion bushel corn crop, and combined with a comfortable one billion bushel carryover, the opportunity may arise for better times ahead. And he says sharpen your pencil to figure out how near you are to the point of breaking even, then locking in some corn and cattle futures.
Darrell Mark offers an example for feeding a 750# yearling, which averaged $117.77/cwt the past week in Nebraska. With a 3.69 lb. daily rate of gain this steer would hit 1,300 lbs. at the end of November (150 days). Feed costs are $5.25 for corn or $65 per ton for wet distillers’ grains. At the same time December live cattle futures are $107.10/cwt, and with basis and insurance, the hedge net is $105.81. Mark says the feeding cost of gain is just under $80/cwt with a potential profit of $53 per head.
Interestingly, since corn prices hit the June high and declined, there has been a slight increase in prices for both 500-600 lb. steers and 700-800 yearlings, meaning the drop in feed prices has not resulted in a wider premium for calves, which usually parallels a drop in feed costs, compared to yearlings. Darrell Mark says that means feeding calves will provide a $40 per head premium over yearlings. His assumptions include 1,250 lbs. market weight reached next February, with a $105.02 net hedge, feed cost of gain at $76.71, and a return to feed at $90 per head. One of his key points is the fact that corn or WDG bought on the spot market and not hedged resulted in calves returning $114 less than when both feed and cattle were hedged while the yearlings made $96 less, and while there is more profit potential on calves, there is more risk. Mark also notes that any rebound in feed prices will quickly erode the profitability of the feedlots, along with a decline in cattle prices.
So, does this scenario match recent history and will it hold up in the near term? Darrell Mark says there are several lessons to be learned from the research he has conducted:
1) The trend toward higher corn prices brought a change in practice with the cattle industry, which was increased interest in backgrounding fall-weaned calves on grass systems.
2) Over the past 10 years, returns have been highly variable for yearlings on the grass background system.
3) Profits for the calf-fed systems (November to May feedlot) ranged from -$151 to +$221 per head.
4) Profits for the yearlings (November corn stalks, spring and summer pasture fall feedlot) ranged from -$171 to +$356 per head.
5) Yearling profits may offer a higher maximum profit, there is also a greater loss risk. “Producers should consider the greater profit variability associated with backgrounding calves and then finishing yearlings.”
Darrell Mark says there currently is profit potential in feeding calves, but that is not guaranteed for the long term. He says risk has to be hedged and performance has to be good enough to get satisfactory returns.
Summary:
Corn prices and distillers’ grain prices have fallen enough and feeder calf prices have risen slightly, enough to pencil in some profits for feedlots which have hedged both their corn and their live cattle. Profits can be locked in for yearlings at $53 per head. But the expected widening of the price gap between calves and yearlings has not occurred, giving more premium to calves when corn prices decline and calves have become cheaper relative to yearlings, with a $90 profit.
Posted by Stu Ellis at 12:40 AM | Comments (0) | Permalink
July 14, 2008
The Livestock Industry's Reaction To Higher Feed Prices
Agriculture has many visionaries and out of the box thinkers, but were they all at the top of their game when it came time to predict the impact of high grain prices on the agricultural economy? The catch-phrase du jour is “unintended consequences,” and the impact of the grain market may have fed some of those rations to the US livestock industry.
Crystal balls are valuable, if they produce a clear picture of the future, but in the case of the pumped up grain market, a foursome of agricultural economists says the impact on the livestock economy was not foreseen. Writing in the current issue of Choices Magazine, the economists say livestock and poultry producers have absorbed significant losses from high feed costs, since they have been unable to pass along those costs to the consumer. The economists are John Lawrence of Iowa State, James Mintert of Kansas State, John Anderson of Mississippi State, and David Anderson of Texas A & M. However, they contend the consumer will ultimately feel the impact as producers adjust to higher feed costs, and many of them elect to leave the industry. And the speed of that adjustment will correlate with the production cycle of the various livestock species, meaning the first impact will be felt in poultry, which has the shorter cycle.
For the record, feed costs are 60-70% of the cost of livestock production, and they have increased 40-60% in the past two years. Corn prices alone rose 266% from the first quarter of 2006 to July, 2008, at Omaha. When corn prices increased 179% in the early 1970’s the swine breeding herd declined 15% and beef inventories decreased 19%.
Beef industry: Kansas State currently estimates the cost of gain for feedlot cattle has increased from 54¢ per pound in 2006 to 74¢ in 2008. Iowa State estimates cattle feeders have experienced a $167 loss per head, which was the largest since their records began in the 1960’s. The Kansas Farm Management Association documents feed costs per cow at $287 in 2006, and will approach $450 this year, pushing returns below variable costs and causing either liquidation or herd reduction. Consumer demand for beef has weakened and economic pressures will delay any recovery. Export demand has improved, but with exports 36% below 2003 levels, more meat is flooding the domestic meat case. The industry is expected to shrink with higher prices facing consumers, but allowing remaining producers to cover costs after several more years.
Pork industry: Profitability existed until 2007, in part due to disease problems that kept slaughter rates down; and when a vaccine was developed pork supplies increased 10%. The result was a drop in pork prices to the lowest level in 4 years at the same time feed costs were reaching record highs. Iowa State estimates producer loses from Oct. 2007 to Apr. 2008 exceeded the profits of the prior 13 months. Feed costs were 75% higher than April 2006. Breeding herd liquidation is underway in the US and Canada and pork supplies are continued to decline through the end of 2009. Demand growth in the export market will offset some of the economic problems. However, it will take possibly a 10% cut in production to cause prices to return to profitability.
Poultry industry: Producers were concerned about competing for corn, since they had few feed alternatives that were satisfactory. The initial price surge in 2006 saw poultry operators curtail production, and with the 2007 moderation in grain prices, the poultry industry responded with increased production, and feeding the overseas poultry market to help keep prices high. Despite seemingly high market prices, producers are cutting production in response to continued high corn prices. Feed accounts for 65% of the production costs and corn prices have increased 35% since the end of 2007. A 20% increase in production costs would result in a 2% decline in quantity offered to the market and a 6% increase in consumer prices.
Dairy industry: During the decade milk prices have hit two record highs separated by a record low; but were on the increase in 2006 when feed prices began to rise. As feed costs continued upward, milk prices began to fall from declining demand overseas, but producers have remained profitable. In the past two years, production costs have increased $2/cwt, and such an increase usually causes a production decline of 2% or more. But current demand domestic and foreign has continued to support prices. Increased production will be required to depress prices, but high feed costs will speed that shift.
Part of the ethanol argument is that it provides an abundance of co-products that make good livestock feeds, such as wet corn gluten, corn gluten meal, or distillers’ dried grains. But one of the unintended consequences is that the rising market price of corn has pushed upward the price for those co-product feeds. Due to their nutritive value, they are priced equivalent to corn, and while their overall price has declined over time, the rising price of corn has pushed up the cost of the co-products to the livestock industry. To take the best advantage of the co-products, livestock operations need to be located as closely as possible to ethanol plants. While conventional wisdom says cattle would most benefit from that, the economists believe that with higher feed prices the determinant would be efficiency of gain, which defines the poultry industry.
Summary:
Supporters of the biofuels industry pointed to the potential abundance of inexpensive feed from co-products as a boon to the livestock industry. But the livestock producer has to buy that feed at prices equivalent to the nutritive value of corn, and with skyrocketing corn prices that is pushing up production costs rapidly for the livestock producer. This is particularly challenging to the beef and pork producer, both of whom are losing money because of high volumes of meat supplies.
If you have been a producer, what has your reaction been? What is your threshold for taking action and what action is that?
Posted by Stu Ellis at 12:50 AM | Comments (0) | Permalink
July 8, 2008
News Bulletin: Consumers Are Stealing Pork
All right boys, what am I bid for a good pork chop? Who’s got a five dollar bill? Hey, there I’ve got $2, gimme $3, now $3, $3.50, all right bid ‘em up, now $4, $4, got it, now $5, bid ‘em up, all up, $5, now $6, anyone at $6? Sold at $5 a chop, and that’s a steal!
Thieves are stealing bronze cemetery urns, copper wiring out of houses under construction, and gasoline as often as they can haul it off. But if they were smart, they would be trucking off hogs and selling them to international buyers for tons of cash. Purdue economist Chris Hurt says hogs are not only cheap in the US market, but compared to the foreign market, where foreign currencies buy more dollars than they used to, pork is a bargain.
In his latest newsletter, Hurt says the low price of pork is a subsidy to US and foreign consumers. With pork prices averaging $2.85 a pound this year and last year, pork producers have absorbed $1.4 billion in losses that consumers should have paid in value. It is all a function of the value of the dollar, which has benefited corn and soybean producers who have sold one billion bushels of beans and over two billion bushels of corn to the export market because of the low valued dollar. Through the month of April, pork exports expanded 52% compared to last year. Interestingly, Hurt says pork production is up 11%, but only 6% more pork has been available to the domestic market because foreign buyers are taking the rest. Over one hog in five is destined for the overseas market. Hurt says he believes the global market will buy the increased US production until pork prices in the US begin to “move sharply higher.”
When will that happen? Hurt says production has to decline, and the Quarterly Hogs and Pigs Report 10 days ago indicated sow slaughter was up 1%, farrowing intentions were down 2% for this quarter and down 4% for next quarter. With the increased slaughter, prices will remain weak, but once the glut is through the packing houses, Hurt says prices, “will improve very late this fall and winter and go wildly higher by next spring and summer.” He says the world is waiting to buy the last of the cheap pork.
If you are trying to pay off a hog house and still meet operating expenses, Hurt predicts pork prices to be in the low $60’s by winter and mid $70 by next spring and summer. With current corn and SBM prices, cost of production for farrow to finish producers is in the low $60’s. He says profits may even accelerate if CRP is released, if ethanol supports are cut, and if weather is favorable, all of which will reduce feed costs.
Hurt’s assessment of the Hogs and Pigs report is corroborated by Iowa State livestock economist John Lawrence, who said he was surprised by the liquidation of the sow herd, because of the higher sow slaughter that had been seen in recent months. In this monthly newsletter, Lawrence said even with farrowing intentions down, the 9.4 pigs per litter is preventing a more rapid decline in hog numbers. He is expecting production to remain above year earlier levels, until it levels off next January and begins a decline into the spring. His prediction for live hog prices is $55-$58 per cwt next January through March, and $62-$65 in the second quarter of the year. He feels the declining supply of hogs in 2009 is a function of the eroding profitability from high feed costs.
But intended declines in production will be bittersweet to many producers, since the June 2009 lean hog contract closed over $100 last week, the first time that plateau has ever been reached. Glenn Grimes and Ron Plain at the University of Missouri agree with Lawrence in their weekly Hog Outlook that hog slaughter will drop slightly below year ago levels in the first quarter of the year and stay down for an 18 to 24 month period.
Summary:
If pork producers can afford to skimp for the next six months, they’ll be in the money come 2009 when hog prices strengthen as production declines. High feed costs are forcing the issue, but the futures market sees the outcome and hog futures are in record territory. Helping the current demand is the value of the dollar, which has spurred foreign buyers to help themselves to inexpensive quantities of pork, and they will continue to do that as long as foreign currencies are at a premium to the dollar. That will not only help feed foreign consumers, but will help keep additional burdensome supplies of pork out of the US meat case, where prices remain at bargain basement levels.
Posted by Stu Ellis at 12:08 AM | Comments (0) | Permalink
June 25, 2008
What Are The Prospects For Profits In Cattle?
There is no secret that cattle bids have not covered the feed budget for quite some time, but many cowboys are holding on for better days ahead. (If only everyone else would get out of the business there might be money to be made!) Times have not been friendly for the feedlot operator or the cow/calf operator, but there may be some ideas that will either raise additional revenue or at least limit the loss.
First of all, please don’t get your hopes too high. As Ohio State Extension Specialist Stan Smith says, “There aren't enough cost saving feed alternatives anywhere in this State of Ohio which will allow us to put together a cattle finishing budget for the next year which shows a profit. At least not at the feeder cattle prices we presently see and the feed costs we can anticipate today.” Pound for pound, beef will not cover the price of corn, when you add in the cost of the animal and all of the other deductions that have to be taken off the sale price.
Smith and other Extension specialists have all heard the response that feeding retained calves somehow clears that hurdle of profitability, but he adds, “Unfortunately, that dog won't hunt.” If you are a full meal deal operator, you are either shorting yourself on the profit of selling feeder calves, or buying your calves for your feedlot that are not properly priced. If you need help with budgeting, Smith offers the 2008 OSU Enterprise Beef Budgets.
Smith says it is reasonable to expect the value of feeder calves to match the cost of feed and the projected value of fed cattle, plus a profit; but he says that is not happening at current economics because someone is willing to pay more for the calves than that formula allows. He suggests leaving feedlots empty this year and next, or finding an alternative use such as backgrounding, re-packaging cattle, or storing such things as grain, fertilizer or machinery in empty barns.
Higher feed costs are reality, says livestock economist John Lawrence at Iowa State University in his latest newsletter. He says they are not a passing fad, and livestock prices will eventually rise in response to the higher feed costs and find equilibrium. That point will also see more land producing crops, increased yields, reduced demand for feed, and commercially viable cellulosic ethanol, all of which will moderate corn prices. In the meantime, Lawrence says corn prices will be somewhere between bumper crop levels of $4 and drought levels of $8.
Until that point of equilibrium, Lawrence says livestock production will have to decline to return to profitability, including liquidation of both cattle and swine herds. Producers remaining will have to manage risk with a variety of tools, but also to learn how to manage margin, not just price.
Margins have been positive only for processors and retailers in the first five months of the year say Missouri livestock economists Glenn Grimes and Ron Plain. Their margin was up 9.5% from last year, and packers’ margin was down nearly 11% for the five months and prices for fed steers were down 2.4%. They add, “Most of the increase in prices that will result from the higher feed grain prices are still in the future.” The liquidation that Lawrence says is necessary is happening faster than the market anticipated. Grimes and Plain report, “The cattle on feed report for June 1 came in a little more positive than the trade reports. The number on feed June 1 was down 4.1%, the trade estimates average was for a 2.8% decline. Placements on feed during May were down 11%, the trade estimate were for a 9.6% decline. Fed marketings were up 2.6% and trade expected the number marketed would be up 1.7%.”
There are a number of realities in today’s cattle market that can either benefit or hurt a cowboy, says Utah State livestock economist Dillon Feuz, and you just can’t manage around them:
1) Heifers were discounted just under $9 per cwt. from steers and they found that heavier calves received a lower price per pound than lighter calves (the well known weight price slide).
2) Angus, black or red, calves received the highest price and that Charolais-Angus cross calves were about $1 per cwt. less.
3) Angus-other English breed cross calves were priced on average about $2 per cwt. less than Angus and calves with Brahma or "ear" influence were priced $5 per cwt. lower than Angus.
4) Small frame calves were priced $10 per cwt. lower than medium-large frame calves.
However, Feuz says there are some management items that can be controlled:
1) Calves with horns were discounted a little more than $1.50 per cwt. So, it would pay you to dehorn any calves with horns.
2) The greater the weight variation within a sale lot, the lower the market price. It might therefore pay you to sort cattle into more uniform sale lots.
3) However, there is also a premium for larger lots, 300 head or more receiving the highest price. Lots of less than a semi-trailer load are discounted sharply.
4) Pencil shrink varied between 0-3 percent. Calves that were offered with greater pencil shrink did bring a higher price per pound. However, that higher price did not fully offset the revenue that was lost by selling less weight. The moral of this story might be that if you want coffee shop bragging rights for topping the sale, offer more pencil shrink, but if you want more dollars in your bank account offer less pencil shrink or perhaps none.
Summary:
Today’s cattle prices are not going to be profitable, no matter how you calculate it, but profitability will return as beef prices rise to meet the value of feed. In the meantime, there are budget calculators that will help minimize the losses, as well as a variety of marketing tips. Cattlemen need to be patient, or in the alternative, vacate feedlots for a year or two and find alternative income for those facilities.
Posted by Stu Ellis at 12:40 AM | Comments (0) | Permalink
April 2, 2008
Pork, Pork, And More Pork.
The old joke about the businessman who was losing money on every item he sold, but thought he could make it up on volume can be applied to the US pork industry. Last Friday’s Quarterly Hogs and Pigs Report indicated there were so many hogs around that money was being lost when they were sold. But there was a large volume on hand to sell.
The market and livestock economists all knew there would be a lot of hogs on hand for USDA to count, but no one guessed the national inventory would be 6.5% above the March 1 count of 2007. The pig crop for the past two quarters was 6-7% more than comparative numbers a year earlier. In fact, market hog numbers were up 7.2% and the breeding herd was even up, meaning there will be a lot of inexpensive pork for the consumer and red ink for the producer.
John Lawrence and Shane Ellis at Iowa State believe the burdensome numbers of hogs on hand will push live hog prices into the $42-$44 range over the next year. That makes a lean carcass price at $55-$59 and they warn producers to not anticipate any seasonal price increase.
At the University of Missouri, Glenn Grimes and Ron Plain are slightly more optimistic about prices, but not much. They expect a 3% demand growth which will pull April through June marketings into the upper $40 range, and fade into the low $40 range for the balance of the summer. Prices might not even be that high, if it were not for the export demand, which Grimes and Plain report being 26% higher than 2007, and the greatest monthly total for pork exports.
That might be a hollow victory, given the significant financial losses producers are suffering with each hog sold. Lawrence and Ellis forecast that to continue through early 2009 without some change. With current corn prices, losses are estimated at $40 per head for contract producers, and similarly significant losses for producers raising their own corn.
The main challenge for the industry is the fact the breeding herd continues to grow. It was up .5% in last Friday’s report. And Grimes and Plain lament that statistic, “The bottom line, we hope, is that the current breeding herd is somewhat smaller than a year earlier and marketings will not be as large in the fourth quarter of 2008 and the first quarter of 2009 as is indicated by USDA’s report.” They think that the breeding herd was larger a year ago than what USDA had calculated, which would indicate the trend could be down and not continuing to grow.
Revisions of USDA estimates were made for the past two Quarterly reports, which Grimes and Plain attribute to problems with analyzing the impact of the circo virus and the success of its vaccine. That revision also caught the attention of Mike Brumm, who writes the University of Nebraska pork newsletters. But Brumm believes the discrepancy was the result of Canadian-born feeder pigs coming into the US for finishing, “Based on my experiences, in prior years almost all of these Canadian born pigs were sold to US owners for growth to slaughter. However, as the Canadian dollar strengthened relative to the US dollar last summer, as opportunities for market access declined in Canadian markets and as feed grain prices rose relative to US prices, an increasing number of Canadian producers began placing pigs in US facilities while retaining ownership of the pigs.”
Brumm is also less than optimistic about a decline in production, saying the growth in pork concentration in Iowa is expected to continue because there is a large number of facilities being planned and construction season is nearing. But the Iowa livestock economists say they are watching consumption more than production, and fear the slowdown of the US economy will pressure pork demand. Both they and the Missouri analysts point to the value of the dollar and say it will be the key to continued pork export trade.
Summary:
USDA’s Quarterly Hogs and Pigs Report indicated higher estimates for hog numbers then had been expected. Because of the volume, market prices will be depressed into the $40 range, and losses per head will continue to mount because of the high corn prices. Due to revisions that USDA made in its numbers of prior reports, the changes were attributed to the complex relationship between US and Canadian pork producers. There should be a high volume of low priced pork in the meat case for the coming year.
Posted by Stu Ellis at 12:39 AM | Comments (0) | Permalink
March 25, 2008
Will Distillers' Grains Become A Dynamic In The Livestock Industry?
If the tail sometimes wags the dog, what are the implications for the beef industry as mountains of distillers’ dried grains are produced in the US? Do ethanol refineries attract feedlots? Do beef rations undergo a renovation? Will cattle production change as a result of the availability of a new feed? What does the crystal ball have in store for the cowboy?
Ethanol refinery capacity in the US increases daily and high oil prices will allow it to reach the maximum of 15 billion gallons per year from corn before the 2012 target date. But for every bushel of corn converted into ethanol, there are 17 pounds of distillers’ dried grains (DDGS) that are also produced, and this perishable product has to find a home. The Center for Agricultural and Rural Development (CARD) at Iowa State forecasts 40 million metric tons of DDGS will be produced by 2011, and possibly 88 million metric tons by 2016. The CARD analysis looks at future use of DDGS, its implications for the livestock industry, and the impact of surpluses of DDGS to the ethanol industry.
Within the corn refining industry in 2006, 70% of the ethanol was from dry milling plants and that share will grow, compared to the wet milling industry which produces wet corn gluten. Both products have the starch removed, and the feed is a high protein, highly digestible fiber with fat. They range from wet products with 70% moisture to DDGS with 10% moisture. Wet products can be transported a maximum 300 miles and still be a profitable ration, but many feed lots are locating near ethanol refineries to take advantage of lower transportation cost and the short shelf life of wet distillers grains. The chief objective is to increase the adoption rate of DDGS as a viable feed and to increase the percentage of use in livestock rations. Regarding the latter, University of Illinois researchers have found that up to 50% DDGS in a ration may reduce performance, but can be profitable if the price is right. On the other hand, Iowa State reports 15% to 20% of the ration will meet protein and energy requirements of the cattle, but anytime the net cost is less than corn, there is an incentive to feed beyond the protein requirement.
In 2006 9,400 livestock producers in the Cornbelt told USDA about their use of DDGS and wet distillers’ grains. A that time 36% of feedlots were using them, and another 34% were considering it. The inclusion rate in livestock rations ranged from 11% to 26% in feedlots and 22% to 31% for beef cattle operations. The survey also found that cattlemen not using the ethanol co-products generally cited unavailability of the products. The Iowa State researchers concluded, “Overall, the survey results indicate that, if producers have the economic incentive to feed distillers grains and if product availability, quality, and consistency improve, there is excellent potential for increased use in the U.S. beef industry.”
But what about the nutritional issues? Ethanol refiners are in the business to produce ethanol and their attention is given to that product. Very little attention is given to the quality of any co-products, such as DDGS, particularly nutritional quality.
1) Because of the processing with inexpensive sulfuric acid, high percentages of DDGS in a ration may have a sulfur content beyond the ability of the animal to metabolize it.
2) High fat content in DDGS may also be a limiting factor for feeding DDGS because of its suppression of fiber intake and digestion. Fat is going to be less in corn gluten feed than in DDGS, but both can vary widely in fat content.
3) Phosphorus content will be higher in distillers’ grains than in corn, but the high levels can be offset with calcium, so it can be managed. However, phosphorus becomes an environmental issue around feedlots.
4) Extensive analysis has been reported about the impact of DDGS on beef carcass and meat quality issues. Rations that contain more than 40% DDGS or wet gluten feeds show quality deterioration.
Based on an equitable distribution of distillers’ grains among various livestock species and the export market, the Iowa State researchers say the US beef industry would have to consume 48% of the supply and possibly as much as 62% of the distillers’ grains, both of which are more than nutritional and quality levels allow. To achieve those levels, the beef industry will have to solve the sulfur, fat, phosphorous, and quality issues. One of the solutions is to feed a blend of equal parts of DDGS and wet distillers’ grains, which complement each other, and can become 75% of the total ration without a negative impact on performance.
Another solution to the growing mountain of ethanol co-products is an aggressive development of export markets. That lessens the amount that has to be consumed domestically, but that only amounts to 4-6% increase annually. By 2017, a total of 28% of US production would be exported, compared to 10% in 2006 and 14% in 2007.
Summary:
As more corn is refined into ethanol and more distillers’ grains are produced, the beef industry has the ability to consume the bulk of the supply, but economics will be determined by supply and demand along with nutritional characteristics. More research is needed to address appropriate rations and optimize performance. Economics will also determine whether refiners invest more in the co-products to optimize their value to the consumer.
Posted by Stu Ellis at 1:00 AM | Comments (0) | Permalink
March 6, 2008
If You Are Marketing Hogs, How Do You Manage Your Price And Cost Risk?
Fewer and fewer hogs are being sold on the cash, spot, or futures market, or with some marketing formula that allows a producer to manage price risk. Negotiated sales are nearly a thing of the past. And what does that trend predict for the future?
The price reporting mechanism of USDA is titled “Mandatory Price Reporting” but University of Missouri livestock economists Glenn Grimes and Ron Plain remind everyone that implementation details are incomplete and the system is just as voluntary now as it was in 2006 when the law was renewed. The MPR is the key to knowing the price at which hogs are sold in the US. And that system, as incomplete as it is, indicates that overtime hog marketing has moved nearly completely into a set price system at the outset of a contract. That is the conclusion of Grimes and Plain in their recently completed study of US Hog Marketing Contracts.
Despite incomplete data, the economists say their information can be reconciled with prior years, and for January they can track sale information on nearly 91% of the federally inspected hog slaughter, which approached 10.5 million head. During the past ten years, negotiated and spot sales of hogs dropped from 35.8% of hogs in 1999 to 9.2% this year. Non-negotiated sales accounted for 90.8% of hogs slaughtered in January. A similar survey in 1997 indicated only 56.6% of hogs were slaughtered following non-negotiated transactions, resulting from contracted production.
Grimes and Plain say 46% of hogs slaughtered in January could be considered as sold by negotiated markets if you combine both the spot sales and the percentage of hogs purchased on a swine-pork market formula. However, that percentage increases somewhat because that formula is also used for hogs owned by packers prior to slaughter.
When measuring the number of hogs sold under a system that “supposedly” reduces price risk to a producer, Grimes and Plain calculate that to be just under 25%. Some of the systems used to establish a payment to producers do not provide price risk protection, say Grimes and Plain. They say it is impossible to determine how many hogs are sold in which the actual production cost is disregarded by the contract, when the payment is made. Their 2004 study indicated that it was 71% of those agreements, and 29% of sales were made with the help of trackable production costs.
From 2006 to 2007, Grimes and Plain say the number of packer-sold hogs increased from 2.6% to 6.7% and held just above 6% in January, and they add, “We still believe the number of hogs sold on the spot market is sufficient to represent actual supply and demand conditions and result in a fairly accurate price for hogs. This belief is based on the fact that packers’ margins have not indicated that they are purchasing hogs at prices much, if any, below their value based on actual supply and demand conditions.”
The federal pricing laws also required reports on weight and carcass prices, and the economists report:
1) The negotiated price hogs had the second lowest average percent lean and the lightest average weight.
2) The other market formula hogs (contracts tied to futures market) had the highest average weight at 209.0 pounds.
3) The packer-owned hogs had the lowest percent lean.
Summary:
Although pork slaughter is at an all time high, a greater percentage of those hogs are being marketing with contracts that do less to protect producers from price risk. Less than 10% of hogs are sold on a cash or otherwise negotiated price arrangements. And less than 25% of hogs are sold with an arrangement that allows producers to manage any of their production risk, such as higher feed costs.
Posted by Stu Ellis at 12:30 AM | Comments (0) | Permalink
February 27, 2008
Even Though Hog Prices Are Low, Are They Worth Protecting From Further Decline?
Pork producers are faced with an unfriendly financial future. Slaughter is at record levels. Production does not seem to be declining. But pork prices are declining and profits have disappeared for most producers. Will pork prices continue to decline and if so, how do you manage that risk? Is this a time for Livestock Risk Protection insurance?
Extension economist George Patrick and two colleagues at Purdue have finished an evaluation of the Livestock Rick Protection (LRP) for hogs which has been on the market for nearly 5 years. He is quick to say that is an insufficient time for an insurance product to prove itself, however producers are using it to manage their price risk. Their evaluation was based on the net cost of the insurance, which is the premium minus the indemnities paid.
LRP only insures against the decline in the lean carcass price of the hogs below an established level of coverage, similar to a crop insurance policy. The producer would select a coverage level, and an endorsement length, which is the time from the purchase to the time the hogs are sold, and those come in choices of 13, 17, 21, and 26 weeks. That allows coverage of both feeder pigs and finished hogs. The carcass weight is assumed to range from 150 to 225 lbs, and is determined by computing 74% of the live weight. Coverage ranges from 70% to 95% of the contract value. There are numerous other details which a crop insurance agent can provide, or can be obtained from the USDA’s Risk Management Agency website for LRP. Coverage prices, rates, and ending values are provided by USDA here.
Values for the insurance are based on The Chicago Mercantile Exchange contract for lean hog futures, and producers who utilize the futures market for pricing will be familiar with the pricing mechanism for the insurance policy. The actual prices are reported by USDA’s Agriculture Marketing Service and those prices are used by the CME for settlement. So how do you know if you are eligible for an indemnity payment? Patrick says, “If the actual end value on the end date of the insurance contract is less than the coverage price selected, the producer may be paid an indemnity for the difference between the coverage level price and actual end value.”
Your cost of the insurance coverage varies with the length of the coverage, and since there is more price uncertainty over a longer period of time, then longer coverage is more expensive. The cost is also determined by level of coverage, just like crop insurance. The Purdue economists evaluated the LRP-Swine during 2007 and found that indemnities were paid just over 20% of the time and were under $1. The cost for the highest level of protection was $1.66 for a 250 lb. hog, but ranged from 1% to 2.6% of production values.
Does that amount of price risk protection satisfy your needs? That depends on the producer, and for some it will and for others it will not. Economist George Patrick says for the risk neutral producers who forego the LRP insurance, they “are likely to have a higher average return with greater downside variability.”
Summary:
High production costs and low market prices face hog producers over the coming year with the result of operational red ink. To protect against hog prices falling further, USDA offers Livestock Risk Protection insurance, which indemnifies a producer from market prices falling during a set period of insurance coverage. Once a coverage level and period are set and the insurance is purchased, producers who are risk averse can protect their price, but at the cost of the policy. Producers without the insurance could have higher profitability, but face greater downside variability in prices.
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
February 5, 2008
My! This 10-Year Cattle Cycle Went By In A Hurry!
Cowboys may see the end of a long hard trail off in the distance, but some economic storm clouds may hit before they get home. That seems to be the consensus of livestock economists who have analyzed USDA’s Cattle Inventory report released last Friday. Cattle numbers are changing, the cattle cycle has been impacted, but market volatility can be expected for both cattle prices and feed costs. If you are raising cattle, how will you be affected?
Four years ago the latest expansion cycle began in the cattle industry, but instead of the average ten year swing, it may be diminishing already. Nebraska livestock economist Darrell Mark calls that “pre-mature.” The inventory on January 1 was 96.67 million head, with a 338,000 liquidation of cows last year causing the turn-around. Purdue livestock economist Chris Hurt attributes that to the drought in the Southeastern US last year that destroyed pasture and forage for many livestock producers.
Beef cows numbered only 32.6 million head at the first of the year, the least amount since 1991. The beef cow herd had been expanding the past three years, but that has come to an end. Hurt’s analysis of the USDA inventory indicates the number of replacement heifers will also decline by 4%, meaning 2008 will still bring fewer cows.
While not technically in the beef category, Darrell Mark notes that the USDA’s numbers do include dairy cows, “While beef cow herd and beef replacement heifers inventories were lower than year-ago levels, the number of milk cows and dairy replacement heifers posted increases of 1.0% and 3.4%, respectively.” Hurt says the demand for dairy products will continue to push that industry to increase in size, “Strong export and domestic demand enabled milk prices to rise more rapidly than feed costs in 2007.”
But back to the beef industry, there are several other dynamics going on there. The western Cornbelt is recording a decline in cattle. After becoming a feed trough full of distillers’ dried grains, the western Cornbelt is looking at pasture as potential cornfields in the wake of $5 corn. Chris Hurt says Iowa cow numbers dropped 5% and Missouri cow numbers by 3%. Indiana and Illinois cow herds remained stable.
Another dynamic is the high price of wheat, which has caused producers to avoid grazing it in fear of damage to that increasingly valuable crop. Darrell Mark says light weight calves were taken off wheat pasture last fall and put into feedlots earlier than would be expected because of the price of wheat. USDA’s numbers indicate only two-thirds of the normal number of calves on small grain pasture are there now, compared to last year. That means fewer calves will be coming off wheat in the spring and going into feed lots.
Yet another dynamic is the movement toward more sources of cellulosic biomass for ethanol production. Chris Hurt notes that some southeastern US pastures may become production fields of switchgrass for ethanol, instead of grazing land for cattle, all because of the economics.
Cowboys have to make a buck, and it has become hard to do with high feed costs, says Purdue’s Hurt, “During the months of July and August last year, corn prices averaged near $3.25 per bushel, causing a false sense of calm. Cattle moved rapidly into feedlots from August to November, averaging an increase of 11 percent in September, October, and November. However, the more recent escalation in corn and protein meal prices resulted in placements dropping 1 percent in December. Given continued high feed prices, feedlot placements are expected to remain low this winter and spring.”
But Nebraska’s Mark says the diminished numbers of calves is also due to the surge last fall in moving them from wheat pasture into feedlots, “At 37.361 million head, last year’s calf crop was 158,000 head less than in 2006 (which was also revised lower) and was the smallest calf crop since 1951. As a result, feeder cattle supplies will remain tight for the next two to three years, supporting relatively strong prices in spite of significantly higher feed grain prices.” As far as prices go, Hurt says finished cattle prices should average about $93 for the year, about $1 higher than last year.
Summary:
The expanding cattle cycle has stopped and has begun to contract with fewer numbers of cows, replacement heifers, and calves entering feedlots. Part of the reason is high feed costs, but drought in the southeastern US hurt pastures, and high corn prices are pushing some pastures into cornfields in the western Cornbelt. With fewer cattle coming to market, live cattle prices are expected to be strong.
Posted by Stu Ellis at 12:47 AM | Comments (0) | Permalink
January 21, 2008
Livestock Producers: Assume Your Defensive Positions
Farm prices are unbelievable…unless you are a livestock producer on the consuming end of corn and soybean meal, and that high price is a high cost, and instead of piling up profits you are loading up losses. Fortunately, domestic and foreign consumers are still creating strong demand for beef and pork, but the high numbers of animals heading to slaughter and the high cost of production have changed the bottom line color from black to red. So, what are the prospects for reversing that trend?
USDA last week released its latest Livestock, Dairy, and Poultry Outlook and Feed Outlook. They indicate livestock numbers are increasing which will decrease prices and grain fundamentals are pointing to higher prices; neither of which is friendly to a livestock producer.
Pork market. Farrowings, pig crops, and litter rates were all projected upwards in the December Hogs and Pigs report which pointed to continued production increases in 2008, along with lower prices and financial losses for producers. The December report adjusted the June 2007 reports to add 1.1 million head that were previously unreported and another 941,000 to the September report, and those adjustments added to the 9.5% increase in fourth quarter production. USDA economists say the farrowing intentions now for 2008 will raise production by 3.7% over 2007. Resulting market prices are forecast to be 9% below 2007 with lean hog prices ranging $41 to $44 per cwt. With the help of an Iowa State calculation http://www.econ.iastate.edu/faculty/lawrence/EstRet/FA/FA07.pdf USDA says slaughter hogs marketed in December probably lost $25.28 per head. One bright light was the pork export market, which was 4% above equivalent 2006 figures for the first 11 months of 2007, and the currency exchange rate may boost 2008 exports by 17% above 2007.
Beef market. Unlike pork production which is increasing, beef production is decreasing, but the anomaly of drought-impacted range has resulted in higher numbers of beef cattle being marketed ahead of schedule. Additionally, high rates of beef cows and dairy cows are being slaughtered because of high prices of forage. Feedlot placements have also increased because of the lack of winter pasture and producers not wanting to graze wheat in an effort to protect that high-valued crop. The high rate of placements will mean earlier marketing than usual. Livestock economists believe the winter timing of the feedlot placements will mean lower grading and reduced export demand because of poor performance and body condition. Consumer beef demand may also weaken because of the declining domestic economy and plentiful supplies of pork and poultry.
Dairy market. Dairy product prices have been less than stellar from the vantage of the producer: cheese prices have been strong but volatile, butter prices have fallen, and nonfat dry milk exports have fallen 13% and stocks are up 227%. The softening of product prices points to lower milk prices substantially below 2007 values.
Poultry market. In the fourth quarter of 2007 egg set was up 3.7% and chick placement was up 4% over 2006 pointing to higher broiler meat production. Both slaughter rates and meat production are up, as well as frozen stocks. The increased production has translated into lower broiler prices. In the turkey market, USDA economists forecast first quarter 2008 prices above 2007, but then falling 5% below last year for the balance of 2008 because of increased production of both birds and meat.
Feed market. Feed grain supplies are up 16% from 2006/2007, but multiple sources of demand have pushed prices above year ago levels. For the Sept. to Aug. grain marketing year, feed use per grain consuming animal unit is 1.71 tons, but less than the 1.82 ton level in 2005/2006 when prices were lower and DDGS were less plentiful. Feed needs are expected to be strong throughout 2008 and will surpass 2007.
1) 2007 corn production was a record and the surplus will be nearly 1.5 bil. bu. USDA recently raised expected feed use by 300 mil. bu. because of more livestock, but estimates for ethanol production were not raised. A strong export demand is also present, helping push estimated cash prices higher into a $3.70 to $4.30 range for the year.
2) Sorghum yield and production declined in 2007 leading to lower supplies and ending stocks. Both feed and export demand will increase, pushing prices 40¢ higher to a range of $3.60 to $4.20 per bushel
3) Barley and oat supplies remain unchanged, but smaller stocks will mean smaller use. The competing demand from the brewing industry is expected to decline from the slowing economy, but barley price forecasts are up 10¢ to a range of $3.80 to $4.40 per bushel, compared to a season average of $2.85 last year, and oat prices are forecast up 10¢ to a range of $2.20 to $2.80, compared to $1.87 last year.
4) Hay stocks are up 8% compared to last year and disappearance is down compared to last year as well. Yields and acreage were both up in 2007 compared to 2006. Alfalfa and corn silage production were both up in 2007. So far in the hay marketing year, alfalfa hay has averaged $26 per ton above year earlier prices.
Summary:
The outlook for production and cost in the US livestock industry could nearly be the “perfect storm.” Pork production continues to rise, beef cattle are being forced to the market earlier than would be expected, and poultry production remains high with more anticipated. At the same time, high feed costs have continued to increase further because of demand from competing purchasers. While feed supplies will be restocked next fall, demand will remain high, but reduced livestock production is not foreseen in calendar 2008.
Posted by Stu Ellis at 12:16 AM | Comments (0) | Permalink
January 2, 2008
If You Buy Distillers' Grain, How Do You Know If You Are Paying A Fair Price?
The new federal Energy Bill continues to promote ethanol production, first with up to 5 billion bushels of corn, until cellulosic feedstocks can take over. But in the meantime corn demand at the growing number of ethanol plants will support higher prices of corn and likely push more livestock producers toward distillers’ grains as an abundant feed source piling up at ethanol plants. But how is the price risk in distillers’ grains managed?
Certainly, the Chicago Board of Trade has not opened a distillers’ grains (DG) pit, and neither has the MERC. In fact DG varies in content, quality, and other factors from one ethanol plant to another. Recently, the USDA’s Grain Inspection staff offered to establish standards for DG, but farm groups were unsupportive of the effort. Without an industry standard and the lack of standard pricing information, how can a DG user be assured of getting the best price while managing the cost? Feedlots typically hedge calves and corn, but in the case of DG, that is not possible. But is it even possible to establish a price relationship across the network of ethanol plants that produce DG?
That is what Kansas State ag economists Tyler Van Winkle and Ted Schroeder wanted to find out in their research on price discovery, dynamics, and leadership in the DG market. They believe that within the growing DG market, more information is needed about price relationships among ethanol plants to determine if a futures market could exist. But the problem is whether there is any integration in the DG market that could help establish some commonality of price. In the past there has been extensive research to determine if a livestock feeder could hedge DG needs using corn and/or soybean meal futures. There is a limited relationship that was found, but insufficient to rely solely on that marketing tool. Additionally, they found less of a current relationship between DG prices and the futures markets than in past years.
The Kansas State economists looked at 6 years of prices in the DG market from Lawrenceburg, IN, Atlanta, GA; Buffalo, NY; Chicago, IL; Los Angeles, CA; Okeechobee, FL; Portland, OR; and Minneapolis, MN, Muscatine, IA; Atchison, KS; and Macon, MO. The price quotes were difficult to reconcile because of the sources of the information, plus the addition of freight and margin to some quotes. The researchers found that some DG markets did have limited price relationships with each other and with the corn and soybean meal futures markets, but that raised some additional questions because corn and SBM are not integrated with each other. Also, the researchers found very slow reaction from one market to another in the adjustment of prices.
The results of the research found that only one-third of the DG market seems to be connected, suggesting the limited opportunity for hedging price movement. However, there was no price correlation in the distance between markets, indicating that a buyer of DG could expect some success in shopping for price quotes. Even though there is a very loose network within the DG market, the suppliers are not independent of each other, but there is no dominant market. Cross hedging corn and soybean meal was not found to be a viable tool in managing DG price risk, but that might give rise to the trading of a DG futures contract.
Summary:
Both the supply and use of distillers’ grains will increase, providing an alternative feed source for livestock producers, but management of price risk for DG is difficult. There is minimal correlation in price movement within the DG supply network, and cross hedging DG with the corn and soybean meal market does not guarantee success. The lack of dominant markets and the need for better price information about DG may prompt the establishment of a DG futures market.
Posted by Stu Ellis at 12:16 AM | Comments (0) | Permalink
December 25, 2007
Is There Any Money Being Made Currently In Livestock Production?
Pork producers are putting on the pounds, some 75 million more pounds of pork than USDA estimated just a month ago. At least that is the increase in the fourth quarter pork production projection, which now stands at 6.1 billion pounds or 8% over similar figures in 2006. That impacts, not only the pork market, but the market for other livestock and meat prices.
Pork producers have been operating in the black for nearly 3 years, but increased production has driven prices to annual lows in the cycle, says USDA in its recent livestock outlook. $40 is the calculated breakeven price compared to the $38-$39 prices that will average for the fourth quarter.
Cold storage stocks are not increasing, indicating that domestic and foreign consumers are buying the record level of production. Recently, there has been an 8% increase in supplies that caused wholesale prices to drop. Comparatively, in 1998 a 10% increase at the same time of the year resulted in a 31% drop in wholesale prices. Since the pork market has not fallen as steeply, USDA economists say the export market has bought much of the increased slaughter rate, another benefit of the lower valued dollar and expanding demand for pork. Fourth quarter exports are forecast at 860 million pounds, which is triple the amount in 1998. In October alone, exports were 31% higher than October 2006, and 81% of the export trade went to only 5 nations. Domestically, higher beef and poultry prices are making pork more competitive in the meat case.
In the beef market, heavy cow slaughter continues, which began with the shortage of forage supplies. But economists say fall rains have re-established pastures in the Southeast and Southwest, and the rate of cow slaughter should decline. Even with high milk prices, dairy cow slaughter had been high because of high corn and feed prices. 2006 saw an 18% increase in cow slaughter over 2005, but in 2007, the rate was about 7% above 2006. Some analysts believe the cattle cycle is now in the liquidation phase, with only a small percentage above the cycle low of 41.851 million head 4 years ago.
Calf slaughter is well ahead of the rates for the past two years, and should have a high impact on the January 1 cattle inventory. USDA says that could lead to reduced supplies of feeder cattle and the potential for reduced beef supplies the next two years. Feeder cattle prices are declining because of the lack of wheat pasture available for grazing. USDA believes wheat producers do not want to risk crop damage in the wake of high wheat price prospects for next spring. Additionally, the profit picture for cattle feeding is negative, but there have been some opportunities for feeders to hedge at $1 per pound or more into the coming spring. The commodity beef market has risen in the past four weeks, but competitive pressure has not insured profits for packers.
USDA economists say there are strong prices for fed cattle; but slaughter numbers are high for heavy weight cattle, there is a high share of choice cattle, and there are relatively high numbers of cattle that have been on feed for 6 months. Retail prices for choice beef are relatively high, cumulative production numbers are ahead of 2006, and with disappearance being down slightly from 2006 USDA says consumers may see higher prices.
Broiler production in the first 10 months of the year totaled 30 billion pounds, but that is 0.3% under 2006. Live weights have been slightly higher, but USDA poultry specialists any production increases will come from the larger number of chicks being placed for growout. That rate has been nearly 5% more than last year. Cold storage grew only slightly from the third quarter, but is 11% under 2006 and stocks are significantly lower than last year. With a slowdown in exports and greater production, stocks are expected to build. That will pressure prices downward, which have been higher in 2007 than in 2006.
Summary:
Increased pork production continues to weaken pork prices, which have slipped into the red for most producers. Cold storage stocks have been increasing but not at the rate seen during the 1998 decline in pork prices. Cow slaughter continues at high rates as the industry’s liquidation phase has brought numbers near the low point of the last cycle. Calf slaughter is also rising with the strain on feedlot profitability, and that means lower beef supplies in the next two years. Poultry production is steady, but placements have increased pointing to higher production, and pressure on prices. However, cold storage numbers are down.
Posted by Stu Ellis at 12:08 AM | Comments (0) | Permalink
December 11, 2007
Are Large Pork Operations Really "Living High On The Hog?"
Large livestock production operations have proven there is an economy of scale, but have they gained an even larger advantage in recent years over mid-sized operations from low prices of corn and soybean meal? With higher prices for corn and soybean meal now compared to the past decade has the playing field changed any?
For decades farmers have called hogs the “mortgage lifter,” and the 1920’s provide the feed value relationship in the hog-corn ratio. 40 years ago when Wendell Murphy’s feed mill used hogs to clean up the gleanings a new livestock production economy was created that would grow to a large scale. That scale drew the attention of economists Elanor Starmer and Timothy Wise at Tufts University, whose research into the production economics of confinement feeding operations rhetorically asks if the playing field has been tilted to benefit the larger operations because of low priced feed inputs.
Starmer and Wise report that poultry was being vertically integrated in the 1920’s but the past 20 years has sped up the process in poultry, swine and beef. The poultry “industry saw its average feed efficiency double between 1945 and 1970, while labor productivity rose an annual average of 10.5% over the same period. Overall production costs dropped by nearly 90% between 1947 and 1999.” They quote USDA statistics that the hog inventory housed in facilities with 2,000 or more animals increased from 37% in 1994 to nearly 75% by 2002. They quote other USDA day that economies of scale are most evident between small and medium operations, leveling off as operations grow beyond 2,000 head.
The Tufts University economists say the 1996 Farm Bill eliminated price supports that remained from prior supply management policies and brought about declining commodity prices, increased production levels, rising input costs, and stagnant or declining net farm income. They say supporters of the policy hoped the US would gain more world trade, but improved technology caused yields to increase, and prices to drop. Critical of current farm policy, Starmer and Wise say, “This paper suggests that one of the major beneficiaries from recent changes to U.S. farm policy has been the industrialized livestock sector generally, and industrial hog operations in particular. Among some of the largest buyers of U.S. corn and soybeans, industrial hog operations spend some 60% of total operating costs on feed made largely of these two components.”
The researchers calculate that costs of production for corn and soybeans from 1986 to 2005 was almost always higher than the market price, based on statistics from domestic and international sources, and the margins widened after the 1996 Farm Bill, “As a result of their ability to purchase corn and soybeans on the market at a price below cost of production, industrial hog operations received, in effect, a discount on their feed from below-cost corn and soybeans. We estimate this discount to be 10% in the earlier period and 26% in the post-reform period.” The economists contend low grain prices after 1996 allowed large livestock operations to save an average of $945.3 million per year in feed costs. “These estimates suggest that industrial hog operations gained considerably from policy changes in 1996 that fed overproduction and provoked lower feed-market prices.”
Starmer and Wise say that since government payments tend to inflate land values, the price supports provided by the 1996 Farm Bill impacted land values, and a subsequent deflation of land values would affect the corn production cost by 4% and the soybean production cost by 6%. They further believe those adjustment shrink the discounted cost of feed, but it still provides a benefit to the livestock industry.
The nearly $1 billion savings in feed costs, say Starmer and Wise, was not available to the smaller operations that grow their own feed. “The availability of low-priced hog feed on the market may have contributed to a structural transformation in hog production, encouraging the growth of industrial operations by giving them a cost advantage over diversified competitors.”
The Tufts University economists hypothesize that large operations saved 2.4% to 10.7% in operational costs from “lax environmental regulations,” which they detailed in their report; and combined with discounted feed costs their overall operational savings totaled 17.4% to 25.7% compared to diversified crop and livestock farms which had smaller herd numbers.
With rising commodity prices, market values are expected to be above production costs for the next five years say Starmer and Wise, which would represent a 29% increase in the cost of feed for large confinement hog operations. They believe diversified operations will regain some economic advantages and may out-compete larger operations.
Summary:
Lower commodity prices, based on the marketing loan program in the 1996 Farm Bill, provided low costs of corn and soybean meal that allowed large increases in the number of large livestock feeding operations. Their economy of scale, according to the research, may have resulted more from government policy than from operational economics, with diversified crop and livestock operations being disadvantaged. Higher commodity prices anticipated in the next few years will return diversified operators to a better economic position.
Posted by Stu Ellis at 12:00 AM | Comments (0) | Permalink
October 15, 2007
Would You Go To Any Ethanol Plant To Buy Hog Feed?
With the growth of the ethanol industry, livestock producers will have an increasing quantity of distillers’ dried grains (DDGS) available as an alternative feed to provide protein and energy. However, DDGS will vary in its nutritional content from plant to plant, and pork producers are particularly urged to be knowledgeable of the characteristics of the DDGS before it is fed.
At the 2007 Midwest Swine Production Conference, University of Illinois swine nutrition specialist Hans Stein said, “Some DDGS products have been heated to an extent that the concentration and the digestibility of lysine has been reduced and it is, therefore, important that the concentration of lysine is measured in DDGS before it is used.” Stein’s presentation on Feeding DDGS to Pigs suggests that many new products from the ethanol industry will become available in the future and the feed value will need to be measured.
DDGS consists of the entire corn kernel, except the starch, which was removed and fermented for ethanol. Most of the earlier constructed ethanol plants were built only to remove the starch, but some of the newer processes will convert the corn kernel into different fractions that will result in a variety of products with different contents. Those might include products with varying quantities of hulls and germs. Stein says when the degermed and dehulled corn has been fermented, a high protein, low fat, low fiber product is produced, but the solubles stay with the hulls, and the remaining high protein product is 40% crude protein and is just DDG, distillers’ dried grain (no solubles). He recommends the inclusion of a 20% high protein DDG in diets fed to pigs, but if a 40% formulation is used, feed intake may be reduced in the growing period.
Other products from the ethanol plants may have had the corn oil removed, and the resulting product is only 4 to 6% crude fat, instead of 9 to 10%. Although untested, Stein expects the energy value is lowered 10 to 15% and less valuable than conventional DDGS. Another product may have had more fiber removed, which is also too new for feeding trials.
One of the prime considerations for a DDGS product is Lysine quality, quantity, and digestibility. Stein says there is more variability in Lysine digestibility than other amino acids because of heat damage during the drying process. Some DDGS samples with the lowest concentrations have the least digestibility. That is why lysine concentration needs to be quantified. Certainly lysine can be computed from the quantity of crude protein present, but because the processing can impact the lysine and not the crude protein, just knowing the crude protein is not sufficient. Stein says a color chart is not a good indicator of lysine, since the color of the DDGS can vary from time to time at an individual ethanol plant. Stein says part of the damage to the lysine comes when the solubles are reintroduced to the distillers’ grains, therefore he says DDG may be expected to have more lysine and it is more digestible than in DDGS.
Most of the available DDGS comes from ethanol plants producing a motor fuel, but Stein says there will be beverage ethanol plants that also produce DDGS. While no testing on the differences in nutritional characteristics has been done, Stein does not expect much difference in the quality and quantity of lysine. It all depends on the production process at an individual plant and the temperature during drying of the DDGS product.
Another difference of DDGS from various ethanol refineries is the concentration of phosphorus, and Stein says while the total amount of P is relatively small, there seems to be a wide variation in the amount of available P. Subsequently, it is important to establish the phosphorus content and the manner in which it was calculated.
In the end, the variations in characteristics of DDGS could be a substantial reason for the great variance in feed efficiency with different formulations of DDGS in swine rations. DDGS with a low lysine content will have an impact on finishing pig performance, and Stein says the crude protein concentration may also have been the limiting factor, “If the inclusion of crystalline
Amino acid is not increased, then the concentration of crude protein in the DDGS containing diets will increase. This can result in reduced feed intake, reduced dressing percentage, and reduced intestinal health, which in turn will reduce pig performance.” Until more research is done, Stein recommends not increasing the crude protein in a ration formulated with DDGS.
The end product is the meat quality of the animal, and Stein says the inclusion of DDGS in a diet fed to finishing pigs does not influence the palatability of bacon or pork chops. However, DDGS fed to finishing pigs will increase the iodine values and produce softer bellies than conventional rations, but the reasons are unknown.
Summary:
More ethanol plants mean more distillers’ dried grains available for livestock feed, but it also means more variability in the nutritional content, particularly in the quantity and digestibility of lysine which is important for swine rations. The variability results from the processing, which is different at individual plants, and pork producers should have DDGS analyzed to ensure quality and help quantify the value of the product being purchased for hog feed.
Posted by Stu Ellis at 12:05 AM | Comments (0) | Permalink
October 11, 2007
Exploring The Details Of Pork Production Economics
While the grain markets have rallied in the past year, and beef values are climbing, the pork market has not shared in the good fortune of other Cornbelt commodities. Profits have been good for several years, but are diminishing with lower market prices and higher production costs. But this is a complex economic equation.
Attendees at the recent Midwest Swine Nutrition Conference heard from University of Missouri livestock economist Ron Plain present his outlook on the economics of pork production. Plain says the story begins with the bio-fuels industry, which he calls the most significant development in US agriculture in the past 25 years. Seven years ago, the ethanol industry used only 6% of the corn crop, but that will increase to 26% for the current year, which brought a large increase in corn prices, and Plain says that caused a large increase in corn acres this year with an expected shift toward soybean acres next year. He believes the traditional stair-step trend for corn prices now has corn making a significant upward jump to the next level.
As corn prices move higher for pork producers, ethanol plants are producing distillers dried grains (DDGS), which has benefits and detriments, “The protein, fat, fiber and mineral content of a pound of DDGS are approximately three times that of a pound of corn. The energy level of DDGS is comparable to that of corn. Because of its high fiber content, DDGS has seen limited use in swine rations.” As the supply of DDGS grows, its price declines, and it is now priced under corn.
Although DDGS provides a high protein ration, the choice remains with soybean meal, and Ron Plain says its prices have followed soybean prices upward and USDA anticipated them to average $200 per ton.
Pork production has increased annually for the past 5 years according to USDA estimates. There is a larger breeding herd, litter rates have climbed, market weights have increased, imports have expanded, and that means there is more pork available per capita. Exports have expanded for 15 years, but tailed off this year as Mexico dropped out of the buying mode.
Although exports have fallen, 85% of US pork is consumed domestically, but its popularity in the supermarket depends on the prices of other meats. Plain says the outlook for beef is bright because of low supplies, consequently pork demand should be quite clear. US citizens are eating more meat as a whole, helped by a strong economy and low unemployment. Plain says his calculations show pork, beef, and turkey demand all up for the year.
Hog slaughter for 2007 is estimated by plain at 107.7 million animals, up 3% from 2006, but that 2008 slaughter will be 109.7 million, a nearly 2% rise. That is due to increased farrowings, increased sow productivity and that 2009 would see slaughter at 110 million head. Plain says 2007 market prices will be close to $63.50 this year, falling to $62 next year, then back to the low $60’s in 2009 for typical barrow and gilt prices.
Summary:
Pork production has continued to climb in the wake of higher feed costs and for the coming years, prices will be parallel to the cost of production. Corn prices have reached a higher plateau, soybean meal prices have followed corn prices up, making production costs higher. Exports have fallen for the first time in many years, but should recover, and total demand should remain strong with good US consumer response.
Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink
October 2, 2007
Pork! And Plenty Of It! So Long, Profits.
The numbers in last Friday’s Quarterly Hogs and Pigs Report were more of a squeal than music to the ears of pork producers. In essence, there will be more pork, and with high feed prices, profit margins will be marginal, if not totally red.
USDA’s Quarterly Hogs and Pigs report indicated the inventory was up 3% over 2006 levels and from the June 1 report as well. In brief:
• Breeding inventory, at 6.14 million head, was up 1 percent from last year
• Market hog inventory, at 58.5 million head, was up 3 percent from both last year and last quarter.
• The June-August 2007 pig crop, at 27.5 million head, was up 4 percent from each of the last two years.
• Farrowing intentions are for 2.96 million sows farrow during the September-November 2007 quarter, up 1 percent from the actual farrowings in 2006.
• Intended farrowings for December 2007-February 2008, at 2.94 million sows, are up 1 percent from 2007, and up 4 percent from 2006.
The slaughter implications for the next few months are a concern to Purdue ag economist Chris Hurt, “Slaughter capacity will be near maximum and has generated some discussion of the similarities to the disastrous fall of 1998 and casting a bearish tint to price expectations.”
Glenn Grimes and Ron Plain at the University of Missouri agree, forecasting dismal prices along with record slaughter, “October commercial hog slaughter is expected to be a record monthly high at over 10 million head. If this does occur, which seems highly probable, it will be the first month ever in the U.S. with a slaughter of 10 million hogs. With this level of slaughter, we expect the price of 51-52% lean hogs, U.S. basis, to be in the upper $30s to low $40s live weight in the last quarter of 2007.”
However Purdue’s Hurt is not quite that bearish on prices, “Hog prices are expected to be somewhat lower this fall and average in a range from $44 to $47 on a live weight basis for 51-52 percent lean carcasses. Absolute daily lows could move into the lower $40s. Late-October or early-November tend to be the period for seasonal lows. Winter prices are expected to improve about $2 and to average in a range from $45 to $48. Spring and summer prices should be much higher and are expected to average in the very low $50’s.”
One of the issues is weak export demand, but strong import pressure:
• Hurt says: “From 2000 to 2006, growing pork exports required an average increase in U.S. production of 1.2 percent per year. So far in 2007, exports so far are down 3 percent. The industry continues to expand for the export market, which is weak, at least in 2007.”
• Grimes and Plain say: “Live hog imports from Canada continue to increase. For January-July, total live hog imports from Canada were up 11.1%, feeder pig imports were up 7.9%, and slaughter hog imports were up 18.7%. We expect additional increase in live hog imports from Canada; but with Canada downsizing its hog herd, the growth will not continue forever.”
So what about production costs? Hurt says with high prices for corn and soybean meal, the cost of production is expected to be above hog prices for most of the next 12 months, with production costs averaging $51.50 and pork prices averaging $48.50 per cwt. He says there has been a great profit run since early 2004, but it has come to an end.
Summary:
USDA’s Quarterly Hogs and Pigs report last week indicated increases to the breeding herd, the hogs headed to slaughter, and to farrowing intentions for the next two quarters. The expansion, along with increased imports from Canada and weak pork exports means a greater supply of pork, record slaughter rates, and prices declining below the cost of production. Pork market analysts indicate high feed prices will aggravate the situation and producers will see red ink for the first time in nearly 4 years.
Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink
September 20, 2007
The 2008 Feed Issue: Supply and Price
When the Senate begins its consideration of new farm policy, livestock groups are expected to be vocal about the problems raised with policies that promote ethanol production and result in higher feed costs for livestock, whether intended or not. The Senate will have the latest USDA Feed Outlook handy and you do also.
USDA’s September analysis of feed supplies for livestock is headlined by the 13.3 billion bushel corn crop currently being harvested. It quickly notes that ethanol’s demand for corn has declined slightly and more corn is expected to be shifted to livestock channels. Combined with the other feed grains of sorghum, barley, and oats, the total 2007 production will be a record of 357 million metric tons, up 77 million from 2006. The total supply for the new marketing year is expected to be 392 million tons, up 55 million from last year, which is a 14% increase in supply.
Along with the increased availability of feed is the increased volume of livestock to eat it. Characterized as “grain-consuming animal units” the increase is up .1 million from last year, and resulting from ore hogs, poultry, and dairy cows, but few numbers of beef cattle.
The bulk of the feed supply is, of course, corn, and USDA says, “Feed and residual use of corn was raised 100 million bushels this month to 5.85 billion bushels because of higher yields, which are associated with increased residual use, and reduced availability of distillers’ grains. Distillers’ grains are expected to be lower than last month because of declining plant capacity utilization and sluggish startups of new ethanol plants.” USDA economists have calculated season average corn prices at $2.80 to $3.40 per bushel, compared to the $3.03 average for the marketing year just ended.
Sorghum production is estimated to be 495 million bushels for the current year, up 217 million from 2006 levels. Because of the higher production, USDA says there will be more available and used for feed. Sorghum prices averaged $3.30 per bushel in 2007, which was 109% of the price of corn, and the current marketing year price is expected to be $2.60 to $3.20 per bushel, which is 93% of the price of corn.
USDA’s barley and oat estimates will next be reported at the end of the month, but because of tight barley supplies in Europe, US exports are expected to increase. US is a net importer of oats, and because of the large Canadian crop, imports will increase, even with a 25¢ per bushel increase in price.
The US feed grain economy can be attributed, in part, to the lower global production and resulting increase in US export business. The largest international decline was in Europe, which suffered another drought. Argentine feed grain production also declined, but only because acreage shifted to oilseeds. For the imminent planting season in Argentina, feed grain acreage is expected to increase by 7%. Chinese corn production declined in the heat, and the Australian crop also diminished from warm, dry weather. Brazilian production of corn increased to 51 million tons with the help of strong export business with the European Union which wants non-GMO crops.
In the coming year, global consumption is expected to increase, and partly at the expense of wheat, which will be used less for feed because of expense.
More than 90 million tons of corn will enter the international export market and the US will contributed 57 million tons, which is the most in over a decade. In bushels that represents about 2.25 billion. Brazil will ship 8 million tons abroad.
Summary:
For the livestock feeder concerned about the availability and price of feed grains, the USDA says substantial increases in corn and sorghum will help address the supply, and prices are expected to average about the same as the past year. There will be more mouths to feed from increased animal production, but the supply should be up to the task. Additionally, US corn growers will supply two-thirds of the world’s corn exports, and prices for corn will be comparable to 2006/2007 marketing year that just ended.
Posted by Stu Ellis at 12:44 AM | Comments (0) | Permalink
September 4, 2007
There May Be Money In Meat Goats
Your holiday menu might have included steaks or burgers on the grill. Your dinner menu for the week will probably include beef or pork, and possibly chicken. But beginning late next week is a holiday for over one billion people who will prepare and eat a goat. Where do they get enough goats? Where is this market? Can I make money raising meat goats? Ah, you have come to the right place for answers!
There are not many households in rural America that serve goat meat, but there are millions of Muslim and Hispanic households in urban America where goat meat is prized. And when the month-long Muslim holiday of Ramadan begins September 13, ethnic markets in major cities will need goat meat to meet the consumer demand. If you have under-utilized livestock facilities, and are looking for an underserved market, one of the considerations may be production of meat goats. You don’t have to eat them, just raise and sell them. Someone else will take care of the slaughter process.
The University of Illinois has just assembled an extensive research collection on meat goat production, and it is all designed to aid the newcomer. So how do you begin?
1) Evaluate your resources, such as personnel (it is a 24/7 job), land (6-8 goats per acre), buildings (20 sq. ft./doe), equipment (hay, pens/chutes), labor (check twice/day), and capital. The latter is important since your operation should be sustainable in 3-5 years.
2) Marketing can include goat production for commercial slaughter, sale of breeding stock, or for 4-H shows. However, commercial slaughter may offer the best profit potential if goats can be marketed ahead of the ethnic holidays. Check the ethnic calendar for consumer demand.
3) A herd health program is necessary and a checklist is provided at the Illinois resource. You will also need to identify a veterinarian which can assist with your operation.
4) Feed will primarily be forage, either on pasture or hay, combined with small amounts of grain or concentrates with minerals. They are efficient users of low quality forage, and feed from the top down which helps eradicate many weeds. Clean fresh water is mandatory.
5) To build your herd, consider many of the issues that you would for cattle or hogs. Check for the health of the animal, look at its current environment, and start with lesser expensive goats.
Meat goat breeds should be judged on environmental adaptability, reproductive rate, growth rate, and carcass characteristics. The primary breeds are Boer, Kiko, Spanish, Savannah, Myotonic, and Pygmy. Dairy goat breeds exhibit better milk and cheese production, but culls and bucks wind up as slaughter goats.
Additionally, the Illinois meat goat resource contains a lengthy list of
1) goat associations
2) classes for production instruction
3) governmental resources
4) marketing information
5) other goat-related sites.
6) Books and magazines about goats
7) Farm production software
Summary:
Entrepreneurs who recognize the potential demand for meat goats in the growing ethnic marketplace should consider not only production and marketing issues, but how the enterprise fits into the current operation with respect to under utilized resources. If the resources are available, numerous references can be consulted for production and marketing expertise.
Your holiday menu might have included steaks or burgers on the grill. Your dinner menu for the week will probably include beef or pork, and possibly chicken. But beginning late next week is a holiday for over one billion people who will prepare and eat a goat. Where do they get enough goats? Where is this market? Can I make money raising meat goats? Ah, you have come to the right place for answers!
Posted by Stu Ellis at 12:24 AM | Comments (1) | Permalink
September 3, 2007
It Is Hard To Swim If The Gene Pool Is Empty.
When a new crop pest appears, researchers scurry into their seed vault to find genetics that may be resistant, and begin breeding that gene into current corn hybrids and soybean varieties. The same drill is required for livestock production, but heritage breed herds are quickly diminishing because reproductive rates, rates of gain, and other performance measurements are not as high as crossbred livestock. But if crossbreds are more susceptible to disease and other health-related production problems, what economical production solutions can be developed to serve both the producer and the consumer?
Ohio State University ag economists Daniel Sanders and Stan Ernst along with animal scientist Catherine Ernst of Michigan State University explored the maintenance of pork heritage breeds and whether consumers would pay the cost of preserving those heritage breed herds. The researchers say the Berkshire, Poland China, Tamworth, and Gloucester Old Spots breeds represent the basis for current livestock genetics and if those are los, then the original genetic information and variability is lost with them. While USDA is preserving some of the germplasm in the National Animal Germplasm Program, it will not be used to actively maintain a population. That means there must be a sufficient number of heritage breeders and herds, as well as a market that will sustain their genetically viable population.
If the market will pay a premium for unique taste and texture of the meat, to offset the added cost, such a niche market presents both opportunities for producers as well as challenges that are foreign to the commodity market. The researchers believe, “Genetic variability is the key to maintaining any population. Without a continuous mixing of genes, serious genetics consequences can result. The overuse of line breeding to improve a strain of animal will eventually lead to the inclusion of inferior genetic traits on a large scale, and the fitness of the entire population will suffer. Only maintaining the line by mixing diverse populations of varied heritage within the breed will keep the overall population stable.” They say the same applies to the heritage breed, and enough animals need to be raised to maintain genetic diversity in the heritage gene pool.
The Ohio State and Michigan State research involved consumer surveys at grocery stores as well as a research model based on the preservation of wildlife species. They took into account that in a litter of 9 pigs, 8 would be marketed and 1 would be reserved for breeding. One of the issues that arose in the surveys was consumer preference for “locally grown” meats, and the choices of “support local farmers” and “freshness” far outdistanced other choices that included “safety” and “flavor.” The consumers’ willingness to pay a premium price for those attributes generally extended as high as $1.50 per pound over the price of the commodity product if it was locally produced. While the consumers were unfamiliar with the heritage concept, they expressed positive attitudes when it was explained.
When it comes to numbers of livestock that must be raised for a diverse gene pool in a heritage breed, the researchers say it is about one-third of the current population. While that is tens and hundreds of thousands of hogs that must be maintained, the researchers say it is an achievable number that could stop the loss of genetic diversity, and within the framework of 55.6 million hogs produced in the US last year, the number is relatively small.
Summary:
The loss of diversity in the US swine gene pool jeopardizes the ability to fight future health problems, but the maintenance of heritage breed herds provides sources for solutions. Since heritage breeds are less efficient in production, costs are higher and those will have to be borne by the consumer, who indicates they would be willing to pay premium prices for traits that the heritage breeds provide. Maintenance of heritage breed herds may involve hundreds of thousands of animals to supply the genetic diversity, but that is a small number compared to total swine produced, and could be maintained with marketing and promotional programs.
Posted by Stu Ellis at 12:26 AM | Comments (0) | Permalink
August 27, 2007
If Risk Management Is A Challenge In Livestock Feeding, Here Are Two Ideas To Consider
Cattle and swine producers, concerned about volatile corn and soybean prices, will be able to sleep better with the help of either Livestock Gross Margin Insurance or Livestock Risk Protection Insurance. They are both provided by USDA, and livestock producers across the Cornbelt are now covered by both insurance plans. “What are the details and how do I sign up?” Glad you asked.
Livestock feeders face risks, not only in feed prices but in the price of feeder calves and feeder pigs. Management of that risk can be accomplished through hedging to ensure profits, but profit margins can also be insured with the help of LGM and LRP insurance programs. Nebraska livestock economists Darrell Mark and Josie Waterbury, in their recent Cornhusker Economics newsletter say that recent changes by USDA have expanded the programs to more producers by enlarging the eligible area and adding swine operations to the programs.
LGM for cattle provides protection against a decline in the cattle feeding finishing margins by simultaneously hedging the corn and feeder cattle input costs and the fed cattle selling price as a bundled option. It is available for calf finishing and yearling finishing
LGM for swine provides protection against a decline in the swine finishing margins by simultaneously hedging the corn and soybean meal input costs and the market hog selling price as a bundled option. It is available for farrow to finish, feeder pig finishing, and segregated early weaned pig finishing operations.
LRP covers the risk of price declines for feeder cattle, fed cattle, and swine. It provides producers an indemnity if a regional or national cash price index falls below an insured coverage price. Similar to a put option, the LRP policy is price insurance only, providing single-peril price risk protection for the future sale of insured livestock.
The University of Nebraska has created an educational website to help producers learn how to use the two forms of crop insurance for livestock. The LRP and LGM study guides address: premiums, beneficial interest, how coverage is purchased, basis risk, hedging outcomes, and enrollment details, including examples that help a prospective user correlate their operation. There are free home study courses, video lectures, and information necessary to understand and use the programs. “The website also contains an in-depth analysis of basis risk associated with LGM and LRP insurance, which differs from traditional basis risk.”
For the Livestock Risk Protection program, USDA made a number of changes beginning in July, in addition to the expansion to 17 additional states. (37 are now in the LRP program.) Both the livestock and the agent must be in the eligible states, but the owner can reside elsewhere. Additionally, USDA removed the prohibition on taking either a hedging or options position that was adverse to the insurance. USDA also extended coverage limits up to 100% of the expected ending value, however reduced the price adjustment factor to 85% for dairy livestock.
Summary:
Cattle and hog producers who are uneasy about volatility in the livestock and feed markets have an increased opportunity to manager their profit margins with the help of Livestock Gross Margin and Livestock Risk Protection insurance programs from USDA. Recent changes in both programs have extended the eligibility to more producers, and with that, the University of Nebraska has provided educational information on-line to learn how to use the risk management programs.
Posted by Stu Ellis at 12:58 AM | Comments (0) | Permalink
August 14, 2007
The Livestock Industry Still Lacks Focus In The Aftermath Of High Feed Prices.
For the past year, there has been a queasy feeling within the livestock industry. A group of entrepreneurs which adds value to agriculture, has been looking at its investment wither in the wake of a hot market for livestock feed. Now with acreage known and yield estimates in hand, the production cost uncertainties have been reduced. But how is the livestock industry reacting to the new era in agriculture?
The outlook for the US livestock industry is a bit more relaxed than it was six months ago when grain prices were rising and no one knew when they would peak. USDA’s Livestock, Dairy, and Poultry Outlook indicates transitions are being made by livestock producers to regain control of their economic lives.
The pork industry is growing according to the June 29th Hogs and Pigs Report, with a 1% increase in the breeding herd. At the same time, litter rates continue to grow with the second quarter reaching 9.15 pigs per litter. That is nearly 1 additional pig since 1995. USDA says that implies almost 22 billion pounds of pork to be produced in 2008, up 1.5% from 2007 production.
The export market slipped a bit in recent months due to 20-30% reductions in demand from Mexico and Russia, which are two major markets. Mexico’s economy is softening, but Russia business is responding to aggressive Brazilian pork exporters. Overall, pork exports are expected to be flat for the balance of 2007 compared to 2006, however USDA says lower pork prices from increased 2008 supplies will regenerate export business.
For the second half of 2007, pork supplies will grow and prices are expected to be $51-53/cwt, compared to a range of $45-49 for the fourth quarter. At the meat counter, retail pork has been more expensive than last year due to higher marketing costs.
For the beef market price volatility has corresponded to grain price volatility. Higher feed prices, reduced hay stocks at the end of the winter, and flood-prone pastures resulted in increased cow slaughter this year compared to the past two years. USDA says that sets the stage for a slower expansion in the cattle inventory. Despite high feed prices, the low inventory of feeder calves has supported that market. Fat cattle prices are 7% above last year and that corresponds to lower slaughter, lower slaughter weights, and overall lower beef production. Lower heifer retention and higher cow slaughter indicates a decline in the breeding herd.
Beef prices at the meat counter have been volatile, in part by lower supplies of choice beef. Retail prices currently are 1% above 2006, and the spread between wholesale cutouts and retail beef is narrowing. The increasing demand by Japan and Korea will help to keep upward pressure on retail beef.
Dairy prices are at record highs, not because of my consumption of ice cream, but due to tight world supplies of dairy products and the weak US Dollar that causes buyers to come first to the US. USDA says 2007 milk production is steady with 2006 at 184.3 billion pounds. However, the higher milk prices and lower feed costs will combine to increase dairy herds. The international demand results from low availability of dairy products in Europe and the inability of Australia to quickly increase supplies. USDA says milk prices will continue at current high levels and should average over $19.00/cwt for the year.
US lamb producers are rebuilding herds, and lambs kept from the market will be replaced by imported lamb and mutton, despite adverse currency issues.
Broiler production is down 2.4% compared to 2006, but with the breeder flock up and trends in place, production in the second half of 2007 should be 2.3% above 2006. Production declines had resulted from lower meat yields per bird. Turkey production is up about 3% over 2006, due to more birds and higher weights. However, prices are considerably higher than last year due to a strong export market for turkey meat. And egg production continues to decline month to month due to fewer birds in the laying flock. Egg prices are strongly higher, due to lower numbers and a stronger export market.
Summary:
The biofuels industry created economic issues with livestock feeds, but going into the second year of higher grain prices, the US livestock producer is making decisions based on those economics. The pork industry is expanding, the beef industry expansion may be over, the lamb industry is rebuilding, dairy is enjoying record high prices for milk and will expand, and poultry meat is in a transition from lower production to increased production.
Posted by Stu Ellis at 12:00 AM | Comments (0) | Permalink
August 2, 2007
Livestock Producers Can Expect Friendlier Feed Prices In The Foreseeable Future
Livestock producer organizations have pushed Congress for policy that protects them against high feed prices resulting from federal policies to promoted biofuels from typical feed grains and oilseeds. Feed budgets have been hurt in the past 10 months by high corn prices, but once the extent of acreage in the new crop was established, corn prices have softened, and USDA now says record feed grain production will loosen the tight supplies.
The official feed grains of corn, sorghum, barley and oats will be produced in a quantity unseen since the 1986-87 crop year. Although sorghum, barley and oats were over one third of the feed grain production 21 years ago, this year their share of the production will be closer to 15% of total production. USDA’s latest feed outlook indicates the total supply will be 378.2 million tons, up 41.2 million from the last crop year. Total use for feed, seed, and residual is expected to total 152.8 million tons which is about 45% of the total use. USDA economists Allen Baker and Edward Allen report that ethanol co-products are replacing corn in feed that ethanol refineries are taking out of the market, “Corn is estimated to account for 89 percent of the feed and residual use, down from 93 percent forecast for 2006/07. Increased production and feed use of distiller’s spent grains are expected to offset decreased feed and residual use of the four feed grains plus wheat.”
The number of livestock consuming the feed has changed little in the past year, holding at 91.8 million animal units. Cattle on feed and dairy cows are down slightly, but hogs and broilers are up. Beef production for the balance of the year is expected to weaken, and feed needs will be picked up in part by distiller’s grains. Pork production is on the rise, so feed for hogs will be up. Broiler, turkey, and egg production are also increasing, so poultry demands for feed will also increase. Food and industrial demands will consume 38% of the supply compared to 31% for last year.
For corn, production will be up, exports have decreased, and both beginning and ending stocks have been pushed upward. That softened prices, with the season average computed at $3.05 for producers.
For sorghum, acreage increased this year, and production is expected to rise by 430 million bushels with the help of a higher yield. New crop sorghum prices should be lower than the old crop, which averaged at $3.30 per bushel. The new crop is expected to range $2.40 to $3.00.
For barley, production is forecast at 231 million bushels, up 51 million from last year. Imports are up to bolster the domestic supply, and to help meet the increased demand. Barley prices are expected to be $2.75 to $3.35 for the new crop, compared to $2.85 for the 2006 crop.
For oats, production is forecast at 100.9 million bushels, down 7.2 million from 2006 on fewer acres, but even with a higher yield than last year. The overall supply will be down, even with higher beginning stocks. Oat production will be about 20% of what it was in 1985-86. Oat prices for the producer are expected between $1.60 and $2.20, compared to a $1.87 average last year.
Worldwide, coarse grain production will be 1.066 billion tons. A 9 million ton increase results from increased US corn production, and negates a 2 million ton global decrease. That is because many parts of the world are having weather problems from either being too wet or too dry. Comparatively, global use is projected at 1.059 billion tons. Global ending stocks are estimated at 137 million tons. With the recent slowdown in US corn exports, USDA has also lowered its estimate of new crop exports to about 2.1 billion bushels.
Summary:
The hot domestic market for corn in the past year cooled off some US export business, because of the same high prices that caused many US livestock producers to rethink their expansion plans. With the feed grain market trying to find equilibrium between the ethanol and the livestock and export industries, the market will be supplied with an abundant crop that will soften prices for the near future. Livestock producers who’ve been challenged with high feed grain prices will benefit from the current dynamics and still have the lesser priced distiller’s grains as an alternate source.
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
July 17, 2007
Droughty Pastures Require Serious Management
Western Cornbelt pastures are drying up. Eastern Cornbelt pastures never did get very lush this year. And Cow/calf operators across the upper Midwest are wondering if their forage resources can be stretched any more. If pasture is a problem, the farm gate has some possible solutions.
Beef cattle are thinking to themselves, “This is déjà vu all over again. Last summer my grass dried up, and this summer it is doing the same thing and it isn’t even August yet!” In fact many cow/calf operators are saying the same thing as their cattle, but they are the ones who can do something about it. There are short term and long term actions that can be taken focused on extending resources, pasture improvement, and reduction of pressure.
Extend your current forage resources
Kansas State beef specialist Twig Marston recommends several actions you can take today to extend what little pasture you may have:
• Enhance grazing distribution with a mineral mixture placed away from water sources.
• Observe pasture weed problems to help plan control methods for next spring.
• Monitor grazing conditions and rotate cattle to different pastures, if possible and practical.
• Be prepared to provide emergency feeds if pastures run out in late summer. Providing supplemental feeding now can help extend the grazing period.
• Supplement maturing grasses with a degradable intake protein for stocker cattle and replacement heifers.
• Avoid unnecessary heat stress by handling cattle during the coolest parts of the day.
University of Nebraska forage specialist Bruce Anderson suggests sacrificing a small paddock where cattle can be kept for longer periods, allowing the rest of the pasture to recover. He characterizes it as, “A small area converted into a temporary feedlot. Although the sacrifice area will be unusable for grazing for the remainder of the season, it leaves the rest of the pasture in better condition due to reduced traffic and grazing. Often the best pasture ground makes the best sacrifice paddock. Good pasture ground will be easier to reseed and more likely to succeed the following year.” Anderson says you can also move the feed bunk, parallel to Marston’s suggestion of moving the mineral box. Wasted hay and manure will enhance grass recovery as much as smothering it.
Anderson says the grazing rules change when pastures dry up. Don’t expect pastures to grow without moisture, “Therefore, it usually is in the producer's best interest to graze pastures completely.” If it takes a heavy rain to get any growth response, Anderson says, "At that point it is best to leave only enough grass to protect your soil from eroding. Any grass left behind will not regrow when it is this dry, and probably will be gone or worthless by the time cattle return later." Six weeks is needed for recovery after a rain, or the plant will be unable to recover from the drought stress.
Reduce the size of the herd
There are two ways to reduce the pressure on the pasture.
1) Marston recommends that producers consider weaning calves earlier than normal. Early weaning can be effective, if current range conditions are limiting milk production in cows and if the cows are losing weight or body condition. Before weaning calves early, producers should make sure that they have the facilities and management available to handle lightweight calves. First calf heifers have the most to gain from early weaning, and feeding early-weaned calves is more efficient than feeding cows without weaning their calves.
2)University of Illinois livestock specialist Justin Sextensays you can also reduce the stocking rate with an early departure of cull cows. He says culled stock contributes 16% of your income and astute marketing will not only ease your pasture problem, but improve your revenue. Sexten says a 10 year study by John Lawrence at Iowa State found that cull cow value peaked in June, then declined through November. To take advantage of that marketing opportunity, conduct early pregnancy checks and cull your open cows early in the summer.
Additional pasture may come from your wheat stubble. After wheat harvest, planting annual grasses can provide an alternative to a dry pasture. Sexten says, “Pearl millet, sorghum-sudangrass, sudangrass and certain forage brassicas can be seeded after wheat and grazed 60 days later. These forages are adapted to growing during the hot periods of the summer unlike cool-season grasses which make up most permanent pastures. Prussic acid can be a concern for sorghum-sudangrass and sudangrass pastures. To avoid this potentially deadly problem wait until these forages are 24 inches tall before grazing or cut them for hay. The drying process of haying allows the toxic compound to dissipate. Pearl millet does not contain the compound causing prussic acid poisoning so it may be grazed later into the fall.”
If you use wheat stubble for a seedbed, Nebraska’s Anderson makes several recommendations:
1) When planting alfalfa the best way to minimize (crop residue) is to bale the straw and be sure to have a well-functioning drill.
2) Control weeds that exist prior to planting with herbicides like glyphosate and be ready with post-emerge herbicides like Select or Poast Plus for weeds or volunteer wheat that emerge later.
3) To ensure a good stand consider cross-drilling or double-drilling by planting one-half of the seed while driving in one direction and the other half while driving at an angle to the first direction.
Bolster pasture health for the future
If you pasture is tall fescue, or another cool season forage, it will appreciate a shot of nitrogen as it prepares for fall growth. University of Illinois Crop Systems Specialist Robert Bellm says August is a prime time for fertilization, “Tall fescue will respond to nitrogen fertilization as well as or better than any other forage grass. In fact, forage production can be increased between 1000 and 2000 lbs per acre for each 50 pounds of nitrogen applied. In addition to a nearly linear increase in forage production from nitrogen applications, forage crude protein also increases while neutral detergent fiber decreases. How much nitrogen to apply depends upon several factors, such as the thickness and uniformity of the grass stand, and whether or not legumes are present in the sward. If at least 30 percent of the forage mix consists of legumes such as clover, additional nitrogen fertilizer may not be needed. On the other hand, if the forage mix is predominantly grass, then 50 – 100 pounds of nitrogen per acre should be applied.”
Summary:
Drought conditions can be as devastating to livestock producers as grain farmers, but pasture management can be easier by reducing stocking pressure with early weaning and early culling of open cows. The supply of forage grasses can also be extended with strategic pasture management, including fertilization prior to fall growth. As an alternative to a dry pasture, annual grasses can be planted into wheat stubble.
Posted by Stu Ellis at 12:15 AM | Comments (0) | Permalink
July 11, 2007
Prospects for Profits in Pork Production In The Next Year
USDA’s recent Quarterly Hogs and Pigs Report held little surprise that the US pork industry was expanding, but ironically it was released on the same day USDA forecast a nearly 13 billion bushel corn crop. Combined, the synergy was more pork at lower prices for the consumer, but with more corn on hand, production costs for the producer would be friendly to profit potential.
On the surface it would appear that plenty of corn will be available for hogs, which have little use for distillers’ grains. But the murky market underneath that surface has done little to reveal the new era price trends for corn and soybean meal.
From his vantage point at Purdue, livestock economist Chris Hurt observes that the April to June quarter was the tenth consecutive quarter for expansion of the breeding herd. It has been slowly progressing, helped by larger litters, more sows, higher weaning rates, and more intended farrowings. Those factors will contribute to a 3.2% rise in pork production over the next year, compared to the past year, says Hurt.
Some of that extra pork will be exported, since the export market has kept the pork afloat in the past year. Livestock economists Glenn Grimes and Ron Plain at the University of Missouri say, “Pork exports in April were down 12.4% from a year earlier. For January-April pork exports were down 1.0% from this period a year ago. Pork exports for January-April were up 12.5% to Japan, up 1% to Canada, down 24.3% to Mexico, down 17.4% to Russia, up 7.9% to South Korea, up 31.9% to mainland China and Hong Kong, down 47% to Taiwan, down 33.9% to the Caribbean, and up 6.6% to "other." The big decline for the first 4 months of 2007 was in exports to Mexico which were down over 52 million pounds from 12 months earlier.”
Purdue’s Hurt calculates market values under the $50 threshold for most of the coming 12 month period, “Prices of live hogs are expected to average about $48.50 per live hundredweight over the next 12 months based on 51 percent to 52 percent lean carcasses. Prices for the third quarter are expected to average in the $50 to $54 range. Last quarter prices are expected to drop to $43 to $47. Winter prices may improve some to $45 to $49, with second quarter 2008 prices back up to $48 to $50.”
With those prices, will there be any profit opportunity? Hurt believes prices will be floating about the average breakeven point, and while some producers will be in the black others will be in the red. The saving factor is the expectation for softer corn prices. But Hurt says, “Corn and soybean meal prices could still be dynamic over the next few weeks until the size of this summer's crops become clearer. Each $1 change in corn prices impact national hog production costs roughly $5 per live hundredweight. The estimated corn breakeven prices over the next year given current futures price estimates for soybean meal are $4.18 per bushel this summer, followed by $2.85 in the fourth quarter, and $3.06 and $3.77 for the first two quarters of 2008, respectively.”
Market weights are still hefty, in the wake of expensive feed, but Mike Brumm’s comments at the University of Nebraska’s Pork Central Mike Brumm says producers have adjusted to high feed prices. Hogs in the Upper Midwest are being slaughtered at weights parallel to the past several years when corn prices were lower. “Even with late finishing diet ingredient costs approaching $160/ton, today’s genetics are capable of putting on 1 pound of gain using less than 4 pounds of feed as they grow from 270 to 290 pounds. With feed costing $0.08/lb, feed cost per pound of gain for these last pounds of gain is only $0.32.”
As the pork industry prepares for a breakeven year, Grimes and Plain say there is still a definite cycle. “From late 1999 to late 2000 there were 13 months of growth in demand for live hogs. From late 2000 to late 2001 there was mixed demand action but losses most of the time for 12 months, then there were 17 months of losses. From mid-2003 to mid-2005 there were 26 months of growth. This growth period appeared to be associated with the popularity of high protein diets. Following the 26 months of growth, there were 14 months of losses in live hog demand. For the last 11 months, there has been growth in live hog demand. A part of these fluctuations in demand for live hogs was probably tied to pork exports.”
Summary:
Thanks to the export market and softer prices for corn, the growth in US hog production will bring abundant supplies and friendly prices to the consumer, without pushing too many produces into the red. Breakeven prices may be the best that most producers can muster, which demands a good risk management plan for buying corn and selling hogs in the coming year. With hogs putting on low cost weight, both the producer and consumer should benefit from the current dynamics.
Posted by Stu Ellis at 12:29 AM | Comments (0) | Permalink
July 9, 2007
Review This Report Card On The Use Of DDGS, Corn Gluten, And Other Ethanol Co-Products
There is a new sheriff in town, and he’s changed the culture of the community. The new sheriff and his posse are the variety of co-products from the refining process that converts corn to ethanol. They have replaced the use of corn and soybean meal in many livestock rations, caused livestock operators to reformulate their rations to take advantage of cost savings and the difference in nutritional values. Because of the Cornbelt culture shock created by the ethanol co-products, USDA’s statisticians needed to find out the impact of the changes.
The National Agricultural Statistics Service surveyed 9,400 Cornbelt livestock operations this spring to determine how many were using one or more of the co-products, what was being fed, and their characteristics, along with the barriers of using them, and preferences of the operators. Included in the survey were dairy operations, feedlots, cow/calf operators and pork producers. Out of the 94 hundred surveyed, 1,276 had used ethanol co-products in their feed ration during 2006, as reported in Ethanol Co-Products Used for Livestock Feed.
The products in the survey included: brewers dried grains, complete feed, condensed distillers solubles, corn distillers dried grains (DDG), corn distillers dried grains with solubles (DDGS), corn distillers dried solubles, corn gluten feed, corn gluten meal, distillers wet grains, dry milled, and wet milled.
Dairy Operations
38% of the operations surveyed were using co-products, and had been for an average of 9.2 years. 22% were not using them, but would, and 40% would not consider it. 77% were buying them from feed companies or co-ops with the balance split between purchases at the ethanol plant or through feed brokers. 56% were buying the co-products on a spot contract, with 32% pricing it against corn and 44% pricing it against both corn and soybean meal. The dairy operators were generally happy with their suppliers, which provided a variety of nutritional and consulting services. 59% of the operations had the feed company help with the feed formula, and 24% used an independent nutritionist. The dairymen were primarily (45%) using distillers’ dried grains without solubles. 44% of the operations were evenly split between distillers’ dried grains with solubles and corn gluten feed. Rates of inclusion were 17% for DDG, 8% for DDGS, and 15% for gluten feed. 92% of the operations were feeding an additional protein source and 72% of those chose soybean meal. Of the operations which were not feeding an ethanol co-product, a wide variety of reasons were offered, with the most common at 26% being lack of availability.
Feedlots
36% of the operations surveyed were using co-products, and had been for an average of 5.1 years. 34% were not using them, but would, and 30% would not consider it. 52% were buying them from the ethanol plant with the balance split between purchases at the feed co-op (33%) or through feed brokers (15%.) 55% were buying the co-products on a spot contract, with 66% pricing it against corn and 25% pricing it against both corn and soybean meal. 65% of the feedlot operators were generally happy with their suppliers, which provided a variety of nutritional and consulting services. 54% of the operations had the feed company help with the feed formula, and 31% developed the ration by themselves. The feedlots were primarily (38%) using corn gluten feed. 19% of the operations were using DDG and 14% were using DDGS. Rates of inclusion were 26% for corn gluten feed, 11% for DDG, and 23% for DDGS. 44% of the operations were feeding an additional protein source and 18% of those chose soybean meal. Of the operations which were not feeding an ethanol co-product, a wide variety of reasons were offered, with the most common at 35% being lack of availability, and 22% cited infrastructure and handling problems.
Cow/calf operations
Only 13% of the operations surveyed were using co-products, and had been for an average of 4.6 years. 30% were not using them, but would, and 57% would not consider it. 66% were buying them from feed companies with the balance split between purchases at the ethanol plant (20%) or through feed brokers (14%.) 69% were buying the co-products on a spot contract, with 61% pricing it against corn and 25% pricing it against both corn and soybean meal. 60% of the cow/calf operators were generally happy with their suppliers, which provided a variety of nutritional and consulting services. 40% of the operations had the feed company help with the feed formula, and 49% developed the ration by themselves. The cow/calf were primarily (46%) using corn gluten feed. 25% of the operations were using DDG and 13% were using DDGS. Rates of inclusion were 28% for corn gluten feed, 22% for DDG, and 28% for DDGS. 42% of the operations were feeding an additional protein source and 25% of those chose soybean meal. Of the operations which were not feeding an ethanol co-product, a wide variety of reasons were offered, with the most common at 38% being lack of availability.
Pork operations
Only 12% of the operations surveyed were using co-products, and had been for an average of 2.7 years. 35% were not using them, but would, and 53% would not consider it. 74% were buying them from feed companies and 21% at the ethanol plant. 55% were buying the co-products on a spot contract, with 40% pricing it against corn and 43% pricing it against both corn and soybean meal. 63% of the pork operators were generally happy with their suppliers, which provided a variety of nutritional and consulting services. 73% of the operations had the feed company help with the feed formula, 11% used an independent nutritionist and 13% developed the ration by themselves. The pork operations were primarily (4%) using DDG and 37% were using DDGS. Rates of inclusion were 11% for DDG, and 10% for DDGS. 93% of the operations were feeding an additional protein source and 84% of those chose soybean meal. Of the operations which were not feeding an ethanol co-product, a wide variety of reasons were offered, with the most common at 36% being lack of availability, 16% were concerned about nutritional value, and 14% cited handling concerns.
Summary:
Before soybeans and bean meal came along, livestock were raised on corn and other starch grains. But high protein soybean meal changed feed rations, and now the availability of ethanol co-products is resulting in more change for livestock feeds. Producers of all species have tried them and are using them to some degree, and with some degree of success, once ration formulations are refined. Livestock operators are finding that suppliers are willing to help work out problems and supply many services and ways to purchase the new type of feedstock. The various co-products from the ethanol refining process contain a wide range of protein and fiber contents, which have to be managed, but can usually be obtained at a reasonable price. Those producers who say lack of availability is the reason for not feeding ethanol co-products need only wait a while longer.
Posted by Stu Ellis at 12:10 AM | Comments (1) | Permalink
July 3, 2007
What Did The Hogs And Pigs Report Say About Pork Producers?
The US pork industry is growing. That is the upshot from last Friday’s USDA Quarterly Hogs and Pigs Report, which said the June 1 inventory was 1.7% more than it was a year ago. Market hog numbers were 1.8% higher, and the breeding herd was 0.9% more. We’re still expanding in the wake of increasingly expensive feed costs. Would someone please explain that?
We’re glad you asked! But it is going to take a moment because the issues are numerous. First of all, there is demand. Glenn Grimes and Ron Plain at the University of Missouri
say consumers are wanting beef and pork. Pork demand was up .6% for the January to May period and beef demand was up 1.1% for the same period. For live animals, hog demand was up 3.8% and the demand for calves was up 4.7% from 2006 statistics. Retail prices were also up 3.9% from a year ago. Grimes and Plain say, “The available data indicates the stronger live hog demand is due to higher retail prices and lower marketing margins which were down 1.4% in January-May compared to 12 months earlier.”
But the scenario won’t last says Shane Ellis of Iowa State University, “The market is expected to respond with prices slightly below those of a year ago. With the increased production, hog prices will be down from a year ago.” And the Missouri economists agree, “USDA's heavier weight market hog inventories indicate third quarter 2007 slaughter will be up 1.4%. We are estimating a 2.4% increase for the quarter and that may be low based on second quarter actuals. For the fourth quarter, USDA's light weight market inventory indicates a 1.8% increase in slaughter from last year. We are increasing the estimated slaughter to 2.8%.”
Both the Missouri and Iowa State researchers say another reason for increased slaughter is the turnaround in death rate from circovirus. With the development and use of a vaccine, there are more hogs surviving, and when hogs survive in the feedlot they make their way to market. “Considering all of these factors, pork production in the third and fourth quarter of the year will be noticeably higher than a year ago. The market is expected to respond with prices slightly below those of a year ago,” says Shane Ellis at Iowa State.
The expansion in the industry is not concentrated in any one area, but the USDA report numbers indicate it is the result of increased expansion in a multitude of states. In total the US added 56,000 head to the breeding herd. The states that added breeding herd were 20,000 each in MN and MO, 10,000 each in IL and MI, and 5,000 in KS and TX. States not in the top 17 states added 21,000 breeding animals in total. States that experienced a reduction in breeding herd inventories were IN, NE, SD, and WI. IA held steady.
With the increase in the breeding herd, Missouri’s economists say it is all part of the cycle, and we are due for increased production and lower prices. “ From late 1999 to late 2000 there were 13 months of growth in demand for live hogs. From late 2000 to late 2001 there was mixed demand action but losses most of the time for 12 months, then there were 17 months of losses. From mid-2003 to mid-2005 there were 26 months of growth. This growth period appeared to be associated with the popularity of high protein diets. Following the 26 months of growth, there were 14 months of losses in live hog demand. For the last 11 months, there has been growth in live hog demand. A part of these fluctuations in demand for live hogs was probably tied to pork exports.” Pork exports to many nations were down, including a drop of 52 million pounds going to Mexico, compared to 2006.
With the decline in exports, increase in farrowings, slaughter, weights, and steady corn prices and higher soybean meal prices, producers can expect some challenges to profitability. Iowa State’s Ellis says, “Profitability may be reduced from the lower prices, but Iowa farrow to finish operations are estimated to have $48-51/cwt breakeven cost in the next two quarters if corn and soybean meal prices don’t dramatically change. There should be opportunity for producers to remain profitable through the summer and into the early fall, but the late fall and winter months could show some red ink. Producers should consider taking advantage of any breaks in the market to secure lower feed costs.”
Summary:
The Quarterly Hogs and Pigs report indicated increases for market hogs, hog slaughter, breeding herd and farrowing intentions. With the growth in the supply, also comes growth in demand, however, based on forecasts, the supply will surpass the demand, and there will be challenges to profitability.
Posted by Stu Ellis at 12:56 AM | Comments (0) | Permalink
June 27, 2007
How Clear Is The Crystal Ball When You Look At The Pork Industry?
Who is currently raising hogs, how are they doing it, and are they making any money at it? Better yet, what is their perspective of the future, and for future profitability? Some probing questions have been asked by two prominent livestock economists, and the farm gate has the answers.
Subscribers to PORK Magazine, members of the PIG Improvement Company, and cooperators with the National Pork Board answered a comprehensive survey taken by John Lawrence at Iowa State and Glenn Grimes at the University of Missouri, whose research and analysis has been published in Production and Marketing Characteristics of U.S. Pork Producers. The survey was taken in February and March of this year and based on 2006 production. It is probably no surprise to hear Lawrence and Grimes say, “The US pork industry continues to evolve and consolidate to fewer and larger production operations.” It has been doing that and will likely continue, based on the intentions of the group.
Statistically, they found, 65% of US hog production was under control of 191 operations which marketed 50,000 or more hogs annually. Another 21% of the US production was attributed to 1,450 operations which marketed 10-15 thousand head annually. They indicated, “Operations marketing at least 10,000 head gained market share between 2003 and 2006, and farms marketing less than 10,000 head lost market share.” So operations selling fewer than 10,000 head annually were a “dying breed.” But overall, the entire industry is contracting. USDA identifies 56,350 owner operators of hog farms in 2006 and that is a 20% decline since 2003, and is down from 323,000 operations in 1988.
Among the operational differences, size was the major determinant of characteristics:
• A higher percentage of the 50-500-thousand-head producers outsourced the feed preparation and gilt development aspects of their business.
• Over half (54%) of the hogs ate feed prepared by the firm.
• Likewise, the 50-500-thousand head producers purchased a higher percentage of their replacement gilts compared to other size categories.
• The percent of firms raising hogs indoors and using split-sex feeding increased with firm size. The percent of all hogs under each technology was 94% and 64%, respectively.
• Wean-finish facilities were less common. Less than 20% of the under 50-thousand-head operations and 44% and 31% of the Large and Very Large producers used this technology and in total it was used on 29% of the hogs.
• The percent of firms raising grain declined as annual hog marketings increased. In total, 35% of the grain eaten by hogs was raised by the firms that produced the hogs.
There was also money to be made in 2006, and it saw an increase in the number of operations in the black and 95% of the 50,000+ head operations reported profits. In 2003, only half of the group was in the black and less than a quarter of the 50,000+ head group was profitable. Lawrence and Grimes say, “In 2006, all size groups anticipated increasing their production in 2007 and on to 2009. Thus, it appears that the supply of pork will continue to grow. Producers’ perceived obstacles to growth depended on the size of the operation, but in 2006 there were some common themes. Animal disease, productivity and compliance issues were the greatest perceived challenges.” Profitability was still an important issue, since the survey occurred at a time of $3.00+ corn. Less than half of the producers marketing less than 500 thousand hogs would continue to raise hogs if hog prices fell below $46/cwt liveweight. Seventy-five percent of the Very Large producers indicated that they would continue to produce at prices below $46/cwt.
Larger producers sold their production on a carcass basis instead of liveweight. Lawrence and Grimes discovered, “The use of contracts, negotiated or group, increased with the size of the firm. Nearly 90% of the over-500-thousand-head operations reported using negotiated contracts and 42% of the producers in this group reported selling to their own packing plant.” 57% of the hogs were priced using a formula tied to hog prices. The Large and Very Large producers sold a higher percentage using formula pricing. Approximately 20% of all hogs were sold on the spot market with smaller producers selling a higher percentage of their hogs this way than large producers. Contracts with pricing based on a formula tied to futures market prices or meat prices represented 7% and 6% of hogs respectively.
Would farmers continue using marketing contracts? All sizes of producers responded positively with a higher than average ranking. In spite of their lower ranking to the earlier question, larger producers responded more positively to this question than the smaller producers. When asked if marketing contracts should be more closely monitored by USDA an interesting trend developed:
1) First, agreement with the statement declined with the number of annual marketings.
2) Second, the level of agreement declined over time among the under 50,000 head producers, but increased, particularly since 2003, with the over 50,000 head producers. Producers’ preference for marketing all of their hogs on the spot market declined in 2006 and has declined over time. Preference declined as producer size category increased.
Contract production is expected to increase in the coming years. Over half of the over-500-thousand-head producers responding in 2006 expect to increase contract production. A portion of the under-50-thousand and 50-500-thousand-head producers expect to reduce contract production, but on average it is expected to increase from these two size groups. The vast majority of growers expect to continue contract production when their contract expires, 78% with current contractor and 6% with another company. Fourteen percent of the growers expect to become independent producers at the end of their contracts.
Summary:
In the past 20 years, five out of six pork operations have disappeared, but the 56,000 that remain are expecting continued profitability. 95% of those over 50,000 head marketed indicated profitability. However with the advent of $3+ corn, they have established that they would stay in business until 2009 as long as half of the producers marketing less than 500 thousand hogs would continue to raise hogs if hog prices fell below $46/cwt liveweight.
Posted by Stu Ellis at 12:11 AM | Comments (0) | Permalink
June 21, 2007
Careful Management Can Get Livestock Producers Through A Drought
The Drought Monitor maintained by the National Weather Service shows the dry conditions that began in the southeastern US are expanding rapidly into the heart of the Cornbelt. While crops that need water are one issue, a beef herd that needs a drink and something to eat is another. With few immediate prospects for the drought to be washed away, many cattle producers are in need of relief.
Maintaining livestock in a drought can create a lot of questions. How do you feed the cows? What about the calves? What are the feeding alternatives? What can be harvested and when? Before you add more questions to the list, let’s get some answers.
Manage your pasture says Dan Faulkner, the Extension Beef Specialist at the University of Illinois by weaning your spring calves early and getting them on feed. Putting the calves on feed is more efficient for them and will reduce grazing pressure by 35%. Faulkner’s advice is to do that before there is no grass to extend the grazing period. Another reason for weaning the calves is to sell your cull cows while the market may be better than in the fall, and that further reduces grazing pressure. Cull the cows that had the small calves, the ones that are unsound, and the ones that are still open after the breeding season. You don’t want them grazing on scarce resources when they are not productive.
Faulkner says, “To maximize forage production under dry conditions, divide your pastures and rotationally graze. Even dividing the pastures into at least 3 or 4 paddocks (8 are better) will dramatically increase forage production under dry conditions. Don’t wait until conditions are dry to divide the pastures because there will not be significant growth at that time even with rotational grazing.” He says don’t let the grass get clipped below the two inch mark because that threatens the vigor of the plant.
Feeding calves
Livestock researchers Francis Fluharty and Steven Loerch at Ohio State University say 100 to 205 day old calves, that are fed high-concentrate diets, can convert 3.5 to 4.5 pounds of feed to a pound of gain. “With the current price of corn, some may be concerned that it's too expensive to feed. However, our data suggests this is not the case and there is no reason to sell light weight calves at a loss.” They calculate that with $4 corn and protein at $250-300 per ton, the feed cost per pound of gain is 40-50¢.
Feeding the cows
Ohio State’s Fluharty and Loerch say, “Rather than buying expensive hay to feed to the cow herd, consider limit-feeding corn and a commercial supplement with limited amounts of hay. Even today, corn grain remains the least expensive harvested feed per unit of digestible energy available to cattle producers in Ohio. Hay has only about half the energy value (calories) as corn grain. When corn is priced at $4.00/bu, it is worth $143/ton. This makes the breakeven price for hay on an energy basis about $72/ton.”
Faulkner’s suggestion is a blend of half and half corn and corn gluten and hay. “You can limit feed high quality hay at about 15-20 lbs. per day. It is possible to limit feed hay by limiting the amount of time the cows have access to the round bale feeder. With high quality hay (58-62% TDN) about 3 hour of feeding is sufficient to get the desired level of intake. With good quality hay (54-57% TDN) about 6 hours of feeding is sufficient to get sufficient intake for maintenance.”
Considering silage
A third alternative is corn silage, which may be available on your farm or from a neighbor. In a drought, Faulkner says, “This corn will produce silage that is comparable in feeding value to silage from corn with a normal amount of grain. The ensiling process will reduce nitrate levels by about 50%, which reduces the chance of nitrate poisoning.”
However, creating unintentional silage needs to be managed, and Dairy Specialist Mike Hutjens at the University of Illinois offers some answers to typical questions in feeding drought-stressed corn as silage:
When should drought-stressed silage be chopped? Ensiling should occur at the same dry matter level (30 to 35 percent dry matter) as normal corn silage, but without ears and kernels it is difficult to determine total plant dry matter. Chop up several representative stalks and conduct a dry matter analysis because it must be optimal for proper fermentation to occur.
What is the feed value to drought-stress corn? The protein, energy, and mineral levels will be similar to normal corn silage, but the dry matter yield can be reduced by 10 to 50 percent. Conduct a forage test for starch and soluble protein.
If drought-stress corn is good quality forage, should I buy from my neighbor? Without grain, the silage yield is 1 to 1 ½ tons of 30 to 35 percent corn silage per foot of barren corn stalk. Price it on a dry matter and yield base.
What about nitrates? Hutjens says, “Nitrate nitrogen (N-NO3) will increase with drought stress. The plant’s photosynthetic surfaces (green material) are reduced and nitrates are not converted to plant protein and growth. If animals are adjusted to high nitrate containing feed, health risks are reduced gradually increasing the higher nitrate feed in the ration over a two week time period.” Have a commercial lab analyze your fermented silage.
What about adding dry corn or other additives to stressed corn silage? Inoculate your silage to jump start the fermentation process, since dry matter is variable, and the inoculant will return $3-6 for each $1 spent. Adding dry corn is not recommended, because it will reduce the moisture level of the corn silage and that is a potential fermentation problem.
Using stressed alfalfa
Ohio State forage specialist Mark Sulc says this year’s alfalfa was first frozen, then dried out, creating significant stress on the plants. With a typical late May cutting, the plants have had to spend a lot of energy on regrowth, at a time when tap root reserves were low. He says, “Many stands don’t appear to be growing any more, but that does not mean the plants are sitting idle. Alfalfa stems stop elongating during the initial phases of moisture stress, but the plant continues to manufacture carbohydrates and protein that are stored in the root system since they are not being used to produce top growth. Allowing those reserves to accumulate a little longer will benefit alfalfa plant health and longevity.” He says let it get into the bloom stage before a second harvest. Alternatively, controlled grazing is an economical way to use it, but be sure to prevent bloat.
Summary:
With the drought area growing weekly, many livestock producers will need to increase their management of pastures and creatively feed livestock herds. Early calf weaning and early culling of cows will reduce demands on scarce pastures. Calves can be started on feed, and cows can use blends hay, grain, and corn gluten and DDGS when pastures are short. Drought-stressed corn can also be converted to silage with the proper tests and management, and alfalfa can also be grazed, as well as harvested, while caring for its own early spring stress.
Posted by Stu Ellis at 12:15 AM | Comments (0) | Permalink
June 19, 2007
If Two Alternatives Aren't Successful, How About Using Both?
There is a new economic challenge at every fork in the agricultural road, and the growing ethanol industry has presented not only the opportunity for higher grain prices for corn growers, but presented a challenge to the livestock producer of either paying more for corn or consuming the ethanol feed co-product. There is currently a growing supply of distillers’ dried grains from dry milling ethanol plants and corn gluten feed from wet corn milling plants as increased quantities of corn are refined into ethanol. Can the US livestock industry really use all of those millions of tons of DDGS and corn gluten?
The answer is yes, says Terry Klopfenstein, a ruminant nutritionist at the University of Nebraska. He was one of a dozen speakers in late May at a University of Illinois conference focused on integrating the livestock and renewable fuels industries. The clash of those titans has thundered through grain and livestock markets, inflating costs for corn users, and dismantling some which were operating on the edge. The point made by Klopfenstein is that livestock will be able to consume the ethanol co-products at some level in their ration, saving on feed costs and extending the supply of corn.
He says if the ethanol plants in operation or being planned were making ethanol, they would consume 7.8 billion bushels of corn and make 21 billion gallons of ethanol. At that point the US would be producing 70.6 million tons of distillers’ dried grains, and if fed to livestock, it would disappear. Swine could consume 8.7 million tons, poultry could consume 6.9 million tons, dairy cattle could consume 16 million tons, and beef cattle could consume 39 million tons. Nutritionally, DDGS is 30% crude protein with .8% phosphorous, and 11% fat. It is a high fiber energy source with high digestibility energy content, which is 125% that of corn in either the wet or dry state. However, producers should watch the high fat content and the variable sulfur content.
Klopfenstein says there is an advantage to using the wet product from the wet milling plants. Once dried, there is a 30% savings under the cost of distillers’ dried grains, and if cattle feedlots were jointly operating with an ethanol plant, the feed cost would only be 75-85% of the cost of corn. Of course, the individual producer needs to evaluate how the animals perform on the feed. Klopfenstein’s presentation included numerous charts on daily gain, feed conversion, marbling scores, and other values; as well as price comparisons with corn and cost of delivery from the plant. Regarding the wet corn gluten feed, it is 19-24% crude protein and only 2% fat. Its energy content ranges from 85-110% that of corn and the sulfur content is stable.
But Klopfenstein offers a potential solution that few others have suggested, and that is feeding a combination of wet corn gluten feed and wet distillers’ grains which allows the two to complement each other’s shortcomings in nutrition, specifically the fat content, effective fiber and protein components. Klopfenstein and colleagues have authored more information for producers wanting to feed both of the ethanol co-products.
Summary:
The growing demands of the ethanol industry will continue to pose challenges for livestock producers, but the ethanol industry is also providing a feed alternative. While there are weaknesses in both wet corn gluten feed and distillers’ dried grains, there is a potential for a blend of the two to approach a more complete ration for the ruminant animal than would just one of the two. With creative feeding programs, the US livestock industry may be able to survive high corn prices by shifting to alternative feeds.
Posted by Stu Ellis at 12:49 AM | Comments (0) | Permalink
June 14, 2007
When And Where Do You Get The Best Prices For Hogs?
Earlier this week Iowa State Economist Don Hofstrand said the successful farming operation of the future would leverage information as much as you leverage capitol today. Information can frequently be more important than any other resource required on the farm. And information about open markets gives the producer the opportunity to make a choice about where and when a commodity will be sold. If there are advantages offered by location and time, then you want to sell your commodity at those locations at that time.
Grain producers will closely watch the local basis to know when it provides an advantage. Livestock producers can do the same, and University of Missouri livestock economists Glenn Grimes and Ron Plain have analyzed USDA’s mandatory hog price data for the past five years to develop a trend of where and when producers will likely have an advantage in selling hogs, compared to random deliveries.
After market information was forced into greater sunlight by the 1999 Price Reporting legislation approved in Congress, actual values could be more readily determined. The information has been published by USDA since 2001, and the Grimes and Plain research focused on 2002-2006 for hog markets.
Everyone knows that today’s electronic marketing allow commodities to be traded around the clock, so the clock was divided into several segments to determine what time of day offered better prices than other parts of the day. USDA’s market reports cover 70% of the federally inspected slaughter and include:
1) The Morning Report covers hogs purchased by packers between midnight and 9:30 a.m. by state.
2) The Afternoon Report covers hogs purchased between midnight and 1:30 p.m. by state
3) The Prior Day Report covers hogs purchased by packers between midnight and midnight by slaughter plant location.
In addition to the time reports, USDA broke the information down into geographic areas of: Eastern Corn Belt, Iowa-Minnesota, Western Corn Belt (which includes Iowa-Minnesota hogs) and National. Grimes and Plain found that afternoon prices were higher than morning prices with only a few exceptions during the five year period. “These positive differences existed in quarters when prices were trending downward as well as quarters with uptrending prices. Over the years 2002-2006, the average afternoon price has been roughly 28 cents higher than the morning average. We believe that the best explanation for the positive difference is that many marketing contracts are currently priced off the Morning Reports, thus creating an incentive for packers to delay aggressive bidding until after the Morning Report data have been submitted to USDA. Afternoon prices are then bid higher.”
The Missouri economists discovered the prices in the Prior Day report averaged 12¢ more than the afternoon price in the Western Cornbelt, but only 5¢ more than the Eastern Cornbelt.
For the last five years, the Prior Day Report price for the Western Cornbelt averaged 12 cents higher than the afternoon price in the Western Cornbelt. The difference in the Eastern Cornbelt was only 5 cents. They say the Prior Day prices should be the hardest to manipulate of all those in the Mandatory Price Reporting system. They also found, “The Iowa-Minnesota afternoon price averaged 71 cents higher than the Eastern Cornbelt, 35 cents higher than the National average, and 13 cents higher than the Western Corn Belt.”
The bottom line for setting contract values is:
1) Use the Afternoon or Prior Day reports to set your base price.
2) Avoid using the Eastern Cornbelt price as a base for packer contracts.
3) The Iowa-Minnesota and Western Cornbelt prices are comparable, and slightly more than the National price.
Summary:
If you are selling hogs or setting base values for production contracts, the Mandatory Price Reporting system may offer several alternatives. The highest prices are found in the Afternoon and Prior day reports, as well as the Iowa-Minnesota and Western Cornbelt geographic areas.
Posted by Stu Ellis at 12:11 AM | Comments (0) | Permalink
May 24, 2007
Why Have Most Pork Producers Remained In The Black With Corn Prices Where They Are?
There is no secret that corn growers are enjoying the result of a market demand driven by ethanol, exports, and feed. However, the pork producer, fearful of being pinched by high corn prices, is also enjoying a demand-driven market. In a period of high feed costs, margins should be thin to non-existent. But that has not been the case, and pork production balance sheets are printed with black ink.
That is not to say that pork profits would be much higher with $2 corn, however profitability in the pork industry has fortunately remained despite corn prices floating from $3.50 to $4. At Purdue, economist Chris Hurt says, “Since the end of March, hog prices have seen a strong seasonal surge, actually putting some green in bank accounts of hog producers. Hog prices were about $42 in late March, but rallied as high as $54 in the past few weeks. Current costs of production are estimated to be in the $47 to $49 range for farrow-to-finish production.”
The existence of the slim margin for pork producers comes despite the fact that more pork is being produced. Hurt says output of packing plants has been 2.5% higher in the first four months of the year, compared to last. And parallel to that are hog prices that are 10% higher, but that is not the result of more demand by the US consumer. Hurt and his Cornbelt colleagues say it is the result of international pork trade and greater marketing margins.
Pork Exports. Simply put, exports are up 3% and imports were down 8%, and the resulting volume difference was a 10% increase in benefit to the US pork producer. At Iowa State, livestock economist Shane Ellis says, “Pork exports in 2007 are greater than a year ago, but most of that was the result of high January exports. Exports in February and March were below those of a year ago. A large portion of the additional January exports were destined for Japan. Between foreign and domestic demand utilizing the increasing US pork supply, hog prices will be supported and above those of a year ago.” At the University of Missouri, livestock economists Glenn Grimes and Ron Plain agree with Ellis, and add that exports to Mexico were down more than 20% in February and almost 30% in March, but for the quarter there is still positive news. “However, the good news is that pork exports for January - March were still up nearly three percent from 2006. But another decrease of 7.6% in April, which is what we had in March from last year, will pull exports down to about last year's levels for January - April.” Ellis makes the point that export markets are shifting, “Even though Japan exports have been consistently increasing, we should remember our other foreign markets. Korean markets now have nearly five times the presence in our export portfolio.” Grimes and Plain report first quarter pork imports were down 7.7% from last year. “In 2006, net pork exports for these three months were 9.54 percent and they were 10.23 percent in 2007.” By the way, the bulk of the imports still come from Canada, and for the quarter they were up nearly 8% over last year.
Marketing margins. The second factor stimulating hog prices was a narrow retail price margin, according to Purdue’s Hurt. “Generally speaking, when packer or retail margins are smaller the producer tends to get more of the consumer pork dollars. That has been the case so far this year. Consumers have paid $.03 per retail pound more for pork, and retail margins have been $.05 per retail pound less. This translates into higher hog prices for producers. In fact, prices so far this year have averaged $46.60 compared to $42.70 during the same period last year. That’s almost $4.00 more and a welcome outcome in this period of higher costs.” Grimes and Plain agree, “All of the increase in retail prices plus some was enjoyed by hog producers. The total marketing margin for pork for January - April was down two percent from a year earlier. For April, live hog prices were up 16.8 percent from last year while the January - April live price was up 10.2 percent from 12 months earlier.” They say the demand growth for pork is from population growth, marketing margins and more exports, but pork producers should not expect the benefits from the marketing margin to last.
Outlook. Hurt says prices are strong through August, based on the futures market, but may drop into the fall period. He believes $50 will be the average price over the coming 12 months. With high prices for corn and soybean meal, profitability will be challenged in the coming months.
Summary.
There has been surprising profitability for pork producers, based on export trade and lower marketing margins for packers that have allowed a few extra dollars to go to the producer. While export demand will continue, the marketing margin benefit may not last, and pork profitability will be challenged to remain in the black over the next 12 months.
Posted by Stu Ellis at 6:21 AM | Comments (0) | Permalink
April 24, 2007
Is There A Profit In The Future Of The Beef Industry?
The price of corn. The cost of calves. The near record amount of cattle in feedlots. That is a deadly combination for cowboys out to make a profit. However that is reality. But like all reality TV shows, scenarios change, and will there be a change in store for the beef industry?
Whether it is writing on the wall or the picture in the crystal ball, it is clear that future beef profits will be dependent upon a production cutback. The April 1 feedlot numbers were the second highest ever for April at 11.6 million head, and trucks were unloading calves into feedlots during March at a 7% rate over 2006 volume. But the unusual element is the fact the beef economy is currently marching to two different drummers, says Iowa State livestock economist Shane Ellis, “Historic trends usually suggest that high feed costs lead to lower feeder cattle prices. However, even though the price of corn is over 60 percent above a year ago feeder cattle prices are at and above prices of a year ago. There appear to be two forces supporting the feeder cattle market. First is the cash price of fed cattle prices which have been around a $100/cwt in the resent weeks. Second is the availability of feeder cattle. The January Cattle report suggests that in the next year there may be a tighter supply of domestically raised beef calves.”
The increased number of placements during March may be a phenomenon attributable to corn prices, suggests Purdue’s Chris Hurt, “The data for March show that placements of calves weighing over 700 pounds were up 11 percent. In addition, lower corn prices may have helped stimulate March placements. May corn futures, for example, dropped $.61 per bushel in March, although $.20 came on the last day of the month. Of equal importance was the strength of live cattle futures. August futures were as low as $88 in early February, but rallied to highs above $95 in March.”
That helps make ends meet for the livestock producer, but in the long term, the current environment has to change says Hurt, and he believes that it is. The high number of cows headed to slaughter and the high number of heifers in feedlots both indicate the size of the breeding herd is being reduced. And he says a reduction in the breeding herd will be necessary if the industry is to be profitable. “Maybe more importantly for the cattle industry is the prospect for a smaller cow herd being reported in the July 20 Cattle inventory update. The way for the brood cow sector to recover from high feed prices is to reduce the size of the cow herd thereby reducing the level of beef production by 2009. In this manner, higher feed costs will eventually be passed to beef consumers.”
Another element helping profitability is the balance of trade in beef. Glenn Grimes and Ron Plain, livestock economists at the University of Missouri say beef imports are down while exports are up, “Beef exports in January and February of 2007 were up 23.8% from a year earlier. Exports of beef during these two months were up sharply in percent to Japan and Taiwan because their borders were still closed to beef last year because of BSE. Our exports for these two months were up to Canada by 21%, down to Mexico by 5.3%, up in the Caribbean by 22.8% and other up 138.7%. Beef imports for January and February were down by 7.8% from 12 months earlier. Net beef imports as a percent of production was down from 10.1 in 2006, to 7.7% in 2007. In other words, beef supplies domestically were reduced by about 2.4% in January and February of this year compared to last year.”
Another dynamic in the beef industry is the transition of the market from the southwest to the North Central states. Dillon Feuz at Utah State University compared state production numbers with years past and found, “Feedlots in the north appear to be feeding more cattle relative to last year and relative to the south. South Dakota, Iowa, and Nebraska on feed totals were up 10%, 6%, and 3% respectively. Conversely, Texas, Kansas and Oklahoma on feed totals were down 5%, 4% and 3% respectively. This lends some credence to the “window” surveys that are reporting more cattle being fed where more ethanol plants are being built.”
Hurt at Purdue says beef prices should keep many producers in the black on the coming months, “For the first quarter of 2007, Nebraska finished steers averaged $90.70 per hundred, which was $1.50 higher than the price in the same quarter in 2006. This was an impressive showing given that beef production was up over two percent for the quarter. The number of head coming to market was up four percent, but average weights were nearly two percent lower because of high feed prices.” And Shane Ellis at Iowa State says there is only one factor that is responsible for underpinning the calf market, “It would appear that those holding feeding feeder cattle are not saturating the market which has helped support the feeder cattle market. It would also appear that in the coming year domestic beef feeder cattle supplies will be in slightly lower, adding additional support to the feeder cattle market. This is good news to cow-calf producers. Many would have never expected to have such a long run of high calf prices. They can thank the influence of a strong fed cattle market.”
Summary:
Despite high corn prices, the strong cattle market is helping keep the feeder calf market in a demand mode. While feedlot placements are at near record levels that will have to change if profitability is going to exist. The latest USDA estimates indicate the breeding herd is being trimmed, and that will be necessary for the consumer to keep the industry in the black in the future.
Posted by Stu Ellis at 12:04 AM | Comments (1) | Permalink
April 19, 2007
What Do Pork Prophets Say About Pork Profits?
$4 corn gave pork producers plenty to worry about. Their primary feed expense had risen 80% in 6 months. The breeding herd had continued to grow in each successive USDA report. Prices were softening and profit margins were growing thinner. About crunch time, the pressure seemed like it might have been easing up. Has it?
There are many factors that interconnect to determine pork profitability; such as marketing weights, the breeding herd, import/export trade, and of course, feed prices. We’ll solicit the thoughts of the Cornbelt pork prophets to get a handle on your pork profits.
Market weight was one of the points covered by Glenn Grimes and Ron Plain at the University of Missouri in their latest newsletter. They say weights have hit the high for the year, with lower weights expected every month until late summer, a trend that will help solidify prices.
Breeding herd numbers are determined, in part, by gilt and sow slaughter, which has not been very high. Grimes and Plain say it continues to run at a level that indicates the probabilities are low that producers are reducing the breeding herd at a very slow rate if at all. In fact, an Iowa/Missouri study found that large producers plan to increase marketings in 2007 and 2009, compared to 2006. Marketing specialist Darrell Mark at Nebraska believes the current pork inventory is closely related to corn prices, “Overall, total inventory was estimated at 61.103 million head, up 1.3%. Despite close to three years of consistent profits, hog producers did not expand as rapidly as they historically have in response to these profits. The moderate growth in recent months was likely due to corn price variability.”
Corn prices have faded from the $4.25 highs at the CBOT in late February, to the current cash prices in the $3.30-$3.50 range. Those prices could further ease with good planting weather, ensuring the acreage will be near the expected 90.454 million. At the University of Nebraska, marketing specialist Darrell Mark strongly urges producers to lock in corn prices as they have faded following the acreage report at the end of March. “The volatility of corn prices throughout the winter and the uncertainty of corn planting intentions ahead of the Prospective Plantings Report likely held breeding herd growth down in recent months. (The) Hogs and Pigs report pegged the hog breeding herd at 6.081 million head, up 0.9% from last year. While that is slightly above the average pre-release trade estimates, it is likely lower than would have resulted if corn prices had been lower and less volatile.” But Mark acknowledges that buying expensive corn is distasteful, “While locking in corn prices at current levels is not attractive by historical standards, it could be profitable for pork producers. Breakevens in the low $60/cwt range (lean weight basis) are possible for producers with modern technology. Importantly, with lean hog futures prices in the mid-$60s to mid-$70s through the remainder of the year, profits could be locked in. To actually have these profits protected, though, protecting against possible corn price increases will be necessary.”
Futures prices for hogs were healthy, despite some negative fundamentals. Grimes and Plain say it was possible to lock in a price between $50 and $51 per cwt live using the futures market for the remainder of the year with average basis. At the University of Nebraska, pork specialist Al Prosch says even the most efficient producers are in jeopardy of lost profits, “Lean hog futures prices are taken from the Chicago Mercantile Exchange. For Nebraska lean hog futures price plus a negative $2.00 basis value is used. Periodically, numbers were revised with current data, and the profitability of Nebraska average producers and the top ten percent of producers were calculated. Average producers had a period of loss in early 2004 when feed prices rose sharply. The top 10 percent of producers were near breakeven. However, this represents only producers who would have had to buy feed on each increment of rising prices. It quickly illustrates the value of cost controls and forward planning and contracting.”
Canadian hogs are still a significant factor in the US pork market and Nebraska pork specialist Mike Brumm says, “In 2006, US producers imported just under 5.9 million feeder pigs from our neighbor to the north. Imports to date this year are running ahead of last year’s record pace.” But exports are strong as well, says Brumm’s colleague Al Prosch at Nebraska, “Pork exports have continued to increase year over year for 15 years. The increase since 2004 has been dramatic. Continuing that performance (exports are off to a strong start in 2007) will be important. January 2007 pork exports were up 17 percent over January 2006.”
Regional issues could play a significant role in the 2007 pork industry. Nebraska’s Darrell Mark notes that corn is being planted in the southeast early and in good soil conditions and southeastern farmers are the only ones planning increases of soybean acreage. Those factors should combine to allow sufficient supplies of low priced corn and bean meal for the pork producers in the Southeastern U.S. Another regional issue is identified by former Nebraska pork specialist Mike Brumm who said there are structural changes underway in Cornbelt pork production. “Iowa and Minnesota are the leading states for importing of feeder pigs as evidenced by the disparity between the breeding herd and kept for finishing inventory expressed as a percentage of the US inventory. These imported pigs come from Canada, Nebraska, Missouri, Oklahoma, North Carolina and lately, Illinois. In the past 3 years, Illinois farrowed more pigs than were finished in the state, with the excess pigs exported out-of-state, most often to Iowa and Minnesota. The shift towards more farrowing than finishing in Illinois is somewhat surprising given the state is the number 2 state in the US for corn and soybean production. The lack of a significant cattle, dairy or poultry industry in Illinois relative to feed grain production suggests that Illinois grain farms rely heavily on exports from Illinois or industrial usage of the feed grains for their market opportunities.”
Profitability is the indicator of success, and Prosch says the pork producer has had a record number of months of profits, “Hogs sold from 2003 through 2006 were sold profitably. This prolonged profitable production cycle has been driven by two factors: Producer restraint in expansion of the breeding is one, and a strong export market is the other. Producers have shown great restraint in breeding herd expansion during the past 3½ years.
Summary:
High corn prices threatened to derail the pork market in the US, but they have come off their highs, and pork weights have slimmed down a bit as well, which helped pork prices. The export trade has remained strong, creating additional disappearance of pork. However, the breeding herd is also strong and growing despite high feed prices. The prudent pork producer will be able to take advantage of the weaker corn market and the strong pork futures market to lock in profitable margins.
Posted by Stu Ellis at 12:25 AM | Comments (0) | Permalink
April 18, 2007
Corn: Do We Feed It Or Do We Burn It?
Corn: Do we feed it or do we burn it? That question is being raised more frequently as the nation becomes concerned that ethanol’s demand for corn will outstrip the availability of corn for food, but more particularly for livestock feed. Iowa is the center of gravity for both ethanol plants and a diverse livestock feeding infrastructure. Outward from Iowa, like ripples on water, the impact will be felt in neighboring states.
Although ethanol is the new kid on the block, the livestock industry is still the heavyweight, consuming about half of our annual corn crop. But with the 10% extra corn acres this year, and the slowdown in livestock feeding due to higher corn prices, that ratio will change in 2007. And that trend will possibly see ethanol and livestock trade places in the next ten years. Iowa State livestock economist John Lawrence says corn typically represents half or more of the feed cost for most meat, milk and egg-producing animals. Rising corn prices are expected to result in reduced supplies and rising prices of all commercial animal agriculture in the United States. There also may be some shifting of meat supplies as cattle are better able to utilize distillers’ grains and solubles (DGS) than hogs or poultry and can gain more weight on pasture to reduce total concentrate feeding.”
With the current feed demand for Iowa livestock, Lawrence says there will be a market for 2.3 million tons of distillers’ grains from 270 million bushels of corn, plus an additional 500 million bushels of corn. But he is quick to temper that estimate, by saying, “These DGS and corn demand estimates will change with inclusion rate in the diet and adoption rates by producers. These decisions will be driven by economics of substitution technology of corn processing that may make the co-product more or less valuable in diets, and management skills of producers.” As every livestock producer knows, DDGS cannot be fed exclusively to any animal, but depending upon price and supply they can be incorporated at optimum levels.
Lawrence urges livestock producers to work with professional nutritionists to balance a ration, looking at the economics of the feeding alternatives, and even the rate of gain for various rations. But most importantly, consider the serious health issues that exist with the use of DDGS:
1) Mycotoxin concentrations can reach problem levels for some livestock — for instance, dairy has zero tolerance for aflaxtoxin.
2) There may be concern in gestation diets. DGS can have high concentration of sulfur and when fed at high inclusion rates may cause problems in cattle rations.
3) Sulfur levels may differ by plant or even batch and some feedlots have high sulfur content in well water resulting in high sulfur intake.
4) Phosphorous is concentrated in DGS and manure and may require more land for manure application if phosphorus is applied at the crop uptake rate.
Feed recommendations for DDGS have been developed in a variety of Land Grant Universities overtime, and with the increased supply and high costs of corn, many feeding trials are still being conducted to refine the rations.
Hogs: University of Minnesota recommendations for maximum inclusion rates for grow-finish and lactation diets are 20%. Kansas State University research showed no change in grow-finish performance fed 10% DDGS in the ration compared to a corn-SBM diet. Lawrence says the currently the more common substitution rate is 10% in a ton of feed or 200 pounds of DDGS and 3 pounds of limestone will replace 160 pounds of corn, 38 pounds of SBM and 5 pounds of DiCal Phosphate. Lawrence says the downside to DDGS in hogs is the potential impact on pork fat quality, making it softer. And he says essential amino acids must be rebalanced in a DDGS ration. Those may be the recommended limits of feeding, but it is not worthwhile to approach those limits pending the cost of distillers’ grains and the cost of corn. Pork producers can utilize a web-based calculator at Iowa State University to evaluate the economics involved.
Beef: In a beef ration, with wet distillers grain (WDG) becomes a more useful product according to Lawrence. WDGS has higher feed value than DDGS in beef rations and higher feed value than corn up to 40-50% of dry matter in the ration. WDGS substitutes for corn and protein supplement. Vitamin and mineral supplementation still is needed, but it already is excess in phosphorus. Maximum inclusion rates are being tested. Iowa State University research found no performance difference at 40% of ration, but may result in reduced marbling and quality grade. Current research is looking at 60% inclusion rate particularly for growing diets. Regarding the economics, Lawrence says, “This example considers a 650 lb. steer calf finished to 1,300 lbs. At current prices of $3/bu corn, $200/ton supplement and $35/ton modified DGS (approximately 50% dry matter), the cost savings per head is $40 and $68 per head when fed at 20% and 40% of the diet, respectively. On the 650 pounds of gain, this is $6.41/cwt and $10.41/cwt reduction in cost of gain. If the corn price increased $.65/bu for the 20% DGS and $1.50/bu for the 40% DGS rations, the resulting rations would have the same feed cost as a ration with no DGS and $3/bu corn.”
Dairy: Lawrence says the dairy operation can use either dry or wet distillers’ grain products. South Dakota State University recommends a maximum of 20% of dry matter in lactating rations. Higher levels may suppress feed intake. DGS can replace most protein supplement if alfalfa and corn silage are both used. Over feeding protein if all forage is alfalfa, under feeding protein if all forage is corn silage. There is potential for use in growing replacement heifers and feeding dry cows.
Poultry: University of Minnesota reports layers and turkeys can be fed diets with 10% DDGS without impacting performance. Higher inclusion rates can be fed if additional energy is provided.
Summary:
While the future of the Cornbelt may be ethanol, the future will also be focused on innovations with livestock feed rations resulting from the availability of distillers’ grains. They may make 10% of the ratio less expensive, but the other 90% may be more expensive. At the same time, livestock producers will have to become more adept at balancing rations to adjust for different qualities of the distillers’ grains.
Posted by Stu Ellis at 2:30 AM | Comments (1) | Permalink
March 12, 2007
What Is A Cowboy To Do?
Would an American consumer pay $50 for a chicken with a serial number? Most probably would not, even though the supply of French “Label Rouge” chickens is insufficient to meet the demand and French consumers don’t blink an eye at the price. Would an American consumer pay $50 per pound for a steak? Most probably would not, even though the supply of Japanese Kobe beef is insufficient to meet the demand and Japanese consumers gobble it up. Consumers bought one million servings of US beef from a Japanese restaurant chain within 10 hours after beef shipments resumed last July, and grocery meat cases cannot get enough US beef to meet the demand. However, our sales of beef to Japan are minimal. What’s wrong with this picture?
The Japanese ban on US beef began in late 2003, when a Canadian cow wandered into a beef processing plant, after making a three week stop in a Washington State feedlot, and the cow was found to have BSE when it was slaughtered. Poor cow and poor cowboys. There was no smoking gun, but there was enough manure on our boots to find the US beef industry guilty and the penalty has been paid by everyone in the beef production chain. Other Asian markets closed their gates on US beef and exports dried up like a West Texas creekbed in August. But when there is consumer demand and a supply to meet that consumer demand, what is a cowboy to do?
In a study by Roxanne Clemens, published in the Iowa Ag Review, entitled, After the Ban: U.S. Beef Exports to Japan Lag Demand, Clemens indicates, “Importers were expressing frustration that they were unable to obtain enough U.S. beef to meet demand, even at the very low volumes needed for a slowly expanding, very cautious market.” The consumer demand for US beef was a bit surprising, since surveys indicated consumer reluctance toward purchasing the product because of questions about food safety and the lack of a verification system that could track the product from animal to consumer. Such a system is used for Kobe beef (and is the basis for the “Label Rouge” poultry) and the Japanese consumers were expected to look for it. Clemens says the survey data and the media castigation of US beef led marketers to stock very little US beef and the detailed inspection, shipment, and delivery system had not been ready for volume demand. In the four months following the lifting of the ban, the meat from about 30,000 animals was all that was in the pipeline to feed a population of 127 million people. Roughly calculated, that is 1/100 of a pound per person.
Japanese restrictions only permit the importation of meat from livestock under 20 months of age. Beef producers can certify age of their livestock “in a USDA-approved Quality System Assessment (QSA) program or Process Verified Program, or cattle can be determined to be A40 physiological maturity or younger through an official USDA evaluation using the U.S. Standards for Carcass Beef and the description of maturity characteristics within A maturity.” What is the live age of the animals providing the meat found typically in a grocery store? Clemens says surveys have found the average age is 16-17 months, and 97% are under 20 months. However, only 5% of the animals have the QSA certification, meaning 95% could be shipped to meet the Japanese demand but are not eligible. Additionally, some processing plants approved for export to Japan were not shipping beef there and some meat eligible for export was not being shipped. Clemens says, “Industry experts estimated that around 3 percent of U.S. beef could potentially qualify for export to Japan when U.S. beef was allowed re-entry into Japan in July 2006. Thus, although the United States is producing vast quantities of the age and type of beef demanded by the Japanese market, Japanese importers have been unable to source enough eligible beef.”
Economist Clemens says the age of cattle entering the slaughter process will not change much, but their eligibility to enter the high value export channel can increase with the participation by livestock producers in the age verification program. The Japanese government says it will not consider increasing the age restriction, but will conduct audits of the present system to determine its performance, and that process could take some time. The Japanese companies which import US beef find consumers uninterested in commodity beef that only meets the age standard, but quite interested in the beef that has a traceable history. And restrictions that limit export to certain cuts of beef will only allow increased export volume if the number of eligible cattle can be increased.
What is included in the identification system? Clemens says each animal at birth is double-tagged with a 10-digit identification number. “The ID number can be used to view production information via the Internet at any time during the animal’s life and is labeled on meat sold in supermarkets. Using the number, producers and consumers can obtain such information as the animal’s birth date, sex, breed, place of birth, calf producer’s name, dates of movements to different facilities, and harvest date. Cellular phones with Internet access capabilities have increased the accessibility of the database because a computer is no longer required to view the data.” Subsequently, a Japanese consumer, wanting a prime cut of beef, can enter the tag number in a cell phone and instantly know the history of that animal, and is more willing to pay a premium value for that piece of meat.
Summary:
Although Japanese consumers are willing to pay premium prices for US beef, the supply just does not exist in Japanese markets because of restrictions that limit imported meat to age and type of cut. US meat packing plants could fill more orders for the meat, and potentially bid up market prices, if there was a larger availability of animals that were registered into a USDA age verification program. Such a program permits the tracking of a piece of meat back to a specific herd, satisfying Japanese consumer desires for information about the history of the animal.
Posted by Stu Ellis at 12:42 AM | Comments (0) | Permalink
March 1, 2007
How Much Confidence Do You Have In The NAIS Confidentiality Laws?
Whether ear tags are used or sophisticated electronic chips are implanted, US livestock owners are moving closer to a system that identifies where livestock are raised and how they move through the market system. Thanks to the Canadian cow that brought the US cattle industry to its knees over the BSE (bovine spongiform encephalopathy) issue, USDA is slowly implementing its National Animal Identification System (NAIS) and many states have already developed premises registration programs. Hundreds of thousands of producers have already registered, but many other producers are vehemently opposed to it, expressing invasion of privacy and loss of confidentiality. Let’s explore that confidentiality issue, since it is at the ignition point of a firestorm.
Confidentiality is a concern within the present structure of the NAIS program, unless Congress provides an exemption to keep collected data out of the hands of anyone who files a Freedom of Information Act request, according to the Livestock Marketing Information Center. Congress has already set that precedent with information submitted to the Department of Homeland Security and the National Agricultural Statistics Service. As the 2007 Farm Bill is being written the new House and Senate Agriculture Committees address the NAIS issue, the confidentiality question will be front and center.
But in a recent survey of Illinois livestock producers about the NAIS issue, confidentiality ranked high, but was not the most important. 476 livestock producers responded to the survey, which asked them to rank the issues of importance related to the NAIS. Scoring 1 as not important and 5 as extremely important, the average answer was:
4.61 Cost to producer
4.59 Ensuring small producers stay in business
4.49 Prevention of errors in data collection
4.34 Data Confidentiality
4.27 Training on how to use the system
3.79 Cost to consumer
3.73 Ensuring ability of 48 hour trace back
3.66 Cost to other industry stakeholders
Confidentiality finished in the middle of the pack, behind financial sustainability of one’s livestock business and systemic errors. Nevertheless, confidentiality is one of those issues that cannot be addressed by typical training, risk management, improving system procedures. Therefore, what is being done on behalf of producers who have concerns?
Legal specialist Eric Pendergrass at the University of Arkansas Agricultural Law Center investigated what various states are doing to raise the comfort level of livestock producers. His report says, “The manner in which the states attempt to preserve the confidentiality of the information can be broken down into three broad categories. The three approaches include: (1) states that have yet to act upon confidentiality concerns and consequently offer no exemption from the states’ open records laws, (2) states that rely on existing exemptions to the open records laws, and (3) states that has specifically addressed confidentiality concerns through specific legislative enactments.”
The states that have taken no action yet (as of January, 2007) include Iowa, Arkansas and Mississippi. Pendergrass says they content the program is still voluntary, and as such, does not need protection of confidentiality.
The states that are relying on existing laws to protect confidentiality only include Illinois and Hawaii. They contend their pre-existing exemptions are broad exclusions that allow the state government to avoid disclosing the information necessary to perform a legitimate government function integral to the operation of state activities.
The states which have taken a pro-active approach to address confidentiality issues of the premise and animal registration include: include Alabama, Arizona, Kansas, Maryland, Oklahoma, North Dakota, Texas, Vermont, West Virginia, and Wisconsin. They have a blend of laws that either addresses the information from the premises and animal registration or a law that specifically addresses the confidentiality issue. States that have established only a confidentiality law for the program include: Maine, Minnesota, Missouri, South Dakota, Tennessee, Utah, and Wyoming.
After analyzing all of the confidentiality laws, Pendergrass says it is noteworthy that to address a specific issue, the various states have embarked on different approaches, some tested and some untested. He says time will tell about the success of their efforts to protect the livestock operators in their states.
Summary:
Few issues in agriculture today carry as much controversy as the National Animal Identification System, which causes livestock producers to have concerns that their competitive advantages could be compromised or that anyone could obtain detailed information about their operation. States which are in the process of registering livestock operations as part of the national program have taken a wide variety of actions to address the confidentiality issues, ranging from doing nothing to passing specific protections. Their success in protecting producers may vary over the course of time.
Posted by Stu Ellis at 6:00 AM | Comments (0) | Permalink
February 20, 2007
Are You Singing The Corn Price Blues?
If you are feeding livestock, you probably have the corn price blues. Maybe you are submitting song lyrics to country music producers about the high price of corn and the low price of meat. It might get good play on every radio station with feedlots and pork operations in the broadcast signal. But instead of country wails and barnyard blues, take a look at your feed ration and see where changes can be made to ensure survival, and return to profitability.
Extension livestock specialists at South Dakota State University have offered their thoughts to producers whose feed bill is 50 to 70% of their cost of production and the bulk of that is in the form of $4 corn. Many producers have opted to alternative sources of energy for their livestock, and while that is expected, management of the new ration is necessary.
Beef cattle
Brood cows are not going to consume a lot of corn, but corn prices have impacted the feeder calf market. The cow-calf operator is advised to keep costs in check and use good management practices. If that choice switches to barley, sorghum, or distillers’ grain, each feed has to be judged on its cost per unit, whether that is crude protein or total digestible nutrients. The origin of the feed will also determine its cost because of transportation expense. A potential risk management tool is to forward contract your feed so cost increases will be covered. Also consider costs for creep feeding, extending the grazing season, changing the dates of calving and weaning, and look at your marketing options. Compare your expense and revenue for each variable to determine your most profitable course of action
Cattle feeders need a strategy that allows them to replace a portion of corn in the ration and maintain a competitive feed cost of gain. Alternatives might be silage, distillers’ grains, oilseeds, or other cereal grains. But those alternatives will provide less energy and that reduces feed conversion. If silage replaces corn at more than 30% of the dry matter, feed conversion drops about 10%. The ratio needs to drop $10 per ton in cost to have the same feed cost of gain.
In addition to the cost of the feed, look at management issues, such as reducing spoilage or shrink by improving storage facilities, or processing the grain so there is better nutrient utilization that improves profitability. Look at other inefficiencies in your feedlot to minimize loss, such as bunk management, labor, energy used for feed mixing and delivery, and ensure your scales are accurate.
Lactating dairy cows
For dairies, corn will be 30-35% of the total dry matter in the ration, corn from silage is 10-15% and distillers’ grains are 5-15% on a dry matter basis. Silage provides nutrients, but balances the ruminants’ needs as well. Silage will probably always be in the dairy ration despite corn prices. Displacement of corn with distillers’ grains means higher dietary nitrogen content in the ration. If corn grain and corn silage were to be replaced by alfalfa hay and (or) silage and distillers grains, there would be a need to dilute the crude protein with low-nitrogen feeds that otherwise might not be included due to either dietary or economic constraints. With high corn prices, the use of highly digestible forages to replace part of the grain becomes attractive. Whatever the decision, it should be based on feed efficiency measured by pounds of milk producer per pound of dry matter consumed.
Sheep
Corn would commonly be 80% of the ration in a ewe flock and 75% of the corn consumed would be for finishing lambs. Distillers’ grains and soy hulls can be substituted for forage or energy feeds. Your decision to modify the ration, based on economics, should also consider management of health issues, as well as feed storage and handling. Any change in feed ration needs to accommodate production stages of the lambs, ewe productivity, and how much feed is being wasted. Since lambs have the greatest feed efficiency at lower body weights, so match the cost of the last pound gained with the value of the last pound gained when considering feed efficiency of an alternative feed. When feed costs rise, your profit margin is impacted for every pound gained, thus your marketing weight should be calculated by feed efficiency in times of high feed costs. Refine the crude protein in the diet, which allows you to reduce the cost per ton by $10 for each 1% change in dietary crude protein.
Swine
Pork producers spend 70% of their operational costs on feed, but there are ways to manage that in time of high corn prices by using alternative grains, but only if you match the cost with the energy value. Since barley has 95% of the relative feed value of corn, barley will be a lower cost alternative if it is less than 95% of the market value of corn on a pound for pound relationship. The same is true for sorghum at 96% and oats at 90%.
While soybean prices have increased, meal values have not risen as much and since it is your primary source for amino acid evaluate alterative source if meal prices increase further. Those might include distillers’ grains and synthetic lysine. Good management of your swine ration, and the decision to incorporate alternative ingredients, may warrant consultation with a veterinarian or swine nutritionist as well as negotiation with a feed supplier for the best deal.
Consider also feed efficiencies resulting in phase feeding and split sex feeding programs which save feed and money. The optimal feed grind will reduce waste and lighter weight marketing means avoiding costly feed inefficiency at heavier weights. Other management issues to target greater profitability may include feeder adjustment, environmental controls and other feeder related mechanical issues.
Summary:
High corn prices have impacted hundreds of thousands of livestock feeders, challenging their profitability as they compete for a product that is in wide demand. However, you can meet some of the challenge by exploring alternative feeds, carefully calculating energy and protein values for efficient gain, and looking for ways to reduce other operational costs.
Posted by Stu Ellis at 6:00 AM | Comments (0) | Permalink
January 31, 2007
Can We Discuss Cowboys And Packers Without Discussing Football?
For next weekend’s Superbowl game you are probably stocking up on chips and dip, you’ve planned for pizza delivery, someone is bringing a kettle of chili, and there will be plenty of your favorite beverages to wash down all of those spicy chicken wings. How many Superbowl gatherings will feature steak, hamburger, beef tips, or barbecued brisket? What’s wrong with this picture? The kickoff is at dinner time. Isn’t beef “What’s for dinner?” To our best knowledge there are no federal, state or local laws against preparing or consuming beef on Superbowl Sunday. There’s a lot of beef in front of the TV cameras, how about beef in front of the TV? Someone needs to work on this issue. In the meantime, we’ll work on the issue of why there is weakness in the cattle and beef market. You have to wonder if they are related!
On Friday the beef industry will be watching for USDA’s cattle report which will indicate how much expansion, if any, is occurring in the current cattle cycle. The past week’s USDA Livestock Outlook hints that increased numbers are not widely expected. “The Cattle report to be released on February 2 may point to a national cow herd expansion that has slowed, as the January 1, 2007 beef cow inventory may not show a significant increase over January 1, 2006 inventories. The Cattle report, along with the January 2007 Cattle on Feed report, could give some indication of the extent to which heifer retention for cow inventory expansion has been affected by poor forage conditions. Any significant cow herd expansion will likely come from the 2007 calf crop, implying that actual cow herd expansion could be at a reduced rate until 2009, which could provide support for beef prices for the foreseeable future.”
Beef prices could use some support. With weakening market values, increased feed costs, and a shortage of forage, cowboys are riding into swift currents of red ink. At Kansas State, livestock economist Rodney Jones says fall profits have quickly faded, “The average October steer closeout returned around $65.00 per head, following profits of around $100.00 per head on September closeouts. The impact of higher feed prices, and higher priced summer purchased feeder cattle, really began to be felt on November closeouts, with returns averaging a negative $46.00 per head. Preliminary calculations suggest that returns worsened for cattle finished in December. Average breakevens were $95.50 per cwt., which combined with average selling prices of just under $86.50 likely resulted in returns around negative $113.00 per head.” And Jones says based on feed conversion and daily gains, January losses could be $123 per head and February losses could be up to $158 per head.
In addition to high feed costs and the drought’s interruption of the normal pasture to feedlot transition, the incessant snow storms across the high plains turned feed conversion from positive to negative, says Jones, “Unfortunately, we have some reason to believe that performance will be below average for early 2007 closeouts. Historical data indicates that overall feed conversions for cattle finished in the first few months following major storm events can be impacted by as much as 15 to 20%. A 15% increase (worsening) of feed conversions with today’s feed prices results in $4 to $5 per cwt increases in the breakevens, translating to around $50.00 per head decline in profit prospects per head holding all other assumptions constant.”
With production costs increased by weather-related events and the corn market, the revenue end of the equation is not much better says Glenn Grimes and Ron Plain at the University of Missouri, “The number of cattle on feed January 1 was up 0.6% from a year earlier based on trade estimates. If true, this will be the fourth consecutive month for the number on feed number to decline relative to a month earlier. On September 1, the number of cattle on feed was up nearly 10% from a year earlier. The placements of cattle on feed during December are expected to show a decline of over 11% from 2005 and fed marketings during December are expected to show a decline of 4.4% from a year earlier.” That may be the best news if it is confirmed. While the market will already have that contraction built in, and discount it after the numbers are released, it will show the trend in the current cattle cycle as not expanding uncontrollably.
While cattlemen may be figuring out ways to stop the bleeding, don’t look to the processing industry for any help in solving the problem. Meat packer profits had been cut to the bone for the past couple years, and have trended up only recently say Grimes and Plain, “Retail beef prices in December were 1.1% below November and 3.8% below December of 2005. For the year of 2006, retail beef prices were 3.8% below 12 months earlier. Based on the data, retail beef prices would have been lower than they were if the total marketing margin had not declined by 3.5% in 2006 from a year earlier. The wholesale to retail marketing margin in 2006 was down 7.7% from 12 months earlier, but the packer's margin was up 18.3% from a year earlier. The packer's margin needed to increase for the last two years and has not been kind to beef packers.”
If the supply begins to tighten up, demand will still have to pick up to justify higher prices. But the fundamentals in the beef market have not been friendly recently. “Pork and poultry seem to be competing for consumer red-meat dollars for beef at the retail level. Overall demand for beef is not seen as particularly strong over the past few months. Exports have not improved much either. According to USDA the U.S. is still having problems resuming beef trade with South Korea as they turn more U.S. beef shipments away saying they contain bone chips or other prohibited animal parts. USDA hopes to schedule more talks before mid-February regarding the dispute.” That is the assessment of Mike Roberts of Virginia Tech, who agrees with Grimes and Plain that packers retreated from higher prices. “Packers are expected to keep slaughter rates down while bidding cash cattle lower hoping to keep margins in the black. The average beef plant margin for Monday was estimated at $16.45/head, up $1.20 /head from last Friday but down $2.65/head from a week ago”
If you have marketing chores, here are some ideas:
1) Mike Roberts says: “Cash sellers are encouraged to push marketings if they can get them out of the pens at the right weights. It is still wise to consider protecting a portion of 3rd quarter '07 marketings at this time. Corn users should hold off pricing more near-term corn inputs now. Corn users may want to protect against rising prices over the next few weeks.”
2) Jim Hilker at Michigan State r at Michigan State says for August Live Cattle: “There is a 10% chance that the price will be higher than $99.79 and a 10% chance that the price will be less than or equal to $75.95. This indicates that there is an 80% probability that the price will fall between these two prices. There is a 50% chance the price will be less than or equal to (or greater than) $87.01.”
3) Allen May at South Dakota State says for fed cattle: “The latest WASDE report left projections unchanged for the first three quarters of 2007 for fed cattle. The January report also gave initial projections for the fourth quarter. Live cattle futures are above the projection range for all of 2007, suggesting pricing strategies are favorable to protection strategies at this time.”
4) Allen May says for buying feeder calves: “There is currently substantial upside for the first and second quarters of 2007, suggesting hedgers use protection versus pricing strategies for those periods. A synthetic put strategy, selling futures and buying an out-of-the-money call, may be a way to manage short-term risk in this volatile market. For the third and fourth quarters the futures prices are in the middle of the projection range.”
Summary:
With higher corn prices and weaker market prices, the beef producer is finding new holes in his belt to use in tightening it up. However, increases in cow slaughter indicate the expansion in the industry may be slowing, which is good news for producers whose profits have disappeared. Increased packer margins have consumed some of the profit, along with a weaker seasonal demand and the closed Korean market. Keys to turning around the predicament will be reduced supplies and increased demand.
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
January 28, 2007
Can We Discuss Cowboys And Packers Without Discussing Football?
For next weekend’s Superbowl game you are probably stocking up on chips and dip, you’ve planned for pizza delivery, someone is bringing a kettle of chili, and there will be plenty of your favorite beverages to wash down all of those spicy chicken wings. How many Superbowl gatherings will feature steak, hamburger, beef tips, or barbecued brisket? What’s wrong with this picture? The kickoff is at dinner time. Isn’t beef “What’s for dinner?” To our best knowledge there are no federal, state or local laws against preparing or consuming beef on Superbowl Sunday. There’s a lot of beef in front of the TV cameras, how about beef in front of the TV? Someone needs to work on this issue. In the meantime, we’ll work on the issue of why there is weakness in the cattle and beef market. You have to wonder if they are related!
On Friday the beef industry will be watching for USDA’s cattle report which will indicate how much expansion, if any, is occurring in the current cattle cycle. The past week’s USDA Livestock Outlook hints that increased numbers are not widely expected. “The Cattle report to be released on February 2 may point to a national cow herd expansion that has slowed, as the January 1, 2007 beef cow inventory may not show a significant increase over January 1, 2006 inventories. The Cattle report, along with the January 2007 Cattle on Feed report, could give some indication of the extent to which heifer retention for cow inventory expansion has been affected by poor forage conditions. Any significant cow herd expansion will likely come from the 2007 calf crop, implying that actual cow herd expansion could be at a reduced rate until 2009, which could provide support for beef prices for the foreseeable future.”
Beef prices could use some support. With weakening market values, increased feed costs, and a shortage of forage, cowboys are riding into swift currents of red ink. At Kansas State, livestock economist Rodney Jones says fall profits have quickly faded, “The average October steer closeout returned around $65.00 per head, following profits of around $100.00 per head on September closeouts. The impact of higher feed prices, and higher priced summer purchased feeder cattle, really began to be felt on November closeouts, with returns averaging a negative $46.00 per head. Preliminary calculations suggest that returns worsened for cattle finished in December. Average breakevens were $95.50 per cwt., which combined with average selling prices of just under $86.50 likely resulted in returns around negative $113.00 per head.” And Jones says based on feed conversion and daily gains, January losses could be $123 per head and February losses could be up to $158 per head.
In addition to high feed costs and the drought’s interruption of the normal pasture to feedlot transition, the incessant snow storms across the high plains turned feed conversion from positive to negative, says Jones, “Unfortunately, we have some reason to believe that performance will be below average for early 2007 closeouts. Historical data indicates that overall feed conversions for cattle finished in the first few months following major storm events can be impacted by as much as 15 to 20%. A 15% increase (worsening) of feed conversions with today’s feed prices results in $4 to $5 per cwt increases in the breakevens, translating to around $50.00 per head decline in profit prospects per head holding all other assumptions constant.”
With production costs increased by weather-related events and the corn market, the revenue end of the equation is not much better says Glenn Grimes and Ron Plain at the University of Missouri, “The number of cattle on feed January 1 was up 0.6% from a year earlier based on trade estimates. If true, this will be the fourth consecutive month for the number on feed number to decline relative to a month earlier. On September 1, the number of cattle on feed was up nearly 10% from a year earlier. The placements of cattle on feed during December are expected to show a decline of over 11% from 2005 and fed marketings during December are expected to show a decline of 4.4% from a year earlier.” That may be the best news if it is confirmed. While the market will already have that contraction built in, and discount it after the numbers are released, it will show the trend in the current cattle cycle as not expanding uncontrollably.
While cattlemen may be figuring out ways to stop the bleeding, don’t look to the processing industry for any help in solving the problem. Meat packer profits had been cut to the bone for the past couple years, and have trended up only recently say Grimes and Plain, “Retail beef prices in December were 1.1% below November and 3.8% below December of 2005. For the year of 2006, retail beef prices were 3.8% below 12 months earlier. Based on the data, retail beef prices would have been lower than they were if the total marketing margin had not declined by 3.5% in 2006 from a year earlier. The wholesale to retail marketing margin in 2006 was down 7.7% from 12 months earlier, but the packer's margin was up 18.3% from a year earlier. The packer's margin needed to increase for the last two years and has not been kind to beef packers.”
If the supply begins to tighten up, demand will still have to pick up to justify higher prices. But the fundamentals in the beef market have not been friendly recently. “Pork and poultry seem to be competing for consumer red-meat dollars for beef at the retail level. Overall demand for beef is not seen as particularly strong over the past few months. Exports have not improved much either. According to USDA the U.S. is still having problems resuming beef trade with South Korea as they turn more U.S. beef shipments away saying they contain bone chips or other prohibited animal parts. USDA hopes to schedule more talks before mid-February regarding the dispute.” That is the assessment of Mike Roberts of Virginia Tech, who agrees with Grimes and Plain that packers retreated from higher prices. “Packers are expected to keep slaughter rates down while bidding cash cattle lower hoping to keep margins in the black. The average beef plant margin for Monday was estimated at $16.45/head, up $1.20 /head from last Friday but down $2.65/head from a week ago”
If you have marketing chores, here are some ideas:
1) Mike Roberts says: “Cash sellers are encouraged to push marketings if they can get them out of the pens at the right weights. It is still wise to consider protecting a portion of 3rd quarter '07 marketings at this time. Corn users should hold off pricing more near-term corn inputs now. Corn users may want to protect against rising prices over the next few weeks.”
2) Jim Hilker at Michigan State says for August Live Cattle: “There is a 10% chance that the price will be higher than $99.79 and a 10% chance that the price will be less than or equal to $75.95. This indicates that there is an 80% probability that the price will fall between these two prices. There is a 50% chance the price will be less than or equal to (or greater than) $87.01.”
3) Allen May at South Dakota State says for fed cattle: “The latest WASDE report left projections unchanged for the first three quarters of 2007 for fed cattle. The January report also gave initial projections for the fourth quarter. Live cattle futures are above the projection range for all of 2007, suggesting pricing strategies are favorable to protection strategies at this time.”
4) Allen May says for buying feeder calves: “There is currently substantial upside for the first and second quarters of 2007, suggesting hedgers use protection versus pricing strategies for those periods. A synthetic put strategy, selling futures and buying an out-of-the-money call, may be a way to manage short-term risk in this volatile market. For the third and fourth quarters the futures prices are in the middle of the projection range.”
Summary:
With higher corn prices and weaker market prices, the beef producer is finding new holes in his belt to use in tightening it up. However, increases in cow slaughter indicate the expansion in the industry may be slowing, which is good news for producers whose profits have disappeared. Increased packer margins have consumed some of the profit, along with a weaker seasonal demand and the closed Korean market. Keys to turning around the predicament will be reduced supplies and increased demand.
Posted by Stu Ellis at 5:16 PM | Comments (0) | Permalink
January 4, 2007
Pork Prices: Red Ink Or Black Ink?
USDA’s Quarterly Hogs and Pigs Report is now factored into the market without too much of an economic burp. As expected inventory, farrowing intentions and the future hog slaughter will be up slightly. But we all know there are some factors behind the numbers that will wrench the market from time to time, so let’s explore what the report did not tell us.
What about all of those Canadian hogs that had been southbound when corn prices were high in Canada and producers were in a liquidation mode? John Lawrence at Iowa State expects fewer hogs from Canada this year. While market weight hogs from Canada were down 2% in 2006, there was a 12% increase in southbound feeder pigs. He says the Canadian pig crop is down, along with farrowing intentions compared to last year. “To put this in perspective, the Jul-Sep decrease is the second decrease in Canada in 10 years as their pork industry has grown. The other decrease was Oct-Dec 2005. A stronger Canadian dollar and a moratorium on hog buildings in Manitoba are expected to slow growth of the Canadian herd. As a result we may see fewer slaughter hogs imported to the US for slaughter.”
On the other hand, Lawrence says exports have been strong, even to the point of hiding a softer domestic market for US pork. “US pork exports Jan-Oct were 11% higher than the year before. This will make 15 of the last 16 years that pork exports have set a new record. Pork exports to Japan, our largest customer, were down 7.4% through October, as were exports to mainland China. Volume to the other major export markets was higher.”
The soft pork market in early 2006 has been reversed a bit, according to Glenn Grimes and Ron Plain at the University of Missouri, “The summer and fall strength of 2006 appears to have pushed demand for live hogs back to the 2004 high. Contributing to the live hog demand strength is pork export growth, population growth in the U.S., and increased slaughter capacity in the U.S. If we can hold the strong live hog demand of the fall of 2006 through 2007, live hog prices for 2007 are likely to average the same as in 2006 to a couple of dollars lower. The challenge to hog producers will be higher corn prices, which may push the breakeven price for average-cost producers to $50-51 per cwt for 2007. If so, the odds are high for modest losses for the year for the average-cost producer.”
Iowa State’s Lawrence agrees, and he has been reworking his calculations for estimated returns for pork producers, based on higher prices of corn. “The revised numbers suggest that it takes approximately 12 bushels of corn to produce a hog farrow-to-finish and the new weight is 270 pounds. Thus, a $1/bushel increase in corn prices will result in a $4.44/cwt (live) increase in cost of producing hogs or about $6/cwt carcass weight. Given the now higher corn prices and price forecast, pork producers may see some red ink during the first quarter of 2007. Summer prices should be higher than cost of production unless corn and/or soybean meal prices increase further. If we have sustained corn prices in the mid-$3.00/bu range producers are expected to be in the red again in the 4th quarter.”
If that is the case, Grimes and Plain at Missouri say it has been quite a ride for the pork producer, “The average-cost hog producer had enjoyed 34 consecutive months of profit at the end of November based on Iowa State University data. The probabilities are good that December 2006 was profitable for the average-cost hog producer. However, as we get near $3-plus corn into hogs, the winter hog-price rally will have to be quite strong to outpace production costs and keep the bottom line black.”
Summary:
With the pork inventory up, and producers signaling an increase in both the breeding herd and farrowing intentions, overall pork prices may not be as profitable in the coming year as they have been in the past three, all because of higher feed costs. Livestock economists say domestic demand is strengthening, export demand is high, imports have slackened, but the cost of production will be a challenge for producers who will start seeing their books with more and more red ink during 2007.
Posted by Stu Ellis at 1:17 AM | Comments (0) | Permalink
December 19, 2006
If Livestock Producers Have Difficulty Controlling The Cost Of Inputs, Let's Help With The Value Of The Output
There’s been some recent conflict between the cowboys and the combineboys, who are fussing over the corn market spurred on by ethanol, which has either squeezed or eliminated livestock profits. Some livestock operators want to dilute some of the incentives that have supported the ethanol industry, and those who’ve watched the price of corn nudge the $4 mark can grasp its negative financial impact on a cattle feeder or pork producer. The farm gate can’t intervene in the conflict, but we can make sure the livestock folks have all the marketing tools they need to manage their price risk until the price pressure eases somehow.
The majority of cattle and hog producers in the Cornbelt are probably locked into livestock contracts, and knowing how they can provide very little wiggle room for the producer, any little bit of help might be welcome. Livestock economist John Lawrence at Iowa State University has assembled a thorough collection of fact sheets for cattle and hog producers, designed to ensure they know the basics of managing their price risk with the help of futures contracts.
Lean hog and live cattle contracts on the Chicago Mercantile Exchange can provide that risk management mechanism to avoid price volatility, both up and down. When the price goes up, you have already locked in a profit. When the price goes down, you have already locked in a profit. The futures contract price is a known quantity, and the only unknown is the basis, and we’ll visit about that also.
First let’s provide some foundation about hog contracts, and anyone signing a contract needs to understand every aspect of the agreement. Many states are assisting producers in the production contract area, and Lawrence says, “The various contracts are sufficiently differ¬ent so that a producer should be able to select the contract that has the most desirable features. All the features should be considered before a contract is selected.”
The buyer will be taking a futures position when you sign the contract to manage his own risk, and your compensation will be equal to that futures contract, minus a discount. The size of the discount (a basis of sorts) will vary depending upon time and distance, and other costs the buyer will incur. There are many resources available to producers to help them evaluate production contracts. Remember, whoever wrote the contract made it fair for himself, but a producer will not sign a contract unless he sees some profit in it.
Since we’ve mentioned livestock hedging on the part of the contractor, let’s look at how the producer would use the futures market for hedging. A producer would engage in a short hedge, in other words, sell a futures contract at a profitable level, and when the cash transaction occurs, the futures contract would be purchased to liquidate the contract and negate the obligation to physically deliver your livestock to the Merc. Lawrence’s four page fact sheet is full of examples on what and how to do it.
Another risk management tool is the use of the livestock options market, which requires a premium be paid for the right, but not the obligation, to exercise a futures contract. Depending upon the volatility in that particular contract or how far in the distance the delivery might be made will determine how much of a premium you would have to pay. Lawrence’s factsheet on using options in livestock marketing are quite helpful for someone who wants some background before visiting with a commodities broker.
The final element in the risk management plan is understanding and using the basis in livestock marketing, which is the difference between the local cash price and the futures contract that is closest to that cash contract. Lawrence says, “Basis levels remain relatively constant because the cash and futures prices react to similar conditions. If hog supplies decline relative to demand, both cash and futures prices tend to rise. If supplies increase, both cash and futures prices tend to fall.”
Since the basis generally remains constant, you can track it to determine whether your current basis is unusually wide (not good for sales) or unusually tight (good for sales). Lawrence provides several aids to help you consider whether the basis is advantageous or not, and when it might become more beneficial.
1) Lean hog basis table
2) Seasonal hog price patterns
3) Live cattle basis table
4) Seasonal cattle price patterns
Your local Extension office will probably be able to help provide more assistance in understanding the use of futures and basis in hedging your livestock. Another resource is the National Ag Risk Library. All of these will protect your ego and you won’t be seen going into a seminar on how to use the futures market. (I know, I taught those until I found out the reason people always had a “conflict” and called me the next day to get the handouts.)
Summary:
The impact of the price of corn has been devastating to livestock producers, whose outlay for feed has been skyrocketing for the past four months. However, there are some good risk management tools that are not only used by many of your neighbors, but are used by the folks who are buying your livestock. The use of futures contracts and a good knowledge of the basis will help many producers weather the financial storm. There are many good resources to get help with price risk management.
Posted by Stu Ellis at 12:35 AM | Comments (0) | Permalink
December 13, 2006
Have You Recently Compared Corn Prices With The Cost of Distiller's Dried Grains?
Corn is a hot commodity. Livestock producers want it for feed. Export houses want it for overseas sales. Ethanol producers keep bidding up the price to feed their refineries. Consequently, the price is strong and has substantial demand-driven support. But take a look at the price of distillers’ dried grains (DDG), which is an ethanol co-product. You’ll see a corn-based product, going up in price also, but driven more by the growing supply than from demand. If you produce livestock, the price of DDG should be on your radar screen and let’s find out why…
Brian Roe’s December Livestock newsletter from Ohio State University compares the corn and DDG prices in the Eastern Cornbelt, where there are fewer ruminants, and more swine and poultry compared to the Western Cornbelt, where DDG is also piling up at ethanol plants.
Roe says the Sept 1 to Nov 30 span saw corn prices in Central IL rise 76%, while DDG prices rose only 38%. At Toledo corn climbed 67%, compared to Lawrenceburg, IN which recorded only a 9% increase in DDG prices. While the price of DDGS is friendlier than corn, the nutrient value of the product is quite comparable, says Roe, “Dried distiller’s grains have as much dry matter (about 89%) and energy (0.89 mcal/lb) as corn and soybean meal and have much more protein than corn alone (31% compared to 9%). The high protein of DDG means it can replace both corn and bean meal in many rations.”
But while nutritional values of corn and DDGS are equal, prices don’t necessarily move in lockstep with each other. “Analysis of the cost of Central IL DDG suggests that, from 1999 through 2006, the average price of DDG was $85 when south Central IL corn was at $2. In fact, over that time period, the average DDG price reported in Central IL was $85.10 while in Lawrenceburg, Indiana, it was $87.90. For every dime that corn increased, the price of DDG went up by $2.58 (per ton.)” But Roe says prices of corn and DDG have diverged during the past 5 weeks and he rhetorically asks if this is a temporary aberration, or a new standard? “It is a question that only time will fully answer.”
He says there are two schools of thought. One says that DDG prices will remain at lower levels until livestock producers realize what is happening and consumption catches up with the supply. The other school of thought is that ethanol plants are grinding out DDG more rapidly than the livestock industry can consume it, with the result that corn prices will remain high and DDG prices will remain low.
Regardless of the trend, Roe says livestock producers should be asking themselves if it makes sense to convert DDG into as much of their ration as they can. Roe calculated the price savings for Central IL livestock producers, based on inserting one ton of DDG, instead of 26.1 bushels of corn and 420 pounds of soybean meal. “Over the 1999-2006 timeframe examined, the average savings from such a substitution was $92.90 for each ton of DDG added to the feed ration. Furthermore, this has spiked during the past 2 months, rising to nearly $130 per ton.” In a related note, prices of gluten feeds or wet distillers’ grains have remained soft compared to corn, and livestock producers should evaluate it as well.
However, there are some caveats that Roe wants livestock producers to factor into their feed budgets.
1) Consult with a nutritionist to closely examine how much DDG to add to the ration.
2) Monitoring the quality of incoming feed (darker DDG can cause problems) and seeing how the animals are responding to the change in ration both in terms of palatability and performance.
3) There may be additional capital and labor expenses as these feeds may require new bins or modifications to existing facilities.
4) Ensure the new feedstuff is being stored properly and protected from the elements and moisture.
5) You’ll have to work out purchase and transportation logistics.
6) There may be changes in manure management that will have to be implemented to deal with its higher phosphorus content.
Summary:
DDG is plentiful, particularly around dry mill ethanol plants, and livestock producers should seriously consider incorporating it into their feed, particularly since DDG prices are not climbing as fast at corn prices. However, there are a handful of issues that will have to be addressed in utilizing DDG in a livestock ration. It remains to be seen if DDG prices will remain below corn values, or whether they will catch up, and what the long term trend will be.
Posted by Stu Ellis at 12:43 AM | Comments (2) | Permalink
December 4, 2006
Will Your Pork Production Budget For 2007 Be Written With Black Ink Or Red Ink?
Grandpa and Dad always referred to hogs as the “mortgage lifter,” and your high school vo-ag teacher was always testing you on the “hog-corn ratio.” While those economic principles will never expire, they are taking a backseat to an entirely different set of economics which have made hogs profitable for the past two years, but the 40 days left in 2006 may determine whether we can squeeze a third successive profitable year. If you are raising hogs, sharpen your pencil and we’ll see whether it writes black or red.
How did you do in 2005? Chances are you made money in 2005, but not quite as much as 2004, at least that is the outcome of an extensive analysis of producer records conducted by University of Illinois economists.
Researcher Dale Lattz says total returns dropped $5.75 from 2004 to 2005, but total returns averaged $46.25 per hundredweight of pork produced. “Total returns for the farrow-to-finish hog enterprises exceeded total economic costs by $7.83 per hundredweight produced in 2005. This was the second highest level of profit during the last ten years.” The issue of feed, which is foremost today, was less of an issue earlier this year and last, when Lattz says feed costs were down several dollars in 2004, while non-feed costs were up about a dollar. 2005 production costs averaged $38.42, compared to nearly $41 in 2004, and those two bracketed the five-year average of $39.21.
For 2006, Lattz says market prices will average about $47.50, and with feed costs recently rising, the year’s average will be about $22.25 and non-feed costs at $17. That would keep production costs under $47, giving producers a third year of profits in pork production.
But what is keeping prices above the cost of production? That hog-corn ratio and mortgage lifter terminology come into play. We are feeding high-priced corn to hogs and selling them into the export market. The strong export market is keeping pork producers in the black.
Glenn Grimes and Ron Plain at the University of Missouri report in their latest newsletter that exports are outpacing any imported pork. “Pork imports for January-September were 1.5% below the same period in 2005. Net pork exports for January through September were at 9.52% of production, up from 8.08% a year earlier. This growth in net pork exports along with population growth are the major reasons for the stronger live hog demand than consumer demand for pork. Our growth in pork exports by country were: Canada up 7.6%, Mexico up 18.6%, Russia up 131.2%, South Korea up 47.8%, China and Hong Kong up 10.7%, Taiwan up 3.9%, Caribbean up 89.3% and other up 7.9%.”
That is the basis for the strong market price, but what about the strong prices for corn which many pork producers are concerned will turn black ink into red? Grimes and Plain point to the recent Iowa State University study that indicates $4.05 will be the corn price threshold for ethanol plants to begin slowing down in their corn consumption. Depending on your location, you are 50-75¢ under that with the spread diminishing.
Grimes and Plain rhetorically ask, “What does this mean for the hog industry? This priced corn would increase the cost of producing hogs just over 30%. We believe U.S. production of hogs would need to be reduced 10-15% to drive up hog prices enough to cover these costs. The big question is who will cut hog production? With the current structure of the hog industry with high fixed investments there is likely to be substantial pain before the reduction occurs.”
The three year run of pork profitability that Lattz details may be coming to an end, if corn prices continue their upward climb. So what do you do? You can take the advice of Dillon Feuz of Utah State University, and tweak your budget a bit. Keep in mind he is a cowboy’s economist, and forgive his references to cattle in this pork report, but he does make some good points:
“Most of the time, we show that you will lose money on just about any enterprise. We not only make sure that we add up all of your actual cash cost, but we make sure that you pay your spouse, children, horse, dog, etc. a full wage as well. We also assume that you are as greedy as most CEO's for major corporations, so we make sure you pay yourself for not only your labor but for your management expertise. We also assume that if you didn't just buy your place yesterday at the current market price and are paying for it, then you must not own it, so you are leasing it at the current market rate. If you look at the budgets published by most agricultural universities, and if you believed all those budgets, there probably should not be an independent farmer or rancher left in the country, because we have shown that you lost money in 49 of the last 50 years. In fact, the only profitable enterprise seems to be when you plant houses or supermarkets, and that is a one and done scenario.
"Adding further to the usefulness of these budgets, no two are alike. Net return on one budget is after you paid for the dog food, because he is a legitimate ranch expense, while on the next budget he is considered a pet and that comes out of your wage you paid yourself. So, after that fine critique, is there a good use for a budget? Yes.
"Many times you can use comparative budgets to help you determine which enterprise will help you make more profit, or lose less money. In making these comparisons, you can leave out many of the budget lines that we agricultural economists insist you include. For example, if you are comparing feeding calves for 100 days following weaning to feeding cull cows for 100 days, then you can disregard your payments to your spouse, children and dog. You will either pay them or not, but their wage will be the same regardless of which enterprise you choose. Likewise, you can ignore that high priced land payment. You obviously have decided to own that land and in making budget comparisons you are simply trying to determine which enterprise will pay you the most from using that land, and not necessarily what percent return that land is generating."
Summary:
Pork producers are having a third consecutive profitable year, but with corn prices climbing steadily, there are threats of red ink as 2006 expires on the calendar. The heavy demand on corn by several consuming industries will cause production costs to rise, and currently they have only been surpassed by a strong export market for US pork. Producers who sharpen their pencil to make their production budgets work will have to be creative in coming months to fend off the challenges to their profitability.
Posted by Stu Ellis at 12:17 AM | Comments (0) | Permalink
November 28, 2006
Should DDGS In Swine Rations Be "Whole Hog" or "Extra Lean?"
Whether it is ethanol in your gas tank, or DDGS, ethanol’s co-product in your swine rations, 10% seems to be the efficient volume for all around balance. As corn prices continue their climb in the demand-driven market, many producers are looking for alternatives to save on feed expense. Distiller’s Dried Grains with Solubles (DDGS) may be your answer, but don’t go “whole hog” with it!
If the Nov. 16 posting on the farm gate gave you some answers, but not all you were seeking, maybe it is time to consider the use of DDGS in your swine rations to shave a few dollars per ton of feed off your production costs. At Iowa State University, John Lawrence calculated potential savings with DDGS, determining optimum level, impact on rates of gain, and what it does to your revenue stream.
Over 50% of your production cost is feed, and about 80% of the feed cost is corn. It is no fun to pay more than $3 for corn, when the price of pork is slowly declining. Researchers at Minnesota have been prominent in their effort to investigate the integration of DDGS into swine rations, and we’ll look at 4 variations, with no DDGS, and diets with 10%, 20%, and 30% DDGS. As the volume increased, the relative amounts of corn, soybean meal, and soybean oil decreased.
To establish baseline costs for a corn-soybean meal ration, the Minnesota researchers calculated feed costs per 200# of gain about $34 based on August corn prices, $43 today, and $52 next spring if the market continually bids on corn acreage. Keep in mind this was a $4.50/cwt of carcass weight sold, but when you spread that throughout the breeding herd, the cost will be closer to $5 because of lower feed efficiencies.
As feed efficiency declines with age and weight, the optimal marketing weight for hogs on DDGS may be slightly different from hogs on a corn ration. If feed prices are less per pound than the pound of meat they produce, it makes sense to continue feeding. But when the balance tips the other way, the economics are against you. However, there are some fuzzy issues that come into play, such as the lean premium, sorting discounts, and the change in market prices as you are loading the hogs for market. Lawrence says, “The bottom line is that if the hogs were marketed at the optimal weight with $2/bu corn, the optimal marketing weight with $3/bu corn will be less.” He has a spreadsheet tool to help evaluate optimal marketing weight.
Lawrence reports the Minnesota researchers found “no difference in performance or carcass traits with DDGS at 10% of the diet throughout the grow-finish phase. Average daily gain was lower at the 20% and 30% levels than at the 0% and 10% levels, and the 30% ADG was lower than the 20% ADG.” Lawrence says the 30% DDGS ration required more feed to put on a pound of meat than the other 3 diets. With the lower rate of gain, the hogs on the rations with 20% and 30% DDGS had lower selling weights for the same number of days on feed.
Another issue dealt with the quality of the meat for the hogs on the higher DDGS rations. The Minnesota researchers said the 20% and 30% DDGS hogs had a lower dressing percentage, although there was no significant difference in quality of meat. However, the belly fat was said to be more unsaturated. While that may be preferable in a human diet, the hogs had a softer belly and that caused problems for bacon processing.
Lawrence at Iowa State says producers need to ensure that DDGS prices are lower than corn prices on a per ton scale. If that is the case, each 10% increase in the ration reduced the feed price by 100 pounds of gain by $.25. “Feed cost of gain decreased at DDGS10 (10%) and again at DDGS20 (20%), but was steady to higher at DDGS30 (30%) because of reduced animal performance.”
Finally, Lawrence looked at the return over feed cost, since the volume of DDGS impacts revenue through feed savings (a positive) and feed efficiency (a negative at higher percentages.) He says “dressing percent was not different between DDGS0 and DDGS10 and they were both larger than DDGS20 and DDGS30 that were alike… These results indicated lighter carcasses for diets with higher levels of DDGS and less revenue per head.”
Summary:
Distiller’s Dried Grains with Solubles can be fed to hogs on finishing diets. There is no difference in rate of gain and meat quality between a ration with 10% DDGS versus total corn. When compound feeds contain higher levels of DDGS, there is a lower average daily gain, and belly fat quality is questioned. With current corn prices, inclusion of DDGS will provide a lower feed cost, but producers need to quickly respond with marketing as rate of gain declines, on higher blends of DDGS in swine rations.
Posted by Stu Ellis at 1:14 AM | Comments (1) | Permalink
November 21, 2006
For The Cow/Calf Producer, It's "Who Do You Trust?" When It Comes To Price Discovery.
How important are local auction houses in helping you determine the value of your livestock? How important is the futures market in helping you determine the value of your livestock? There are many sources of information, but which receives your greatest reliance? Oh, and by the way, what value do you place on the Mandatory Price Reporting system? Now that you have thought about those questions, let’s see what other producers have to say, and see if you agree with them.
You probably scored local auction houses pretty high on the list of places that help you determine the value of your livestock, unless you think there is something smelly about your local bidders. We’re not going to get into that, but we’ll find out what producers in the Northern Plains told researchers from North and South Dakota State Universities about the trust they place in various price discover channels. Their study, Public Price Reporting, Marketing Channel Selection and Price Discovery: The Perspective of Cow/Calf Producers in the Dakotas, takes a look at the need for reliable information from markets to help cow/calf operators determine livestock values. As you know there has been a decline in the number of terminal markets, along with a decline in the number of folks who are voluntarily reporting local market prices. Those trends resulted in the USDA’s Mandatory Price Reporting (MPR) system.
The cow/calf operators have remained mostly independent of vertical integration in the beef industry. The researchers say USDA has found, “The cow/calf industry is the only segment of the beef industry that has not succumbed to the forces of increased market concentration and vertical integration. In 2005, there were approximately 770,000 beef cow operations in the United States and 85 percent of the beef cow inventory in the United States was located on beef cow operations of less than 500 head.” Over 60% of the calves are sold in local auction markets, 23% in private sales, and 11% in satellite or Internet-based video auctions.
Producers of feeder calves, needing further backgrounding, or stocker calves, ready for the feedlot, placed heaviest emphasis on local prices to determine the value of their animals. “With respect to usage, 98% of producers look to local auction market prices disseminated in the local media as a source of information in their price discovery process. After local auction market information, producers look to local contacts 80%, and quotes from buyers 75%.”
Regarding reliability of the information, producers placed a wide range of trust and distrust among the information sources. “Survey respondents ranked auction market reports in local media outlets to be the most reliable source of information for price discovery, followed by local contacts and satellite auction prices. The source of information considered to be the least reliable was the “other sources,” followed by USDA price reports, fee based information sources, and futures markets. One interesting fact gleaned from the data is that with respect to usage, USDA price reports ranked higher than fee based or futures market, but fee based reports and futures market reports ranked higher than USDA price reports on the reliability scale.”
On the issue of the Mandatory Price Reporting system, various researchers have found that producers have a less than stellar trust in the system; however USDA’s Economics Research Service believes the dissatisfaction results from surveys taken when cattle prices were relatively low. So the Dakota researchers embarked on an initiative to find out from producers in the Northern Plains. “We were surprised to find that the cow/calf operator opinions on mandatory price reporting are not correlated to the herd size, level of education, years of experience, or the membership in beef industry or livestock association…the majority of cow/calf producers in our survey view MPR as having a beneficial effect on the beef industry in general and the cow/calf industry in particular.”
Specifically:
• 34% were undecided if replacing the voluntary price reporting system with mandatory system for the public reporting of slaughter cattle prices had been beneficial to the beef industry.
• 37% were undecided if replacing the voluntary price reporting system with mandatory system for the public reporting of slaughter cattle prices had been beneficial to the cow/calf industry.
• 57% agreed (9% disagreed) that replacing the voluntary system with the mandatory system has been beneficial to the beef industry.
• 52% agreed (11% disagreed) that replacing the voluntary system with the mandatory system has been beneficial to the cow/calf industry.
On the issue of price transparency, “a majority of respondents do not believe that regime change in the public price reporting system has improved market transparency or increased market efficiency.” When asked if the mandatory reporting system improved the price discovery process in their region, a majority of producers were unsure (57% on slaughter cattle, 53% on stocker cattle, and 49% on feeder calves.) About a third of the respondents agreed that, with the implementation of MPR, the price discovery process improved in their region. “Given that Dakota cow/calf producers expressed a preference for local market information during the price discovery process, it appears that producers would also prefer greater coverage of local markets in public price reports.”
The Dakota researchers say their findings on when producers make marketing decisions point to several facts:
• Cow/calf operators tend to make decisions regarding herd size, retaining feeder cattle, and retaining stocker cattle primarily on the availability of pasture.
• Producer preference for local information sources is also a plausible explanation for why a strong majority of respondents do not believe that the value of public price reports as an input into their marketing decisions has increased as a result of regime change in public price reporting for fed cattle.
• A majority of producers in both the feedlot and cow/calf industries do not believe the public price reporting has improved their negotiating position under the mandatory price reporting system.
Summary:
Feeder calf and stocker producers would prefer to sell to other backgrounders or feedlots based on information gathered from local auctions to help them determine the value of their livestock. The further away from the home pasture the information originates, the less trusted it is, even with the USDA’s Mandatory Price Reporting System. Although that system is not distrusted, a majority of producers are uncertain of its reliability.
Posted by Stu Ellis at 12:59 AM | Comments (1) | Permalink
November 16, 2006
Is Your Pork Operation Caught In The Corn Cost-Price Squeeze?
Whether you feed your own corn or buy it, $3 corn seemingly doubles the cost of producing hogs. If you are operating on a tight margin because of high feed costs, and since the use of less expensive Distillers’ Grains does not provide much help to the pork producer, what can you do? Some producers have been marketing at lower weights to avoid feed costs, but that may not be the best answer. There are two ways to define your predicament and we’ll provide some suggestions.
To survive high corn prices in a period of declining prices for market hogs, and shutting down your operation is not an option, think about what your options really may be. The current period of profitable pork prices, squeezed by the high costs of corn, could be compared to recent periods of low pork prices, where you feel the same squeeze, except corn costs were not as high. What did you do to ensure a profit margin at those times of low pork prices? Since your biggest expense is feed, you concentrated on feed costs, and that still should be your focus say Extension Swine Specialists.
Let’s return to 1998 when pork prices were in the tank and you kept your operation going. At the time, Swine Specialist Gil Hollis at the University of Illinois provided Tips for Surviving Low Market Prices and said, “Feed is 75 to 80% of variable costs. During low market cycles, swine operations must be able to cover variable costs. Controlling feed cost is the only way to substantially influence variable costs.”
Hollis offers a variety of suggests for controlling feed costs, including: reducing waste, cooperative purchasing, and phase feeding, “Phase feeding is especially critical in the late finishing phase due to the large amount of feed consumed.” Other suggestions are:
1) Reducing sorting loss, shown by Kansas State University to have a $50-100 per hour labor payback.
2) Keeping current with marketings by ensuring your hogs are not eating more and gaining less, which reduces your net, regardless of the cost of feed.
3) Culling non-productive sows, since poor sow feed efficiency (6:1 to 7:1) makes it impossible to make money by fattening sows, even with low feed cost.
4) Looking closely at your non-feed costs, where small savings can make a difference in times of narrow margins.
At the University of Nebraska, Extension Swine Specialist Duane Reese has offered 26 Feeding Program Management Tips. In short, he says the key aspects are quantifying and monitoring your pigs’ performance, selecting nutrient sources, formulating diets, implementing a quality control program, monitoring costs and comparing to expected goals, and minimizing feed wastage.
Reese wants you to look at feed usage first and lower impact factors later. “There are several possible measures of feeding program economics. Feed cost per ton is the worst measure you can use, because it gives no consideration to pig performance or revenue. Better measures are feed cost per pound of gain, feed cost per pig marketed, or profit per pig. The best measure is returns per pig space.”
Reese follows that economic principle with 26 ideas that will help you get there. Some of those include ways to ensure your high priced corn is being efficiently metabolized by the hog into a profitable rate of daily gain. Other ideas suggest split-sex and phase feeding, which you may already be doing, but Reese underscores the concept. He also suggests working with your feed manufacturer to identify additional points of potential savings.
If you are trying to keep your pork operation in the black, some minor tweaking may be all you need to do, until there is an increase in the demand for pork, and University of Missouri livestock economist Ron Plain says there is light at the end of the tunnel, “Two things which are positive for retail meat demand are a low unemployment rate and low gasoline prices. Both of these factors have been positive for meat demand in recent months. Hopefully, they will continue to be and this will keep hog prices up. Given the rapid run up in corn prices in recent days, a sharp drop in hog prices would quickly change the bottom line for hog producers from black to red.”
Summary:
It may seem like you are at the mercy of market prices and production costs, but there may be some operational changes which will allow a pork operation to remain in the black during a classic “cost-price squeeze.” Among those are adjusting nutrients to ensure better feed efficiency, acquisition of corn and other feed ingredients in ways that will reduce costs, and making sure you are feeding the animals that will provide a return to your labor and management.
Posted by Stu Ellis at 12:42 AM | Comments (0) | Permalink
November 9, 2006
Which Way Does The Wind Blow At Your Livestock Operation?
The fragrance of livestock means money, unless your nose is bothered by the richness in the air, then you are likely to define it as an odor, and an objectionable one at that. The recent trend to concentrate livestock operations has created skirmishes in many areas, from legal and public relations battles, to guerilla-type warfare. At issue is a livestock operators right to raise and sell livestock, which goes as far as someone’s nose which gets bent out of shape by the odor of nature. Beyond the mudslinging, what has been happening with property values, tax assessments, and other local laws that are constantly being challenged by both sides of the livestock issue?
Economists Ann Ulmer and Ray Massey at the University of Missouri poured over lawsuits, tax and land value actions, and other documents that might give a hint about the impact of an animal feeding operation (AFO) on neighboring property owners. Whether you are the smeller or the smellee the Ulmer and Massey research, will give you a hint about some precedents being established in livestock country.
The Ulmer and Massey research found that the impact of the livestock operations was limited to nearby property, and while a major caused a reduction in property value, a contrasting case indicated that values increased because the number of workers at the operation caused an increased demand for housing, subsequently raising its value. While several cases resulted in no change in property value, one study found the local economic impact of the operation outweighed the negative impact on real estate values.
Your distance from the facility has a direct impact on whether you are really affected by the livestock operations, according to the Missouri economists. For example, an Iowa study found negative impact only for homes downwind of the livestock operation. Pennsylvania and North Carolina studies found impact for everyone within a circle around the operation, but the longer the radius, the less the impact. In Colorado and Pennsylvania, the impact depends on the type of operation, and while swine and poultry vied for the worst, beef and dairy were less objectionable.
Ulmer and Massey report confusing conflicts with several studies about the degree of impact of the livestock operations. Larger facilities were not seen as bad because they were probably newer, had better technology, and better management. While all operations had some impact, one study found that a new operation joining others in the same vicinity would have a less objectionable impact. Another study found that the more animals, the more objectionable the animal feeding operation was.
Two studies examined by the Missouri economists looked at the impact of management practices on nearby residential vales. They found that an operation with a good conservation program impacted the area less, than one without a conservation plan. Similarly, some Iowa research found that the operations which had a lesser impact on land values were also the ones with better management of manure storage, land application, and site selection of the operation.
It was earlier noted that one study concluded there were significant economic benefits to the animal feeding operation, that the negative impact on home values was overshadowed. However they note that a Nebraska resident was able to get a reduction on his tax bill because of the nearby livestock operation, which he, himself owned.
Summary:
The perennial battle between livestock operators and residential home owners has been the subject of extensive study, but with little consensus. While it is a given that property values may decline, those impacts could be restricted by distance from the facility, direction from the facility, and how many animals were in the facility.
Posted by Stu Ellis at 5:56 AM | Comments (0) | Permalink
October 30, 2006
Have You Been Modifying Your 2007 Feed Budget?
Picture, if you will, two steam locomotives hurtling at each other at something near top speed. One is hauling livestock. The other is hauling the 2006 harvest. Their possible point of collision is a small whistle stop appropriately named Feed Grain Stretch. Whether they have a thunderous wreck, or safely pass each other in the night, is a tale that we won’t know until we digest the work of Allen Baker and Edward Allen, both with USDA’s Economics Research Service. They have been looking at the numbers from the October Crop Report, counting the amount of livestock that need to be fed, and calculating whether there will be enough without pushing up the cost of livestock production. Don’t cheat by peeking at the last page until you read the whole story.
ERS economists Allen Baker and Edward Allen acknowledge the 2006 corn crop will be the third largest, but that is little consolation when you look at the other trends in the October report. USDA lowered its estimates for both planted and harvested acres for 2006, as well as cutting the yield projection by 1%, and even reducing the carry-in stocks from 2005. While those statistics tell only part of the story, the real punch came from a 209 million bushel cut in the 2006 production estimate. That comes at a time when demand keeps setting record highs. 2006 production also fell for sorghum, barley, and oats, and the economists succinctly predict, “The lower supplies and continued strong demand are expected to strengthen prices for all the feed grains.” Before you liquidate your herd, let’s look at some of the details in their report, Feed Outlook, to see if you can slide through.
While you don’t typically think in tonnage, just look at the relative numbers, when ERS says, “Total 2006/07 feed grain supply is 347.1 million tons, down from 359.3 million in 2005/06 and the smallest since 2003/04. Total 2006/07 feed grain utilization is projected at 318.0 million tons, (compared to) 304.5 million a year earlier.” Supply is down by 12 million tons, demand is up by 14 million tons, and the trains are racing closer to each other.
Something that may be generally known, but not in detail, is the fact there is more livestock around that needs to be fed. USDA’s 2007 forecast is for more animals everywhere:
• Beef production is forecast at 26.8 billion pounds, up from 26.0 billion in 2006.
• Pork production is forecast at 21.8 billion pounds, up from 21.0 billion in 2006.
• Broiler production is forecast at 36.6 billion pounds, up from 36.0 billion in 2006.
• Egg production is forecast at 7.7 billion dozen, up from 7.6 million in 2006.
• Milk production is forecast at 183.9 billion pounds, up from 182.1 in 2006.
That is the demand, so what about the supply?
Corn makes up 94% of the feed grain content in the US, and the recent crop report indicated farmers did not plant as much this year, primarily because of higher energy and fertilizer costs going into planting season. There was a decline of 650,000 acres in IL, NE, and OH alone. Next August, at the end of the marketing year, the carryover is projected to slip below the benchmark 1 bil. bu. mark as more than half of the US surplus is consumed. As a result, prices are expected to rise: “The strong projected demand and reduced supplies combined to raise the price forecast 25 cents on both the low and high ends of the range to $2.40-$2.80 per bushel compared with $2.00 in 2005/06.”
The sorghum story is about the same with a 301 million bushel production in 2006, but 93 million less than 2005 production. This comes despite an increase in acreage, but dry weather cut the yield, and even an increase in the estimate of 2005 carryover stocks could not offset a drop the overall supply. So estimated sorghum prices are higher: “Prices were increased 25 cents on each end of the range to $2.20-$2.60 per bushel compared with $1.86 in 2005/06.”
Barley seems to make it a broken record, with lower production, and higher prices. The US will produce 180 million bushels of barley, down 32 million from 2005. Both planted acreage and average yield are down, but the overall decline in barley production is not news. USDA says, “Area harvested for grain is the lowest since 1885, while production is the lowest since 1936.” The total available supply is estimated at 303 million bushels with the help of imported barley. “Barley prices were raised 10 cents on both the low and high ends of the range to $2.55-$2.95 per bushel compared with $2.53 a year earlier.”
The oat saga is not new, with production decline in a decades-long trend. 2006 production will be 94 million bushels, 18% under 2005, the function of declining acreage and dry weather. Total supply is forecast at 251 million bushels, which is down 5% from 2005 even with larger imports than 2005. Compared to the 94 million bushel production, imports are projected at 105 million bushels. “Prices were raised 10 cents on both ends of the range to $1.70-$2.10 per bushel compared with $1.63 in 2005/06.”
Feed grains can either be consumed in the US or exported to help meet world demand for livestock feeds. Internationally, production will be up slightly, helped in large part by Chinese corn production, which will result in larger Chinese stocks. There were numerous dry and wet spots in grain producing areas of the world, cutting yields in some areas and enhancing production in others. USDA is projecting only a 1 million ton increase in foreign production of coarse grains to 675 million. International feed grain trade will level out the imbalances, and despite higher prices for US corn, exports will continue throughout the year, although not at the current high pace. Also increased U.S. prices and high freight rates will allow China to export some of its corn.
As those trains race toward each other, they may not reach a collision point in 2007, thanks, in part, to a large 2005 corn crop and imports of barley and oats. There could be quite a drama in another 12 months, however.
Summary:
The US livestock producer who purchases feed grains will have to modify production budgets for 2007 and increase the amount to be paid for feed. Lower production for corn, sorghum, barley, and oats will all result in higher prices. US barley and oat supplies will even have to be bolstered by imported grain. Corn exports will continue, even with the decreased US production, however, higher prices are expected to ration some of the outbound shipments as they impact domestic feed consumers.
Posted by Stu Ellis at 5:17 AM | Comments (1) | Permalink
October 25, 2006
Can The Pork Industry Compete Against The Ethanol Industry?
If you are a pork producer, how are you going to survive the ethanol onslaught? Cowboys can feed distillers’ grains with a less expensive ration to send beef to market. That is not an opportunity for the pork industry, which has to buy corn, and will have to bid for it against ethanol plants where prices are buoyed by the price of oil. So the question is, how will the pork industry survive competing against ethanol for corn? It may be the pork industry that puts up some major challenges to US ethanol policy.
Distiller’s grains are a challenge in a hog ration. There is a sufficient amount of energy, with lower phosphorus content, but amino acids pose a problem and there is a quality variation among suppliers. So most pork producers will opt for the corn constant and have to pay the bill to get consistency. At Purdue, Livestock Marketing Specialist Chris Hurt says our current pork market environment will collide with the ethanol bandwagon and it will not be pretty. It is all summarized in his latest marketing letter, HOGS VS. ETHANOL: ETHANOL WINS!
In that current environment, Hurt says weights will drop (that is a price plus). But corn costs will rise, (that is a price minus). Hurt says there will also be some expansion with the herd up 1% and the breeding herd up 2%. With US population growing at the same pace, there will be more mouths to feed more pork, so the per capita ratio remains even.
The issue of corn availability is worsened by the fact that ethanol users, benefiting from federal blending subsidies, can bid an additional $1.38 per bushel for corn, raising its price 50 to 66% without a detriment to the ethanol industry, but to a major harm to the pork industry, says Hurt. He says the traditional corn user will have to adjust to the new realities of the corn market, and some may be unable to do so. On the other hand, Hurt says a family pork operation, raising its own corn, will be able to capture an increased value, “Family farms that still raise much of their own corn and also produce hogs will tend to be the least affected by the bio-fuels era. They will have available supplies of corn, a natural hedge between high corn prices and hog prices. If they own land, the federal ethanol subsidy and profits from ethanol will be partially capitalized into their land values.”
Chris Hurt says the demand for ethanol, particularly in the western Cornbelt where there are more ethanol plants, has increased both demand and prices of corn. Comparing values to corn prices in Indiana, Hurt says Minnesota corn bids have increased 15¢ per bushel compared to Indiana, and comparing years before and after the explosive expansion in ethanol plants. He says there is a 13¢ increase in relation to South Dakota and Indiana, as well as a 10¢ improvement in Iowa corn prices versus Indiana, all since the ethanol plant construction era.
So what will Cornbelt prices be for corn, if pork producers have to bid higher for it? Hurt says for the past year, corn has averaged abut $2 per bushel, but more recently that has been at the $3 mark, and may be for the next year. He says hog production costs will rise up out of the high $30 range into the mid-$40’s. “Expected returns, then, are only $2 to $3 per live hundredweight this fall and winter and $4 to $5 next spring and summer.”
How much can an ethanol plant pay for corn and still make money? That is the question a lot of pork producers will be asking each other, if they have to raise hogs on $3 corn very long. Hurt says with $60 crude oil, and the current price for distillers’ grain as an income stream, the ethanol plant could pay up to $5.50 per bushel, but only $4.12 if the current ethanol subsides are eliminated, which is a function of the $.51 blenders tax credit and a yield of 2.7 gallons of ethanol per bushel of corn.
Hurt contends the financial benefits to the ethanol industry will compound problems for pork producers and others, who need to buy corn, “If the ethanol industry continues to receive these large subsidies, there is little to constrain the increase in capacity until corn prices are bid up to, or beyond, their breakeven levels. Of course, it is never clear just where this is because the single most important factor in the determination of ethanol producers' corn breakeven will probably remain the price of crude oil.”
If there are challenging days ahead for pork producers, what would be an action plan to avoid difficulty? Chris Hurt offers several opportunities:
1) Curtail expansion to avoid a pork surplus.
2) Adjust rations to increase protein levels, look for alternatives, adjust feeders to reduce waste, and learn the process of incorporating distiller’s grains into a hog ration.
3) Look for supply contracts to manage the risk of supply and cost.
Hurt says the pork industry will be able to compete, since their product is as important as fuel. But he expects a leaner industry, one that is no longer expanding, and one that can rely on itself.
Summary:
Growing demand for ethanol, which is pushing corn prices about $1 higher than an 8 year average price, will make life difficult for pork producers, until it become easier to feed distillers’ grains to hogs. While it is possible, the ration needs closer monitoring and adjustment. But ethanol subsidies, which have benefited the corn economy and the ethanol industry, will hurt the pork producer if corn values continue to rise. The pork industry is left with little choice but to halt any planned expansion as well as manage risk a bit better.
Posted by Stu Ellis at 2:13 AM | Comments (0) | Permalink
October 12, 2006
Significant Forces Are Impacting The Livestock Industry, From The Small Producer, Up To The Largest Producers And Processors
In a short 12 year span, the pork industry turned nearly inside out with regard to the size of entities and their share of the market. 1991 saw 68% of the hogs marketed by producers who sold less than 5,000 head per year, and a 13% market share for producers with herds in excess of 50,000. By 2003, the small folks had a 9% market share and the big folks had a 58% market share. That is an example of structural change in agriculture, and that is today’s focus as the farm gate looks at what has happened to U.S. livestock production.
There is a great diversity of livestock production in the U.S., but Purdue University agricultural economist Mike Boehlje says there are significant trends surfacing. Those include production contracts, vertical integration, niche marketing, and global sourcing and selling have combined with industrialization, specialization, managerial intensity and challenges to location of both production facilities and processing plants.
Boehlje writes in the current e-magazine Choices, that “A "world standard" is evolving to greater commonality of technology, size of production units, processing and quality, particularly in the case of pork and poultry. This is less so for beef, in large part because of its reliance on forage.”
Boehlje says the future of livestock production will be fewer and larger production units designed to capture economies of scale and better respond to consumer demand. An integral part will be technology, such as genomics and tracing systems that will alleviate concerns about food safety. Smaller producers will be challenged to survive, but may do so in niche markets where premium prices will offset higher costs. Processing plants will grow in size, demanding more capital, as well as a hefty inflow of contracted animals, but lenders may not want to help producers expand without guaranteed access to processing plants.
Boehlje says it is not the smaller livestock producer who will have to compete with the big boys, but the U.S. processing industry will have to face foreign competition, “Global livestock firms that locate production-processing capacity in different countries will increasingly dominate the industry. The implication is that the North American livestock industry will face even more competition in the future.”
Additionally, there are several factors that will push and pull on the U.S. livestock industry, with both pluses and minuses.
1) Regulatory reform may increase costs and reduce profits for large firms, and drive smaller operations out of business, but may be the key to meeting domestic and foreign consumer demands which will be important for market access.
2) A differentiated product focus will bring many outside issues into the mix, such as organic, animal welfare, free-range, no antibiotic, and other production practices that tend to increase cost, and discourage large producers. However, these are attractive niche markets which reward production with higher prices, and usually demand smaller volumes supplied by smaller producers.
3) The horizontal and vertical structures of the production industry have both allowed large firms to grow, and small firms to remain viable through risk management linkages. While critics have alleged that smaller producers have suffered from reduced market access, Boehlje says, “Assessments of market power in the U.S. livestock industry have generally been inconclusive, or indicate limited impacts.” He added that while anti-trust laws should be enforced, government efforts to restructure the industry may be marginally effective.
Other issues that may determine the future competitiveness of the U.S. livestock industry include:
1) Value chain coordination, which is complex and difficult to achieve, but which needs consideration to determine its viability.
2) Identity preservation and trace-backs will happen, regardless of government intervention.
3) The degree of success of niche markets depends on the consumers’ willingness to pay higher prices.
4) Regulatory costs will vary from one production facility to another and from one processing plant to another, and will have a varying impact on U.S. competitiveness.
5) Border crossing interruptions disrupt the market and can be difficult to reverse, even for scientific reasons, and new rules are needed to ensure unimpeded flow of livestock.
6) New issues, such as energy or fertilizer from manure, and ethanol plants consuming livestock feeds create new economic opportunities and challenges, which may geographically sh