Brumm Speaks Out

I receive a daily ‘newsgram’ from the Food Marketing Institute which is the grocery store industry group. I started to receive it so I could see what the retailers are thinking about as they present our pork products to the American consumer.

In this mornings email, there was an article on convenience stores that I found really interesting. In many rural communities, convenience stores are the social hub of the community, whether it be Caseys, Kum and Go, QuickTrip, QuickStar, Cenex, etc. All of us have stopped at these stores for small purchases and/or gasoline, etc.

A survey of convenience stores for the magazine CSP says 58% of consumers reported buying a nonalcohol beverage on their most recent stop. Fifty percent (50%) of shoppers think of convenience stores as places to buy beer with the average shopper purchasing beer 3 times per month. Other top products purchased during a convenience store stop included candy/gum (41%), gasoline (39%), lottery tickets (37%), salty snacks (36%) and tobacco products (34%). Total convenience store sales were $8.7 billion for the 52 week period ending November 27, 2011.

The reason I find this so interesting is the impact of convenience stores on people movements and possibly the transmission of PRRS. So far this winter, PRRS has been a major health challenge in the upper Midwest. Transmission of PRRS between production sites can be via air borne or fomites of some sort. When PRRS breaks in a production unit, producers and their veterinarians often do a lot of head scratching to try and identify the biosecurity break that may have allowed for the introduction of this devastating virus.

I’ve wondered for years the role of local convenience stores in disease transmission. Drive thru any rural community early in the morning and you’ll see lots of traffic at the local ‘C’ store as people get a cup of coffee, can of Mountain Dew and/or donut. At 3-5 pm, this is repeated as everyone again cycles thru to get their favorite beverage.

Think about how many dirty feet come thru the store on a given day, and how many potentially are tracking PRRS virus. After stopping at your local ‘C’ store, do you change shoes/boots before entering your swine facility, or do you rush in (it will only be a minute!) to check on something before going on to the next task. Based on Dr Scott Dee’s infamous ‘snowball from hell’ it seems logical to me that the local ‘C’ store should be treated as a potential source of PRRS virus. While we all stop at the stores for our favorite beverages and gasoline, we need to take the extra step when we return home of changing our foot ware before entering our pork production facilities.

Last February the spot market for SEW pigs hit $71 on the week ending February 4. This past week the spot market was at $69 as listed in the Friday USDA report. Forty pound feeder pigs are $77 on the spot market, right where they were last year at this time. Prices are high for 2 reasons – a belief that summer profits can support such prices and a shortage of pigs to fill barns due to the impact of PRRS on breeding herds.

The impact of PRRS on breeding herds this winter has been large in the upper Midwest. There are reports of severe abortion storms and even sow deaths as the virus goes thru a unit. I’ve talked with several shareholders of units that have been hit by PRRS and many times they are in the market for weaned pigs and/or feeder pigs to fill existing facility spaces. A common question at the Minnesota Pork Congress was ‘got any weaned pigs for sale?’.

Selling weaned pigs or feeder pigs is indeed a feast or famine experience. While the pig price was very high in January and February last year, by late May SEW pigs traded as low as $10/pig with 40 lb pigs averaging $45-50/pig. Sellers of pigs aren’t going to make large investments in production facilities with this type of variation in income. This type of variation explains why sellers of weaned pigs typically don’t invest in production facilities without a weaned pig sale contract of some type.

I’ve had a few calls with questions about SEW contracts, but with the spot market swinging this wildly, it is really tough to formulate a contract that is fair to both buyer and seller relative to the spot market. If lenders are involved, it has been tough to keep contracts together if the buyer is in a position of losing money on these purchased pigs. In the last market down-turn, many lenders refused to lend money to purchase pigs under a contract arrangement since purchase of the pigs would worsen the balance sheet of the producer, something the banks were unwilling/unable to do with federal bank auditors looking over their shoulder. Some of these broken contracts are still being settled in arbitration hearings and court filings.

Ultimately, the buyer of SEW pigs ends up owning shares in the weaned pig production unit, or the seller of SEW pigs ends up retaining ownership of some or all of the pigs. While we can talk about specialized production (breed-wean and wean-finish), ownership is consolidating to farrow-finish because of how profit risk has proven to be difficult to share.

The Minnesota Pork Congress was Wednesday and Thursday this past week and I had the opportunity to speak with many of the readers of this blog. A common theme in our conversations seemed to be speculation regarding who is expanding and when will the expansion in production impact the markets. There was also a lot of discussion regarding how many wean-finish and grow-finish spaces will be constructed this summer and everyone agreed – quite a few.

At the same time as many were asking about expansion plans and impacts, some of you were asking for my thoughts on the major issues that will impact the industry is 5 and 10 years. This is a little tougher, but the list I came up with includes:

1) Exports – with over 25% of our product now leaving the US, any policy decision that influences this will impact us. The free trade agreements with Korea and other countries will help stabilize some of our export numbers, but we are increasingly at the mercy of our trading partners with our trade numbers often determined by issues unrelated to the quality or price of our pork products. Successful producers in the future will include considerations of foreign trade in their risk management decisions.

2) Animal Welfare – I don’t see any relief from this debate. The consumer continues to be unaware of production agriculture and relies on many sources to form opinions about our production practices. This past week there has been quite a bit of discussion among university officials about the recent Yahoo News ranking of the most useless college degrees that ranked several agriculture pursuits as the most useless. This included animal science/ husbandry and veterinary science. Like it or not, our long term ability to produce products such as pork, beef, etc in a safe, humane and relatively cheap manner will be dependent on our ability to inform the consumer regarding the bias in the options being presented by such groups as HSUS, PETA, etc. Their long term goal is no animal agriculture, not improved animal agriculture.

3) Global population and food security – how do we feed a world population that is expected to peak sometime around the year 2050. Many speak of a need to double output in the next 30-40 years, with a fixed production area for land and more fights over water allocation. Pork production will need to continue to improve in efficiency (not only feed:gain or pigs/sow/yr) but also pork per gallon of water used, pork per unit of environmental emission, etc.

4) Ownership of production facilities – how do we transfer much of our production base to the next generation of producers? While we have youth involved in many production aspects, much of the asset base of pork production in the Midwest is in the hands of producers who accumulated these assets over many years – generally meaning ownership is 50+ in age and often over 60+ in age. There is a growing need to develop and implement generational transition plans for much of the production base that exists. While youth will make many mistakes along the way, we need their enthusiasm and willingness to risk change.

5) Production efficiencies – these will continue to improve. Ten years ago no one talked about 30 pigs per female per year and now we’re envisioning up to 40 pigs per female per year. We have production systems achieving 2.3 lb of feed per lb of liveweight gain wean-finish and 1.75-1.8 lb/d daily gain for the same period. In the future we will be talking about energetic efficiencies using terms such as lb of carcass lean per unit of energy intake, etc.

6) Environmental concerns – production methods including facilities will evolve to less the environmental footprint per lb of carcass lean produced. I don’t think we’ve even begun to imagine the possibilities of how this improvement will occur or the impact these improvements will have on our image with the consumer.

The $0.50/bu decline in corn prices for the March, May and July contracts the past 2 days following yesterday morning’s USDA report is the talk of Midwest agriculture. If you’re a grain seller, you’re suddenly going to make plans to hold corn for a period of time to see if the market recovers some of this loss (about 8% drop in value in 2 days). If you’re a buyer of corn (i.e. pork or chicken producer), you may suddenly be trying to forward price more of your feed needs.

In the middle of all of this is the basis. Up until 2 days ago, the average corn basis in Iowa has been running about $0.27 under Chicago. However, local elevators and ethanol plants have been paying a smaller basis to access corn on the spot market to fill immediate needs. I suspect that next week we’ll see widely varying basis bids as local coops, mills and ethanol plants react to the price crash that came with this report. Mostly I think the basis will have to narrow to pry corn loose as sellers wait for some return of corn prices.

On the other hand, the drop in grain prices (corn, soybeans and wheat) have lean hog futures climbing with February hogs up $2.70/cwt the past 2 days. This suggests a very strong profit outlook for the US industry this spring and summer.

The big unknown now is pricing of ddgs. In addition to a sudden change in corn prices (and local basis bids), we’ve got the ending of the blenders credit from the federal government and the move by most ethanol plants to remove more corn oil from their distillers grains. The historic pricing of ddgs that many of are used to thinking about is ddgs priced at 85-90% of the value of corn on a lb/lb basis. With all of the market turmoil, and all of the changes occurring at ethanol plants, what will be the new pricing of ddgs? Add to that questions about the relative feed value of new process ddgs (generally containing 7.5-8% oil) vs old process (10.5% oil).

While the decline in feed grain prices along with the rise in lean hog futures are comforting, there is enough uncertainty that risk management is still the underlying management strategy for pork producers.

Beginning this week, there will be some changes in USDA market reports, etc. I have been receiving an automated weekly link to a summary report of DDGS prices and corn:DDGS ratios every Friday. This week’s link included notice that USDA has discontinued this specific report. I have seen stories about other reports being discontinued by either USDA or NASS (National Ag Statistics Service) due to funding limitations.

This points out once again the minority role agriculture plays in the US economy. We are blessed in the US with an abundant and safe food supply. Our consumers have options that most people in the world can’t even begin to dream about when it comes to food choices, including growing methods, processing methods and diversity of items. At the same time, we have a world leading obesity problem. This is leading many in Washington to question the role of the Department of Agriculture in the US economy. Many are suggesting that the US Government doesn’t need to spend money on food production details, including research and reporting when it is clear the American consumer already consumes ‘too much’.

Between now and the year 2050, most modelers of population growth are suggesting that we need to double the worlds production of food. The US has been a leader in production technology and low cost of production due in no small part to the investment by USDA in research and the many market reports that contribute to our relatively efficient market system.

I remain concerned by the decline in funding for USDA backed research and market reports. If the goal is for the US to continue to be the leader in food production at low cost to the consumer world wide, funding from the public sector must continue.

Now that the Iowa caucus is done, it appears to me that agriculture will be relegated to a minor (if any) role in the candidates debate. With a majority of the US population living with 1-2 hr drive of a coast line, it is easy for most consumers to ignore where their food is produced or the many forces that influence it’s price.

It’s Friday before New Year’s and as I work in my office, snow is falling. Winter has been late in arriving in Minnesota. How late – yesterday I saw a producer installing plastic drainage tile lines at the Iowa-Minnesota border. Normally the frost should be at least 1-2 foot deep by this time of year, and getting deeper rapidly. With warm temperatures and no soil moisture, frost is reported to be no more than 1-2 inches deep in many area fields.

On December 23, the USDA released the December 1 Hogs and Pigs report. By now everyone has read that the US sow herd only grew by 25,000 females. Even with productivity increases, it looks like slaughter capacity won’t be an issue next fall. However, a growing number of producers and industry professionals are becoming concerned about the 2013 prospects.

I am aware of several new sow units being planned, with most that I know of planning to begin construction this summer. While some of the new sow construction is replacement activity, with the old sow unit becoming nursery or wean-finish sites, at least 60% of the activity that I’m aware of expansion.

Generally construction of a new sow unit is timed so gilts can begin populating the gestation barn while the farrowing rooms are built, with the target for first matings to occur by mid-late September. In many cases, the goal is to begin farrowing pigs shortly after January 1 if no construction delays occur. For the US industry, this means farrowing intentions for the Dec-Feb period for the 2012-2013 year will be higher. This also translates into an increase in pigs coming to slaughter beginning in early June of 2013.

Of concern is the ability of US and Canadian plants to slaughter many more pigs during the fall spike in pig numbers coming to market. In the US we have been sitting at 430,000+ pigs slaughtered per day for several months. Producers have commented to me on some difficulty with scheduling extra loads for slaughter – packers have been ‘full’ this fall with most loads scheduled for delivery at least 2 weeks in advance.

If expansion is occurring, some slaughter capacity is available by US and Canadian plants operating fuller shifts on Saturday. During 1998, the last time we really had a slaughter capacity issue, there were even a couple of plants that killed pigs on Sunday. While this is a short term solution to slaughter capacity, long term it is hard on people and equipment.

Will/can the US packing industry add capacity by the fall of 2013? Obviously they can’t add any new slaughter plants to the mix. The last major plant constructed in the US was the Triumph plant in St Joseph, MO and once ground was broken for construction it was a 3+ year process before the plant was operating anywhere near design capacity.

There are still a number of major slaughter plants in the US that are single shift. They remain single shift plants for a variety of reasons, ranging for availability of hogs within a reasonable transport distance to site specific issues such as water disposal restrictions, etc. Several of these plants have indicated that under the right conditions, they would like to add a second kill shift to the plant, effectively doubling capacity. However, this can’t happen overnight as most of these plants would have to expand their cooler capacity by quite a bit to handle the extra volume of carcasses and chilled products from the breaking and processing lines.

While 2012 is shaping up to be quite profitable to US pork producers (as long as exports remain strong), question marks are looming for 2013.

The spot market for weaned pigs has been at $60/pig for the past 2 weeks, a price pig sellers haven’t seen since last February and early March. This suggests a lot of optimism by producers for the late spring and summer markets.

This past week I was in Columbia, Missouri to speak at the Passion for Pigs conference. I shared the podium with Lee Fuchs from the St Louis office of the Farm Credit System. He reported that there is a lot of optimism by producers for the coming year. However, he also shared data that suggested many producers have hedged this optimism, with some producers having more than 50% of all their hog production for 2012 hedged or otherwise forward contracted.

This extensive use of forward contracting for both inputs and sales during a profitable production window reflects the changing industry. In past cycles, producers would have remained uncontracted so as not to miss the ‘high’. Today, producers sell pigs on margin and when their margin targets are met, they buy inputs and sell pigs. They remember all too well the lessons from 1998-99, 2002-2003 and 2008-09.

At the conference I also talked with exhibitors. It appears there will be a construction boom in the industry this coming year. One builder says their company is getting calls from grain farmers who are looking to build a barn in order to access the manure. Grain farmers report increased corn yields for second year corn in corn on corn rotations when the sites have swine manure applied. The market for manure is heating up with these types of results.

Ten to fifteen years ago I spent a considerable amount of time and effort with the Nebraska Pork Producers Association working to convince grain farmers that hog manure could be a valuable component to their grain enterprise. At that time, not a lot of interest in manure, with many grain farmers expressing opposition to siting of hog production facilities in their communities. Now, these same opponents are in the forefront of seeking such facilities in order to enhance their grain enterprise.

Six dollar corn is changing how we formulate diets for our pigs. It is also changing how rural communities feel about having production facilities in their midst. Who would have thought that corn at $6/bu would have a positive side for the pork industry.

Last week the average barrow and gilt slaughter weight in the Iowa and Southern Minnesota market region was 276.2 lb, the heaviest on record. Sales weights are higher for 2 reasons. The first is full slaughter schedules at all of the major packing plants – producers continue to deliver enough pigs to have daily kills in the 420-430,000 head range, very close to the estimated total slaughter capacity.

The second reason – pigs are profitable. For several of the packer grids, the most profitable delivered weight is around 290 lb and some producers are even targeting closer to 300 lb live weight as their delivery target. If you have a 295 lb liveweight and 76% carcass yield, you end up with a 224 lb carcass. At $86/cwt carcass weight, the gross revenue for this pig is $192.64. A truck load (168 head) yields a check of $32,363 and a typical site of 2400 head sold is $462,336.

My best guess – weights will continue to creep upwards. Packer payment grids for several of our major processors don’t have severe enough penalties for overweight pigs to discourage this ongoing trend, even in the face of higher feed ingredient prices.

On a personal note – my daughter is currently in the local intensive care unit for respiratory distress and failure to maintain her blood pressure. She has been hospitalized since November 28 and looks like at least 1 more week or so. If you want to see a true fighter, follow someone like her through her life history of health and physical challenges. My thanks to the many who already have called and/or written with their comments and thoughts of concern for her well being. Obviously, her well being is suddenly the most important priority in my family’s life.

While pork production may be our chosen profession that many of us practice with a passion, our family’s are why we do it – be sure you take some time this upcoming holiday season to celebrate and worship with your family. Our industry is better because of our families and our family values that we live by daily.

This week has meant a lot of hospital time for me. Our daughter has been hospitalized since Tuesday with a high fever of unknown origin. Yesterday she began responding to generalized treatment (IV antibiotic) so some relief, but still concern as to the cause of the fever. I obviously have been out of the loop on a lot of industry issues this past week and thank those of you who have already expressed concern and prayers for her recovery.

In the past 2 weeks the official WTO decision on COOL was announced. It was interesting to note that the FMI (Food Marketing Institute – the retail grocery trade group) came out in support of the WTO decision. The final burden of COOL was on their shoulders and they struggled over appropriate labeling of not only pork and beef, but fruits and vegetables. Enforcement of COOL labels has been limited by USDA due to budget restraints but they remained worried about the specifics of enforcement.

With grain prices continuing their downward trend, the profit prospects for next year continue to climb. I am aware of several building projects being planned, with a large number of new wean-finish barns and some nursery and grow-finish projects also being planned. Sow expansion talk is still limited, although there is some talk of older sow facilities being replaced with new sites located in non-PRRS areas, with the new sites being larger (expansion).

I continue to get asked about wean-finish versus nursery moved to finisher – which is best? Properly done, wean-finish has proven to work very well. Improperly built and managed, wean-finish is a disaster with pigs that face health challenges. Included in this whole discussion is what will lenders lend money for – their bet is on the side of wean-finish as the financial risk is much less to them.

I spent much of this week with clients reviewing winter ventilation details and evaluating temperature logs from recorders placed in barns earlier this month. In every instance, I found mistakes in controller settings that cost producers a lot of money.

The most common mistake I saw was incorrect furnace temperature settings. The goal of furnace settings in the controllers is to turn off the furnace at a point relative to the controller settings so the variable speed fan(s) on stage 1 doesn’t increase speed as a result of the temperature probes delayed reaction to the furnace heat.

If the controller speeds up variable speed fans at 0.1F above the set point, the furnace should turn off about 2F below the controller set point. This week I saw controllers where the off temperature setting for the furnace was at or even above set point in this type of controller. This guarantees that every time the furnace operates, the fan(s) will speed up and unnecessarily remove some of the added heat. I have a temperature plot for 1 facility with pigs near market weight that indicates furnace operation, something that should never happen with a facility full of market weight pigs, especially at this time of year.

If the controller has a different set point relative to the controller set point for when stage 1 variable speed fans increase speed, the furnace should be set to turn off at 2F below this set point.

A second common mistake was setting bandwidth too narrow for the stage 1 variable speed fan. If you set the band width too tight (1F or less), I can just about guarantee there will be more temperature variation in the room, not less. Stage 1 fans are generally very small relative to the room being ventilated. It takes time for this fan to exchange enough air to impact conditions in the room. If the band width is too narrow, the controller calls for the next stage fan to operate which often chills the room, causing the temperature to drop, sometimes low enough to cycle the furnace circuit. Think of bandwidth as time in a controller –time for the small fan to make an impact on conditions in the room.

I generally recommend 2F bandwidth for stage 1 fans and am ok if you want to go as high as 3F. The stage 1 fan is at the bottom end of the thermal neutral zone so a slight warming in the room before the next fan functions is ok – you won’t get into a heat stress situation. If you are concerned about when the later stages operate, tighten up the temperatures between these upper stages. By the time they operate you are getting serious about heat relief so have fans turn on/off at tighter temperature ranges won’t do any harm.