ddipietre

How the "Tragedy of the Commons" Can Become Even More Tragic

ddipietre — Mon, 17 Aug 2009 17:22:55 -0400

The "tragedy of the commons" is an idea put forward by Garrett Hardin in the late 1960's (http://en.wikipedia.org/wiki/Tragedy_of_the_commons), describing how commonly held resources are supposed to be stripped to nothing when those who use them act solely on self-interest instead of in the common good. The notion is that a community resource will be over-used when individuals apply their private profit calculation to how much of it they will employ. At first glance, this matches economic theory in that there is no economic motive to economize the use a variable input when it is valuable to the production process and free of charge.

Economists often note that a solution to such a problem is to privatize the "commons" and sell it/rent it or its uses to those who can afford to pay the most for it. Prices allocate use and only the lowest cost producers would be able to afford to continue using the resource as it's scarcity increased and price pushed up. This mechanism insures that the community resource isn't wasted by those who have high cost production functions and cannot convert the use of the input to valuable products very efficiently. A common but usually less effective strategy is government allocation of the commons on the basis of fairness which results in the tragedy thing coming. Use of even the national parks in the United States is allocated by an admission price and often by daily maximum admissions after which the gates are closed, etc.

Where things really ramp up for tragic outcomes is when government constructs a framework for playing in the commons based on unsustainable rules and/or short-term, narrow constituent payback or wooing. Nowhere is this more evident than in the housing market debacle where the government forced private banks into loans that their credit scoring models would have rejected outright but were made based on the enabling government guarantees. Nothing gets the powerful and efficient forces of the market off-track and headed for more tragic results than when government constructs the playing field on the commons, maps out unsustainable goals and then unleashses markets to drive home the outcome. The result of course is that when things go predicably awry, the government is surprised at how selfishness coupled with "unmanaged" and "unregulated" market forces could create such a mess.

Forces are teeing up to create such a problem in a variety of issues related to agriculture. When USDA decides to start listening to some of the new ideas being put forward like subsidizing "how we produce food" instead of just producing food, tragedy cometh nigh. I can predict without much fear of contradition that bans on the use of all anitbiotics in livestock chains except for diagnosed disease control will lead to increased antibiotic resistence in humans throughout the world.

Forcing global trade back to regional supply chains with cap and trade will exhaust the planets resources at a significantly higher rate and lead to increases in global hunger and more volatile prices in the regional chains. Removal of a third of the corn crop for fuel by extra-market policy actions will not result in a single penny in average net income to corn producers on a ten-year, inflation adjusted basis but will lead to billions in lost equity and production system instability not only in corn use chains like livestock systems but for corn producers too.

Oh, a minor correction, the average, inflation adjusted net margin to corn production will increase by an amount just necessary to compensate the added riskiness of agriculture due to the instability generated by the initial policy action but it will only be received by the fewer and larger corn producers who remain after the inevitable consolidation which the policy actions will cause.

Political Food for Thought: Organic Food Takes a Hit

ddipietre — Thu, 30 Jul 2009 10:52:07 -0400

I am sure there are some true believers really hitting the ceiling today after the release of the meta-study published this month in the American Journal of Clinical Nutrition entitled "Nutritional Quality of Organic Foods: A Systematic Review". This journal is certainly not "in the pocket" of major agri-business interest nor is the institute which conducted the analysis: The London School of Hygiene & Tropical Medicine.

Here is the money quote: “On the basis of a systematic review of studies of satisfactory quality, there is no evidence of a difference in nutrient quality between organically and conventionally produced foodstuffs. The small differences in nutrient content detected are biologically plausible and mostly relate to differences in production methods.”

As close as I can tell, the NOP (National Organic Program) of USDA is funded to about six million dollars a year and is slated for some substantial increases (at least in percentage terms). Not a whole lot of people in the US favor organic over conventional since the image has largely been lower visual quality and higher prices. I am always skeptical of nutrition research at first read but it tends to add credibility when entities likely to favor something by political bent, reach opposite conclusions and publish them.

I scanned some of the more serious organic and food blogs and their reaction to the study is full acceptance. Most acknowledge they didn’t expect organic to be more nutritious but for a variety of personal reasons preferred it. Some of the reasons given were the hoped for collateral benefits to the earth (less chemicals, less energy, less consumerism), though many acknowledged that there is no guarantee of these and you need to examine carefully the individual producer prior to acceptance of a “brand”. That’s a lot of work. Others suggested preserving gardening techniques as a kind of legacy skill to pass on to their children so they didn’t come to believe that food originates at the supermarket.

The only argument that rung true to me is one that suggested that some organic methods restored flavor attributes that seem to get muted in conventional production. Having a tomato that actually tastes like the name is a rarity these days but they sure do uniformly fit into those little green, plastic sleeves.

I Went to the Farmer's Market and Didn't See Any Farmers.

ddipietre — Mon, 27 Jul 2009 18:23:15 -0400

I have been to our local farmer’s market and I didn’t see a single farmer there. The nice lady that makes this incredible garlic flavored goat cheese for $15/lb is really, truly an artisan, but I wouldn’t call her enterprise farming, nor would I call the others who buy their goods from wholesale markets and distribute them at the farmer’s market, farmers. That guy with the big straw hat and the 1960’s painted up VW bus (I am completely serious) is not really a farmer either. Back to the goat cheese, I have a feeling that this absolutely delicious goat cheese doesn’t come under any health scrutiny from any of the government bureaucracy so if locally produced goat milk cheese can give me some nasty medieval pox, I’ll just have to accept it as part of the riskiness of negotiating these straits of life with the siren song of Big Food trying to Jedi-mind-trick me into sure death, (but at least at a discount).

There is a push to support “locally produced” food for a lot of reasons. There are lots of versions of this but buying within 100 miles of home is a common defining principle. First, as the logic goes, locally produced food supports the local community and prevents dollars from leaving town and landing in some bank in New York City. Nevermind that local people have no monopoly on virtue if they retain the cash and that any successful farmer will tell you that the forecast of his failure by local people when he took a risk stung and fear of their petty jealousy of his success when it happened was one of the things which gave him the greatest pause prior to taking on that expansion or investment in the future. Keeping the money local doesn't mean you will get any of it or any of its collateral benefit nor escape the fish eye and tall tails from jealous neighbors who want to lop off the head of anyone who tries to stand above the local average.

Locally produced food presumably uses less total energy and produces less greenhouse gases as the product progresses from conception/germination to the dinner plate. This is one of those magic facts that doesn't quite work out when you put on the old audit brim and start really adding up the numbers. Nevermind the lack of diversity of local production means less variety and those Taconite miners in northern Minnesota will have to face the fact there are just so many recipes for sugar beets, I'll bet if I divide the pounds of produce in that VW bus by the gallons of gas used to haul it to the local market, the energy use per calorie created wouldn't be greater than "Big Food"'s methods, especially since a modern freight train can move a ton of food 436 miles on a gallon of fuel.

Locally produced food is supposedly safer and more nutritious and more likely to be environmentally friendly in production techniques since those producing it are your neighbors. This logic rests on the belief that neighbors would resist the panic engendered by the prospect of a total crop failure on their subsistence five acre plot and be constrained from putting five times the pesiticide required on their suddenly threatened organic food plot since they have to face you every day. I think the prospect of returning to the insurance agency would be too much for some and the pesticides would flow (in secret of course). This logic believes that neighbors, as opposed to corporate titans somewhere way far away, would be mighty embarrassed sitting next to you and the other locavores (what the local food movement calls themselves) in church as your children were heaving up their accidently e. coli tainted, locally produced breakfast granola in the narthex. Bossie the milk cow got into the organic flax seed patch and the rest is history as are your children's intestinal villi. I guess this kind of community intimacy polices some activities, but I'm not sure I want to play poker with local food producers and I don't barbeque anything they eat so this whole community building thing is not necessarily a selling point for me. Plus knowing who poisoned your children and being close enough to catch them in the parking lot might not be the best thing for law and order in the local community unless you view the community down at the gray-bar hotel as just fine.

There is mounting government policy support for this movement since all of the magical thinking listed above strikes the current set of sweet spots in the various national and global policy targets. Beyond funding “farmer’s” markets pavilions throughout the country in every little village big enough to have someone capable of filling out government stimulus request forms, the government is heeling to activists both in the film-making business and in the University who are using their mediums to attack the structure of production agriculture and its associated processing and distribution.

Raining down a host of expensive audits, challenges, legal actions, regulatory demands, paperwork multiplication and charges for your (alleged) role in some Brazilian's decision to chop out another hectare of rain forest, coupled with threats to destroy your global brand (and making good on it) is all meant to give the local guys a competitive edge, some training wheels for a few years until everyone comes to their senses and plants a garden. When the city council directs your school board to buy local food just make sure your kids have all their medieval pox vaccinations up to date.

The New Wedge Between Crops and Livestock: Government Policy

ddipietre — Tue, 21 Jul 2009 12:03:57 -0400

In one sense, there has always been a certain conflict between crops and livestock since they tend to benefit from each other when the one is not doing so well at least price-wise. When crop prices are low, at least temporarily, livestock producers gain profits through lower cost of production. When crop prices skyrocket, livestock producers tend to struggle until a passthrough occurs or some adjustments take place. In the past however, there were good reasons for the two major arms of U.S. Ag to talk about their symbiosis and protect each other's interests. That's when the vast majority of U.S. produced corn, for instance, was destined to be livestock feed. That dynamic is changing largely due to government policy changes.

It was not too long ago that the National crop associations were engaged in meetings to surface more win/win situations such as specialty, value-added crop traits that might increase quality characteristics of meat, lower odor from effluents, and/or benefit livestock and meat sales in other ways that allowed a value added premium for crop producers. Recent changes in government policy however are driving wedges between the interests of these two interdependent streams of agricultural production in the U.S. and abroad.

The first was ethanol subsidy and mandates which not only introduced competing demands for corn but resulted in removing a third of the expected corn crop each year from agricultural use completely. This created a new dynamic in corn price volatility which is not easily managed with traditional risk management tools. Incentives to plant more corn meant that soybean prices would also rise as more continuous corn production would be likely and acres driven to corn were not available for soybean production, a critical or at least traditional protein component of U.S. livestock feed. Not to say there are not some substitutions which can be made but the classic models, forecasting tools and stability of all these industries began to take on new characteristics and lots of increased volatility. Removing grain from the food chain results in a kind of competitive rebalancing among relationships and products that have not been heretofore observed. I am talking here about how pricing and profit relationships reallocate corn between agricultural and food uses and fuel uses. Add to that the uncertain impacts of government support for fuel uses etc. and livestock producers were left with a scramble to understand the new landscape, learn how to (and not to) hedge its risks and understand its trade-offs with the value proposition of corn as a feedstuff.

Global warming legislation has the potential to do just the same thing. Government policy advocates of cap and trade point to the tremendous income potential for agriculture through participation in such programs, namely the ability to sequester carbon through a variety of technology changes and practices and then to sell those sequestrations as credits to greenhouse gas producers who want to exceed their mandates. While various means are available to both crop and livestock producers to generate saleable credits, the net advantage may fall to crop producers who can conceivably deliver up more saleable credits at lower cost. Already, beef production is cited as a principle problem in climate change and worldwide, various estimates place the problematic impact of agriculture in total at 15% or more.
Let's not forget too, the inevitable and never forecasted impact of government intervention in agriculture, the unintended consequences. For instance, the impact of this legislation will cause
restructuring and consolidation in the crop sector as it will give more
capable producers an exploitable advantage which will drive more acres
into their management and control.

If we get to the point where crop producers are supporting such legislation and livestock producers are against it, we have the basis for another wedge as well as another upset in all the newly emerging price ratios and their historical meanings, expansion/contraction signals, risk management techniques, forecasting accuracy etc. When we get to the point that U.S. crop producers are essentially or at least substantially uncoupled from their relationship with U.S. livestock producers it may be a good thing in the long run but the short run is going to get really ugly...again and again.

Less Supply for Languishing Demand

ddipietre — Sun, 19 Jul 2009 22:41:08 -0400

As demand continues to languish, Smithfield plants in the midwest and Tyson slowed kills as a means to boost prices at the wholesale level. The strategy appears to have worked as the LS500 (Carcass Composite) price picked up over $10/cwt in the last 10 days but live prices remained stuck in the mid to upper $50 range.

USDA reports year-to-date slaughter down a little over 4%, just shy of 2.6 million head. The biggest problem remains the export markets where May results revealed exports down over 30% from a year ago. Japan was perhaps the biggest disappointment since its demand had remained firm until the recent report where the month over month decline was just over 13% and the year over year decline over 15% in tons shipped. China and Hong Kong are returning to 2006-2007 levels and were down dramatically since the purchase boom of last year.

On the home front, savings in the U.S. is now close to 7% which by historical standards is very high. The calculated savings rate in the U.S. has been close to zero for many years but the "savings" in the recently released report for May is being generated by debt reduction, which is counted as savings if it increases faster than new debt is taken on. This of course suggests that consumer spending, which has been fueled in recent years by new debt, is not likely to fuel a robust recovery very soon. Housing values are still declining in key areas of the U.S. which will continue to dampen demand and slow credit markets, at least at the consumer level. There is a lot of chatter about June/July being the "low point" in the recession and the third quarter is now viewed by many economists as the first quarter of potential growth (or at least no further decline) for GDP. Since unemployment is expected to inch up through the fourth quarter to top 10%, it is difficult to find much evidence that growth of any significant kind is in the cards for this year. Credit card default rates are expected to climb as unemployment tops out and will bring a second or third wave of difficulty to banks and credit markets.

As I have alluded to in a previous column, the longer the recession runs, the more likely we will see some persistence in the spending patterns and newly acquired "tastes and preferences" of U.S. consumers. If there is a mindset change regarding spending and what is acceptable from a consumption point of view, we may not see a robust return to spending on consumer goods and food purchases (especially branded and value added items) when the economy begins to grow again. We seem likely to be facing a long flat period in demand for meat from U.S. consumers and if USDA forecasts are correct, it won't be completely flat, it will be tilted slightly down at least on a per-capita basis. The meat industries in the U.S. are going to have to come to grips with that new reality.

The Balancing Act Continues

ddipietre — Tue, 07 Jul 2009 09:06:13 -0400

I traveled through the midwest corn production areas last week and I must admit, the corn looks exceptionally good. This falls in line (and my impression is no doubt influenced by!) the recent USDA corn report which puts acres planted for the coming year at 87 million (which is second in acres to 2007, the all time ethanol corn demand plantapalooza), up a million acres. Acres planted by June 1 were within 1% of the 10 year average despite some muddy conditions early in the Spring. This comes as we also find a record soybean planting spree, again, all in response to the dramatic supply/demand imbalances set off by diverting a third of the corn crop to fuel. This will be bad for crop producers, many of whom bought their inputs for the 2009/2010 crop year at inflated prices from the last cost escalation caused by worldwide demand to make bigger crops. Not to mention, they will be teeing up these crops at harvest into a not so hungry livestock industry that will most likely (by that time) be smaller.

For swine producers, all of this is welcome news as it takes some of the COP pressure off, however, until demand returns or there is a measureable reduction in production, not much can be anticipated in terms of margin improvement. The massive stimulus spending is not yet bearing much fruit as unemployment creeped up again this month approaching 10% (and now equal with the average of the EU nations). High unemployment means lower household income and a remixing of the menu down from historical average meat consumption levels. The fixation on H1N1 is still strong and may be getting stronger which also tends to dampen global demand for pork due to the low levels of education in many developing nations which associate it with consumption of pork.

As I have maintained, any restructuring or downsizing in the pork production capability of the USA will be lender led as individual producers, by and large, are not going to throw in the towel on their own. With weaned pig prices in the spot market now selling at $20+ below contracts, we are close to the point where contracts fail, especially those that are flat or do not have a market price adjustment mechanism, at least over some range. Producers are also looking at all the various packer contract pricing schemes which pay more under current conditions and are I am sure, talking to their packer about shifting their current pricing to those methods. My observation has been that when this happens, you jump out of the frying pan into the fire as current conditions shift within a few months and now you are priced unfavorably again (as your original pricing strategy comes back into its own!). For some reason, packers don't like to switch pricing practices or allow producers to jump to alternate pricing schemes whenever it is favorable to the producer.

Tastes and Preferences

ddipietre — Fri, 19 Jun 2009 07:47:00 -0400

We usually think about demand in the two dimensional way that we are restricted to visualizing it in with a graph. That is, the amount demanded is a function of price. In actuality there are several other factors which determine demand that are embedded in those graphs but not visualized. For instance, we know that the level of income influences demand as does the availability and price of substitutes and something called tastes and preferences. For instance, if you hate carrots, lowering the price is not likely to induce more quantity demanded, though we might show the demand curve for carrots for a group (like people in the U.S.) as a function of the price.

One of the big questions coming out of the financial upheaval currently inflicting the global economy and the various scares related to the H1N1 virus (among other things) is whether or not large groups of people are having their tastes and preferences reset. There is some emerging polling data by food groups which suggest the shift away from national brands to store brands and private brands may not be a temporary money-saving tactic but a longer lasting preference reset. This may happen if the previous ten years comes to be thought of as a time of wasteful exuberance and a new mood of practicality and pragmatism begins to entrench itself.

Some of the other areas where tastes and preferences are being potentially reset may be in the demand for gasoline. My little town of Columbia, Missouri is touting itself as a "bike-friendly" community and is spending more than $20 million of tax money on rearranging and marking the streets so that bikes have their own lanes and certain busy intersections become more safe and easily negotiated if you are on a bicycle. Our town newspaper editor believes there is evidence that people are actually relocating to Columbia because of these amenities. If tastes and preferences shift in this direction, even if gasoline prices fall, there will be less demanded at each price compared to five years ago as this other factor underlying demand shifts.

Modifying tastes and preferences for meat is the goal of entities like HSUS and PETA who hope by educating the public about the way animals are raised in this country (regardless of how representative and factual their representations may be) they will cause a preference shift away from meat consumption so that regardless of future price, less will be demanded. Some are hypothesizing that the gasoline price shocks and the general rising awareness of respect for the environment will result in less consumption so that even when prices fall, we will not return to the same levels of consumption which have characterized historical use rates.

Each commodity organization, regardless of the product (pork, beef, lamb, etc.) has a demand enhancement focus which attempts to influence tastes and preferences which recipes, advertisements linking meat consumption to traditional events (like Sunday BBQs and holidays) as well as celebrity chef endorsements and nutritional information.

While we seem certain to add a substantial number of inhabitants to planet Earth over time, a factor which will increase total demand for food, a question arises as to whether there will be a shifting landscape in tastes and preferences (at least once an individual gets beyond meeting survival needs). This may be especially true in the developed world where a kind of consumption guilt mongering is taking hold and being reinforced by ethical arguments, environmental and social responsibility arguments and just plain personal conservation and frugality motives. All of this will potentially reshape the coming strategic environment for global meat production and consumption.

Russian Roulette with Three or Four Chambers Loaded

ddipietre — Thu, 11 Jun 2009 11:22:28 -0400

The pig production business has always had its ups and downs but developments over the last few years have resulted in the structuralization of increased levels of price and financial risk. By structuralization, I mean that these factors are now regular, recurring added risks that are no longer random, isolated events which no risk management process can adequately predict or mitigate effectively. The factors include the predicted and now realized reduction in the average level of the stocks-to-use ratios for corn and soybeans placing feed prices in a continuing, annual, heightened state of price risk volatility. Bob Wisner, retired crop extension professor from Iowa State University told World Pork Expo attendees that we will end up the soybean year with as little as 2.2 weeks of the supply remaining. The cold, rainy corn belt conditions which delayed the corn planting period in the U.S. and now has resulted in lots of replanting is resulting in USDA forecasts of likely below normal yields and a situation in the coming year where world corn demand will exceed world corn supply. Biofuels policy has contributed to the structuralization of these added risks and buffers their cause from market mechanisms which would likely eliminate them.

World economic conditions have lowered per-capita income world-wide through dramatically increased unemployment rates and will soon likely result in markedly higher energy costs. Add to this the spectre of inflation risk associated with the chosen policy path to correct the global recession and it seems unlikely that the coming decline in the value of the dollar will stimulate enough increased export demand for U.S. produced meats to overcome the inflation in input costs. Reaching a 20% of production export level has created tremendous benefits but also subjected a sizeable portion of the future revenue stream for U.S. meat to wide swings.

Random shocks such as the emergence of H1N1, while not necessarily a new structuralized risk, represent the tipping point events which when combined with increased structural price and cost risks result in a kind of "lighting a match near a gasoline spill" explosion which lands on the balance sheets of U.S. meat producers.

We could go on with the coming regulations, increased enforcement actions, renewed in-roads by animal welfare activist groups and so on to realize that one day in the next several months or short number of years, the pass-through of these risks will substantially impact the price of meat from U.S. markets. As always, many events could happen which roll back these mounting risks but they are not currently registering on the "likely outcome" meter.

Increasing Intended Production

ddipietre — Sat, 30 May 2009 14:58:07 -0400

It's time to get intensive. By that I mean we need to focus on existing but overlooked means to extract more value from our production. One way to do that is to focus on our revenue stream and the process which generates it so we become just as celebrated in our knowledge of this as we are for knowing our cost of production. Once that happens, we will have the components which make up profits (revenue and cost) and some really big changes will start to happen. But since almost no production workers have full access to the revenue numbers of the farm, they are continually focused only on cost of production and production metrics. Because of that, we still operate in a fifteen year old notion/and the "irrational exuberance" that believes if production rises and/or costs fall, we will automatically make more profits. The key error in this thinking is that pounds and pigs are not measures of value, they are measures of physical output and weight. Not a dollar sign in sight when you look at PSY, FE, W-F mortality, or my all time favorite, pigs/crate/year (the metric which cost the industry over a billion dollars by my estimate). While they may be correlated with profits over a range, there is certainly NOT a one to one correspondence.

We practice a kind of reductionism in this metrics area which is handy and necessary to an extent, so too, on the revenue side if I ask you, for instance, what the price of hogs is today, you are likely to give me one number, the average base price. All you have to do is take out one of your packing plant kill sheets (I refer to them as receipts, useless for revenue management) and what you will notice is that there are dozens of prices today and in some packer matrices you literally have hundreds of prices each day, though please don't read them all to me the next time I ask you for your current price! Those "pounds out the door" that we love to increase face one of those dozens of prices depending on the carcass it is hanging on. When you use the average price times the average weight times the number marketed you are on the road to mediocrity in revenue and production process management. In a story in the Wall Street Journal several years ago, it was reported that Atlanta, Georgia reported to the International Olympic Committee its average summertime temperature when making application to be the venue for the summer games and as we know, won the bid. During the games, when the Scandanavians (I think it was) began to complain to the IOC about the oppressive heat and humidity of summertime marathon running in Atlanta, the benefit of hiding the variance in the average was revealed. Not that Atlanta was trying to pull anything but we tend to use averages freely when communicating summary details about a lot of things when the variance may really be where the rubber meets the road.

Adding to this, we normally only fill in the blanks that our record systems ask for so we only have the metrics and output values that those record systems produce. That's really a big constraint to progress and getting intensive. For instance, if you rely on your Pigs Weaned/Breeding Female, your total mortality and total lbs sold etc., etc. you have some good sub-system metrics for tuning up some facets of production but you really know nothing about what percentage of the pounds you marketed were undiscounted for weight or quality, much less what percentage were within a targeted range around profit maximization. Getting intensive means that we come to understand just how good we are at achieving the intention we had when we started producing pork. When I ask producers what their intention was (is) they usually say something like "Make Money!" or "Produce pigs!". That's an OK starting position but not much clarity of the kind which leads to actionable improvements so I would call it kind of an "average" answer.

I maintain that our intention is to sell every pig that comes into our care, at or very near its profit maximizing weight with an outstanding premium for non-weight quality measures at the least possible cost. That mouthful actually creates a basis for judging how well your actual production process meets your intentions. Unfortunately no record system that I know of actually helps you get very close to measuring this comprehensively, or even partially. When you use partial data like for instance measures of sort loss, as your proxy for profit, you will be led down the primrose path to big mistakes. For example, if you constantly track your sort loss on sequential kill sheets and try to minimize it, you will normally find you reduce average weight of loads as the mechanism to drive sort loss down. The packer you sell to will help you track just how well you do that on the next kill sheet. The problem you have is no one sends you a report about all the very profitable pounds you failed to produce on the pigs which were not in sort loss and which now go to market at even more reduced weights. Since we sell distributions of weights in the pigs on every truck, when you lower the average weight (almost regardless of how you do it) you drop the weight on the pigs that are too heavy as you drop the weight on the ones that are 10-30lbs lighter than the discouted ones as you back down the sort penalty. Ideally you would back down the average weight of loads until the additional loss from the underproduced (but profitable) pounds present in lighter pigs on the load was just equal to the sort loss reduction savings from reducing the heavy end pigs. I can tell you for sure, that this will lead you to accept some positive sortloss. But since we only track sortloss, we only focus on that.

If your range of weights is typical (over a three to six month period to avoid a biased sample) you will find that only a very small percentage of all your pigs actually wind up meeting your intentions (at least as I described it above). Getting intensive means we find a way to track variance from intention and develop action plans to reduce it. I will begin focusing on some very simple tools you can employ to do that in the near future. Come by at WPX and we will chew the fat on this topic. Look for the Swinecast entry in the BarBQlossal area and I will share more of these mysteries with you in person.

I Never Forecast Price but...

ddipietre — Tue, 12 May 2009 18:14:57 -0400

When you consider price movements in hogs, there are at least three regular patterns of price movements that are happening simultaneously and their interaction sometimes gives us an unusual outcome. The three patterns are the seaonal, cyclical and trend patterns in prices that work together to nudge prices around a fairly predictable grand cycle though levels of prices, rather than their patterns of rise and fall are of course harder to predict. I generally believe there are too many variables with too much variance to adequately provide a price forecast beyond a few weeks. Since we live in the age of random shocks, all it takes is something like the H1N1 situation on top of a global recession to make price forecasting the terrible task that it always is. There is a saying that price forecasters should know that seems especially appropriate and that is..."If you must forecast, forecast often."

With all of that said, and fearing becoming the next in a round of forecasters that held out hope just to see it dashed, I think it is worthy to mention that we may witness this year the strange case of rising hog prices in the the fourth quarter. This can happen when the cycle movements (the repeating four year pattern of hog prices related to systematic over production followed by contraction) meets up with the seasonal (the 12 month repeating pattern of hog prices that is related to seasonal infertility and the fact that hogs don't eat much and therefore don't grow when the weather gets hot, etc.) in just the right way.

We have had contraction in the US slaughter due to MCOOL and some sow herd culling here in the U.S. Increasing productivity of the remainder has dampened the decrease but it is still there to some extent. We are at a low point in the production cycle which should be bullish for prices but demand was destroyed by the global recession and the flu fears. The terrible profit situation which has resulted over the past several months has kept the lid on production and we are now at a point where the restoration of demand both domestically and in the export markets, which could happen relatively rapidly and persist in growth for several months, will appear as the global downturn moves into history and growth returns to the U.S. and the world. When it happens, it will spark a strong upward price response for U.S. producers.

The timing of this momentum could place it in the third and fourth quarter where it might just overwhelm the seasonal declines we expect to see each year as more pigs come to market and weights accelerate in the cooler fall temperatures. The cycle impact will be positive once the recession stops and its momentum may overpower the price dampening seasonal pattern in the fourth quarter of this year. It is a long shot but has a better than typical chance of happening. That would result in at least a flat price in the fourth quarter and may result in increasing prices through the fall and into the new year instead of the plunge we so often see at that time. Don't look for dramatic price increases all fall but the restoration of demand will have a huge impact on the industry when it comes and it should persist for a while since we will not be able to increase production very quickly to meet the unleashed demands.

I'll regret writing this but I thought I would toss it out there since we are so at a bottom that the only movement possible is up barring another random shock catastrophe.

More Meddling in Markets or "The Problem of Too Many Balls in the Air" Revisited

ddipietre — Thu, 07 May 2009 09:09:37 -0400

We have in the US energy policy regarding ethanol an illustration of the classic problem in economics which I like to call "too many balls in the air". When it comes to economic thinking and analysis, individuals or groups with "skin in the game" tend to focus tightly on the single variable they want to improve (like the corn price in the case of ethanol) and fail to understand that markets are complex interactions of sometimes hundreds of linked transactions and markets all of which can and usually are affected by extra-market interventions to move the target variable. There are economic models that can and do attempt to account for all of these impacts simulataneously and track the movement to a new equilibrium in all affected markets but they can be large and clumsy and not very good at tracking the short term movements to new long term equilibria.

A good illustration of this is the ethanol policy. By subsidizing ethanol and mandating its use, the government has stimulated nothing short of a gold rush to build plants and to plant corn. We have all witnessed how the related markets have been affected. Land values, corn production inputs such as fertilizer, seed, and combine prices just to name a few shot up dramatically. Pulling land out of other crop production to focus on corn caused soybean production to fall and its price as well as related product prices to advance substantially. Where corn was used as a feed input in meat production, dramatic cost of production increases forced albeit limited substitution of corn and what is arguably the single greatest equity drain catastrophe in the history of the hog business. One prominent agricultural lender believes that the industry is now within 90 days of a near complete liquidity freeze up (out of operating capital and no additional willingness to loan) and we all know the saying, "When you are out of cash, you are out of business".

The collapse of the global markets brought everything back down to earth. The collapse of gasoline prices drove ethanol profitability and the ability to move the growing supply into the ground. Well capitalized plants with strong management bit the dust leaving participating corn farmers in their shadow holding worthless commitments to buy corn at once inflated prices which now had vanished. Puzzling as it may seem, the government reaction to this is to move in behind the collapse and fix the problem with more market distorting policy actions. Since the government now has a management position in much of the automobile industry, it will start by forcing a ramp up in the percentage of vehicles produced that can utilize E85. Next, it just announced a program to push cash into faltering ethanol production plants to make sure they are as immune as possible from another round of market-based signals to shut down. Force an increase in demand, cushion and prevent management failure to operate at a profit. How can this lead to anything but another mess and de-stabilization of the delicately balanced agricultural complex?

The policy makers and narrow agricultural interests who like to think they are performing a nice juggling act by tossing this one ball in the air have just been blindsided by the EPA which has recognized that there are a few more balls that need to be juggled. One of them is the global reaction to diverting a hefty part of the world corn supply into energy production and out of the food sector. When the EPA looks at the global greenhouse gas accounting of the US energy policy it rightly acknowledges that throughout the world, corn production is likely to increase substantially due to the price/demand incentive caused by the reduced availability of US corn. They refer to this as the "indirect land use charge". What this means is that around the world, forests, pastures, wetlands and other beneficial land use practices are likely to be cut down, filled in and ripped up to plant corn. Already, as is well documented, Asian countries are ranging into Africa, Brazil and Indonesia to establish long-term leases on vast tracts of land which could be coverted to corn production. The EPA wants to "charge" ethanol distilling with this penalty price to restore a market signal preventing some of the over production of ethanol which is once again being teed up. Guess who is opposed to putting any market based signals into the equation which might dampen a renewed gold rush in ethanol production? You got it, the one ball jugglers.

One Bit of Good News in a Sea of Disappointment

ddipietre — Thu, 30 Apr 2009 15:21:08 -0400

We are seeing something almost as destructive as a limited terrorist attack in terms of producing fear, panic, overreaction and economic injury. Media misinformation and paniced responses from some world governments (like Egypt deciding to cull every pig, some 400,000 of them) has produced a sensationalized reaction from what at the end of the day will very likely be a very mild flu virus spreading around the world (http://www.latimes.com/features/health/la-sci-swine-reality30-2009apr30,0,3606923.story) but monitored like it was the bubonic plague. Of course these scientists could be wrong and it is the fear of being wrong that has set the world in motion.

This kind of economic damage (not simply to pork producers) but to grocery stores, theme parks, airlines, ball clubs, hotels, people's quality of life (fearfully staying home and avoiding human contact) etc. will exceed the impact of some of the bombings and chaos deliberately caused in the last five to ten years. The curious thing about it is it will also serve, most likely, to be one of the "cry wolf" things that deaden people's response to real emergencies in the future.

Trying to pin down today, how many confirmed deaths have occurred from the H1N1 outbreak is quite a slippery task. Much of what is being reported is "suspected" H1N1. Considering that the CDC website (http://www.cdc.gov/flu/about/disease/us_flu-related_deaths.htm) reveals that each year 36,000 people in the United States alone die from the garden variety flu bug (usually with complications leading to pneumonia), how could we even conduct anything like normal lives if all of those deaths were breathlessly (no pun intended) reported by the local and national media on a minute by minute basis each year.

As all of you are aware, most local and national media persist in calling it the swine flu based on its classification from 50 plus years ago, even as they report that the name is misleading and that it is not a disease of pork products or food of any kind.

Now for the good news, sort of..., the Bureau of Labor Statistics reports that after two consecutive quarters of very negative percentage changes in food expenditures by people in the United States (down 7.3% and 14.7% for the third and fourth quarters of 2008), the first quarter 2009 number reveals a return (or just short of it) to the baseline 2008 values. This is happening even as unemployment rises and only "green shoots" here and there can be observed in the broader economic garden. This leading indicator of more green shoots though, signals the potential return of commodity price increases which will accompany the eventual recovery. So our little green shoot comes to us with a rise in oil, corn and soybean meal prices and price outlook while hog prices cannot seem to stay even balanced on the launching pad, much less blast off the way they are supposed to at this time of year.

There will be some good news shortly. We are so oversold, to borrow a saying from the commodity traders, "that buying opportunities abound". That's a long way around saying this cannot go on forever and just as high prices cure high prices, the same applies to low prices.

The Crystal Ball is Opaque

ddipietre — Fri, 24 Apr 2009 10:07:46 -0400

Unfortunately, we are at a time not only in the meat industry but also in the general U.S. and world economy when what little anyone had to make a forecast for the future has largely disappeared into an opaque soup of uncertainty. There is little doubt that demand for meat, both in the United States and worldwide, is tied to among other things, per-capita income and a behavioral variable related to perceived and actual wealth (although there is some controvery about the wealth effect). Both are down with rising unemployment and plummeting asset values.

Income changes positively in an economy when there is real (effective) investment. Subsidies, stimulus, money printing and government spending are taking place at such volumes today, when will we know when real, long-term, sustainable investment has returned? You can observe the opacity of the outlook by the way the stock market has moved radically up and down over the past year and continues the same today. Not just the precipitous declines but the rallies and then the profit taking which often drive hundreds of percentage point changes in the indexes daily. The effect of the short-term, unsustainable boosts are built into the market but the uncertainty comes from whether or not they will be a "flash in the pan" or an igniter of long-term investment.

The fundamental issue is, we will expect to see demand for pork worldwide increase as real growth returns to the world economies. Actually knowing when real growth returns will be very difficult to gauge. Part of the problem is government policy actions which stimulate short-term demand, fade when the projects are completed. The hope is that these "kick-starts" in stimulus will enable real, long-term investment which is sustainable to begin again. Building a bridge, retrofitting local government buildings with more energy efficient windows etc. which are common projects of the stimulus, in the first case enable real investment but don't create it. When the bridge is done, the bridge builders are done unless it enables commerce that would not have happened without it. Otherwise, it is a bridge to nowhere regardless of how many people live on the other side. In the second case, the retrofitting saves the local government money but actually decreases demand for energy, which may be a social good but it doesn't create real investment. The money saved by the local government goes into more enabling but not creating of investment opportunites.

Subsidizing things like solar, wind energy and the production of ethanol, will create short term employment (due to the subsidy) but if these things don't catch fire and really either reduce the cost for energy by resulting in something new and permanent in terms of technological efficiency (which is very stimulative to the economy) then we are really up a creek. Subsidies and stimulus in and of themselves are not sustainable long-term increases in productivity, and they muddy the water in the short term since they create, short-term increases in the key indicators people watch to see if real, long-term, sustainable investment is returning. There really is no way to easily tease out the short-run and soon to end boost from the emergence of the longer-run, sustainable increases in investment needed to advance income and demand (for cars, houses, washing machines and pork chops etc.). If they don't work, we are left with huge debt, inflation and stagnate growth.

The crystal ball looks a lot like a 16lb bowling ball, you pick your color of choice, but seeing through a bowling ball is just not possible.

Demand

ddipietre — Tue, 14 Apr 2009 08:01:22 -0400

The price outlook to producers can be summarized as I have said before by observing "which falls faster, supply or demand". It is clear that both are falling, nationally and domestically, and the price responses still seem to suggest demand is falling faster than supply but a slowing is beginning to take place. There seems to be some traction developing and as everyone in this business knows, spring is the beginning of the annual reduction in supply as various biological factors begin working their way through the production complex and summer demand for certain cuts begins to increase, at least domestically. We have experienced years when the season price pattern for spring does not develop so it is not a sure thing.

There is little doubt that the biggest impact is connected to the global recession which should burst the truism that agriculture is "recession proof since people have to eat everyday". There are a multitude of factors which make this recession especially hard hitting for meat producers. They include the large increases in unemployment both in the United States and abroad which results in real, current income declines but also the "wealth effect" impacts of the huge and nearly unprecedented decline in net worth. The wealth effect describes how losses in net worth result in economizing by consumers even if they have the same current household income and have little fear of unemployment.

One of the things you can observe in the meat case is that there has been a flattening of prices between the best and most economical cuts of beef and pork. Premium cuts of beef and pork are a huge bargain by historical standards. I observed a whole boneless pork loin in a big box store selling for $12.00, less than the price of a single person eating one meal at a restaurant (other than fast food). Similarly, buying a boneless beef loin and cutting your own steaks or allowing someone else in the chain to do it and buying only a single steak is very cheap by the standards of the last five years. This matches the typical grocery survey data results which is emerging describing the strategies of consumers in this environment. In general the trend is away from brands to private labels, couponing, eating a greater proportion of meals at home, choosing fast food when eating out and remixing the dinner plate at home to less expensive combinations of calories.

There is little doubt that the situation will improve dramatically when the world economy rebounds since demand will return far faster than production can scale up. It is almost certain that in the middle of a recession, most forecasters are more pessimissic regarding the date of recovery than actually winds up being the case. The earliest forecasts of recovery are late summer to early winter. Let's hope the rule holds true. Unemployment however tends to lag recovery as recession restructured firms are reluctant to add workers until recovery is well underway.

Thats the medium term. The longer term suggests that meat is slowly being recast in what can be called the tobacco model. More on that next time, since if it continues, there is a relatively predictable path for future costs, prices, taxes, demand and global consumption shifts.

Head in the Oven, Rear End in the Freezer and Calling it a Nice Average Temperature

ddipietre — Fri, 03 Apr 2009 17:00:56 -0400

The externality crowd (the politicizers, activists and interest groups who believe that agricultural producers are pushing a multitude of costs off on the globe and their community without paying for them), should take a look in the mirror. When a small group of the population, such as those who have a true willingness to pay for things like country of origin labeling, organic food, locally produced food, carbon-neutral food, etc. gain the political clout to force the costs of these attributes on everyone (willing to pay or not), they have used the government to structuralize a huge cost externality. Which is to say, they have forced others to pay for attributes only they demand.

Their typical response is that food is so cheap in this country, that adding these attributes and forcing their cost into the system for everyone is justified and "affordable". That's an argument they buttress by referring to the fact that on average, less than 10% of personal income is spent on food in this country. The amount spent on food as a percentage of income is actually a distribution which is hidden by the average. The lowest 20% of wage-earners, the working poor, spend well above 20% of their income on food.

To the extent their externalities push global food prices higher and higher they should know that the poor in Egypt spend 80% of their personal income on food and that's after heavy government subsidies for bread, for instance. Folks who love to impose their preferences on others and therefore the costs of unwanted attributes, seem to abandon their own willingness to pay principles when incomes fall in an economy. http://www.independent.co.uk/life-style/food-and-drink/news/sales-of-organic-food-slump-by-up-to-30-per-cent-1656632.html

Cost of Production 2009: The End of Points and the Beginning of Distributions

ddipietre — Fri, 03 Apr 2009 16:18:54 -0400

For years, modern swine producers thought about cost of production as a point or single number. For almost a decade, a cost of production of 38 cents a pound was consider standard, high efficiency cost control. Those days are gone and I don't mean just that number. There is no new number which is or will be the normal cost of production for all of us who love to live by rules of thumb. The cost of production for meat animals is largely determined by the cost of the underlying feed ingredients which have entered a phase of volatilty that is not likely to abate. The continued mandates for ethanol production which will absorb four billion bushels of US corn production will keep key feed ingredient prices on a perpetual "stocks-to-use" razor and provide another source of price volatility here-to-fore reserved for weather events alone. The combined impact of weather and reduced stocks-to-use values will force the volatility of the grain sector into the cost of production for poultry, pigs and to some extent beef production.

I have forecasted the cost of production for pigs in the US using a simulation technique which is based on the last three years corn and soybean meal price distributions to give you a new look at how you must conceive of your costs now and in the future. The pattern of the distributions of corn and soybean meal bleed through to the shape of the distribution of the cost of production estimate. In the graph which follows, the height of the histogram bars is the probability of a given average cost prevailing in 2009. The average cost of production: $67.72/cwt is not the outcome with the highest probability due to the skewness of the distribution but you should learn to look at this as the pattern of likely outcomes rather than our nice, tidy, single cost rule of thumb. Doing so will give you certain key understandings which will help protect you from big mistakes. The graph follows:

The long tail to the right reflects the fact that crop price volatility push a greater danger of very high costs into your system than they do of dramatically lowering your cost. This is based on the last three years but a similar pattern is observed in the last couple of decades since droughts and other crop killing disasters happen from time to time and mega-bumper crops (such as doubling the five year average) are non-existent.

By coming to visualize your cost of production in this way you will avoid some important traps of the single point mindset. First, you will avoid the temptation to average price self-sufficiency. By that I mean, you believe because you are a low cost producer, you can simply take the average price offered in the market for pigs and in the long run beat the competition. That notion only works in price stable environments, in other words, "the old days". The new days require risk management rather than the safe haven of "cost-control only" as a strategy.

Second, you will be relieved of at least some of the fear, that when high prices come, they will last a long time or occur frequently. Very, very high prices are rare (as illustrated in the graph), which is to say, they have a low probability. Since "high prices cure high prices" through substitution and use conservation, you will be guided to make better decisions about locking long term current high prices in an environment when bubbles and other price drivers have everyone thinking prices could go even higher. Such as when commentators where talking about $12 corn last summer.

Lastly, this new envisioning of prices and therefore costs, will give you guidance regarding locking margins, which is the only way to go at this stage of the game when meat prices and input costs are subject to wide and unpredictable swings. By visualizing the patterns of corn and soybean meal prices coming into your cost of production and realizing the impact their distributions (rather than their levels) have on your distribution of costs will help you avoid liquidity disasters by choosing margin locking opportunities with better skill and ingenuity.

The End of Obesity is Just Around the Corner

ddipietre — Mon, 16 Mar 2009 09:34:34 -0400

If you imagine in your mind, the irrigated agriculture of California you probably can see a large valve sticking out of the ground with a wheel on top situated in the middle of a massive field with deep furrows. As the valve is turned, water gushes out into the furrows, flooding them to provide water for the crops. Alternatively, you might see large water guns irrigating the fields with booming sprays similar to a lawn sprinkler on steriods. The way of the future will require a much more efficient approach if water use to produce crops in California is to be sustained. Intensive approaches to irrigation have been developed for use in very dry climates where evaporation is heavy and represents a large waste of what little available water is there. In these methods, drip irrigation delivers water right to the root zone in buried or partially buried plastic pipes with small holes to meter out the water. This almost eliminates evaporation waste and the delivery of water to soil areas just outside the root zone where it is unavailable to the plants and therefore wasted. While these methods have made some arid parts of the world spring to life and support large harvests, they have been viewed as techniques largely only practical for areas where water was very scarce. We are coming into a era where water, energy and other key natural resources are either becoming scarce or will become scarce by government policy actions aimed at preserving them for the future.

These practices which aim at delivering precisely metered levels of scarce inputs directly to the point of uptake are referred to as intensive methods of agriculture. Even though industrial and intensive as adjectives for agricultural methods have sometimes been used interchangeably in the past, there is a major distinction which is now coming to the fore. Industrial methods are employed in scaled up systems which deliver substantial efficiencies compared to older and often smaller scale techniques but they have been largely erected within an environment where key resources necessary to support them are abundant and therefore comparatively inexpensive.

If you look at how the modern swine industry, for instance, has developed globally, it has tended to shift geographically to locations where the key inputs required for production are either abundantly available and therefore inexpensive, or where infrastructruture allows the transportation of more locally scarce inputs to the production site without a disqualifying markup in cost. This capturing of regional cost differentials is beginning to fade as a viable strategy since first world governments are beginning to view the economic landscape as the world vs. the region or nation. Therefore, energy and water for instance, though abundant locally in certain regions, are now being considered world resources which must be managed in the future for the best outcome for all. This means taxing use to reflect the true global cost of using available water rather than the local cost of providing it.

This point of view, if widely adopted and promulgated via joint global policy actions will begin to strip away the comparative advantage force which under market systems allocates scarce resources efficiently by market determined prices. Imagine a set of taxes and regulations which in a sense "level the playing field" of costs so that comparative advantage among countries and regions disappears or becomes equalized or better yet, managed so that governments grant comparative advantage by policy decisions. This of course is a recipe for dramatically shrinking the capacity of the world to produce food and other products but it is what is increasingly contemplated by policy makers and is gaining ground on a global basis.

The equalizing of resource prices at the margin or managing their differntial cost is accomplished by taxing users differential rates reflecting what someone calculates to be the "true global cost" of their use. So here are some beginning examples related to the swine industry. Measure, regulate and then tax the creation of dust, gas emissions, particulates in the air, odors, antibiotic use, manure generation and recycling, labor that works within confinement facilities, electricity use, fuel use, land use, water use, crop use, technology use (if viewed as wasteful or creating animal welfare issues etc.) to make sure the true cost of using these globally owned or managed resources is known via the budgeting process before their use is committed to production processes. Similarly, grant subsidies for the use of certain favored products and technologies so their use will crowd out the "old and the wasteful" resource use and give favorable economics to certain technologies wherein they have a comparative advantage. Once this is accomplished, you unleash market forces to reallocate resources under the new set of rules and price in or stimulate the development of technologies which operate profitably under the new cost structure.

While I am not completely sure how the future looks under this developing scenario, I can tell you one thing for sure, it will be the end of obesity on a global basis and will go a long way to contain the population growth problem which is vexing the world.

Characteristics of Competitiveness are Changing in the Meat Complex

ddipietre — Fri, 06 Mar 2009 20:10:36 -0400

Just as the landscape is changing on a global economic front as outlined in my previous blog, so then are the characteristics of competitiveness as we look out into the next five year horizon. Many years ago, responding to the advent of scale in animal production, veterinary science in production agriculture moved from a focus on individual animal treatment to something widely referred to as herd health. The change signaled a move from diagnosing and treating individual animals to defining the conditions within which the herd would be best served and proscribed culling for individuals that did not conform or adapt to the generalized conditions. Defining the conditions best for the herd meant creating SOPs for bio-security, ventilation, average temperature at each day of age, average nutrition and a set of standard vaccinations as examples. Not every individual animal prefers the average or thrives in the average conditions and the response in general was to allow it find a niche in the group or be culled.

This trend in focusing on the conditions of the group allowed scale to develop and simplified the operational functions from the farm to the feed mill to the records kept and care duties of the production people. This is why almost all of our metrics like ADG and FCR etc. are averages for the group, since the group systems in place cannot measure individual animal performance. In fact, in almost every farm regardless of size, an individual pig is not weighed or measured in any significant way until it is slaughtered. Granted, in the farrowing house, while the animals are clustered in small groups and are small in size, various individual animal treatments such as vaccinations routinely take place but that is largely it. Not until the animal reaches slaughter does it get throughly examined for outcome and that is because another party is buying it and demands to know exactly what they are buying.

The movement to group functions, group health protocols and group SOPs and records etc. while advantageous and cost lowering in powerful ways hide incredible amounts of information from producers which will become increasingly valuable to know in the coming competitive environment. For instance, even though there are notable exceptions, becoming larger has meant that costs of production have fallen, sometimes dramatically, both in fixed asset use and in variable costs. However, under conditions where the opportunity lies in individual animal focus, smaller scale farms, if they are attentive to the right factors have big advantages. Unfortunately, many if not most smaller farms use low knowledge systems of production and keep limited records (and when they do keep records they often use the same systems employed by larger scale farms, focusing on the group). Therefore, they fail to execute their inherent advantages.

For instance, we now know that there are tremendous opportunities in reducing individual animal weight variance at the end of the production process. Not only do the animals price better in the typical packer matrix but the profit optimal weight of the group is higher and the feed and other costs are less per lb. of gain when standard deviation of finished weights is reduced. In a typical large scale system, one person may manage the marketing of 50,000 or more head of pigs on feed and if it is their full time job, sometimes thousands more (not sales per week but inventory in finishing). On a smaller scale farm, the ratio of person to pig is a lot less which allows better observation and the potential for tighter group marketings. This can be offset by the size of load costs in transportation etc. but the point is, where advantages accrue to individual animal attention, smaller scale farms have much higher potential advantages. Conversely, larger scale farms have much greater advantages with factors affecting group economics since scale drives their per unit cost down.

I am going to suggest in the next few blogs that a premium is going to begin shifting to individual animal attention (not just for disease control and medication delivery but be sure examples exist there too as has been recently popularized). The coming age is going to be focused on intensive production vs. industrial production, a distinction I will explain later. As a hint, the crop guys are way ahead of animal production when they can load a field soil type and elevation map in their GPS driven fertilization, chemical delivery and seed density delivery software on the tractor and differentially meter, on the fly, the perscribed amount of inputs for each soil and elevation configuration as it passes below the applicator or planter. In addition, the combine produces a harvest map which precisely differentiates the outcome within an acre in output. The big advantage is there is no intermediary between the producer and the information (so for instance, they do not have to rely as meat producers do on the selective information sharing provided by the slaugherhouse to discover their results). This level of detail and the immediacy of information allows the development of highly efficient and intensive production processes vs. more "herd health" oriented approaches which by analogy would be proscribing average levels of inputs and measuring only output results per acre or per field.

Innovation in a age of restricted access to resources and government policy actions which thwart the execution of market based comparative advantage will tilt the playing field to those who can drive intensive processes in an optimally sized production environment.

Reconfiguring the US Meat Industry: How Politicization is Beginning to Trump Economics

ddipietre — Tue, 24 Feb 2009 08:55:48 -0400

The U.S. swine industry is about to be reshuffled in some extraordinary ways. For the first time we are witnessing political ideas at work in the world and in this country which are gaining the upperhand in their attempt to slow down the natural execution of comparative advantage based on efficiency and market economics. Since 1995 the US industry has enjoyed a steady and sometimes dizzying increase in total demand as net exports rose year after year. This is a testament to the global effciency of the industry and its ability to deliver a consistent, safe and high quality product. At the same time, the desire to slow down the expansion of the industry in the US has been building because of a long list of issues which have been slowing gaining political strength.

Since we do not live in a country where the national level of meat production is set by central planners, the move to slow down the gradual expansion of the industry over the years has taken an indirect tack. By positioning a large number of issues which allow the industry to grow into its potential world demand as cost externalities, governments at the local, state and federal level are slowly pulling the support structures which have enabled growth. Cost externalities justify the intervention of government in a market based economy since in their presence, the market will not automatically achieve the societally optimal level of production. Cost externalities occur when conditions somehow prevent a firm from having to pay all of its costs. When this occurs, the firm will produce too much output. To put it in farm terms, what would be your response to receiving 25% of your feed inputs for free? Of course, you would expand production if possible.

By gradually defining most of the key enablers of growth as externalities, governments in developed countries have paved the way to enter the market mechanisms and "internalize" these costs, with the resulting planned reduction of output. At the present time the EU is well ahead of us but we are catching up fast. Some of these cost externalities are now becoming the conventional wisdom thanks to a growing host of politicized research and "commission" reports. These failures to pay full costs are positioned as arising from antibiotic use, manure management, packer ownership, animal welfare, odor control and management, greenhouse gas emissions, a host of other environmental issues including particulate matter releases, fear of food safety (peppers, peanuts and soon just about everything you eat), energy use, water use (including all the water that is consumed by the entire meat production chain from corn to processing to retail delivery and final cooking), the encouragement of obesity, mounting "food miles" associated with shipping exports hither and yon, etc. Are you getting the picture yet?

If you can convince people that issues surrounding these things all represent places where meat producers have either unjustifiably cut costs or were simply not required to pay the true societal costs of their resource use in these areas, then you justify a government intervention to "calculate the costs" and push them back onto the meat industry.

The most efficient way to slow down the growth of just about any major U.S. agricultural production is to negatively affect its exports. Without the demand from export markets (which is about 20% of total demand for U.S. pork), the industry will shrink dramatically. Right now of course, the global demand for just about anything is shrinking due to the collapse of the credit markets and the resulting global recession, but the government can institutionalize the reduction of meat exports by various means and the reopening of the MCOOL rules is certainly one of them. If our final rules invite an extended trade war with some of our most important export markets, it will not take long, in an environment where shrinking balance sheet equity and wary agricultural credit market officers wind up achieving the proposed "societal optimum" pork and other U.S. meat production. Medium and smaller sized family producers are always more severly hurt by these optimizations.

Lots of things can be cost externalities when you want to get creative. A second child can impose costs on a society that its parents do not have to pay directly, which has led China to consider children as externalities in its current "one child" policy http://www.cnn.com/2008/WORLD/asiapcf/03/10/china.onechild/index.html with fines, forced sterilizations and forced abortions for those who can't seem to "contain their costs".

Optimal Exports as a Portfolio Problem

ddipietre — Mon, 16 Feb 2009 08:49:32 -0400

If you think about it, each dollar of expected pork revenue, as we look at 2009, has a variance around it. That is to say, not every lb of forecasted sales has the same likelihood of being realized. It is safe to say that the anticipated level of demand from domestic consumption is well known and relatively low variance. The demand which originates from the export markets is highly variable and can come from surprising places. Because of this, there is no doubt that the expected income variance is much higher for export sales than it is for domestic purchases and as you might suspect, it has a higher expected value. Those two attributes tend to go together.

In a sense, as the US pork industry faces its 2009/2010 sales, it faces a set of risky propostions with regard to both domestic consumption and net demand from outside the US. This leads us to the question, "What is the optimal level of pork exports for this country?" I use the term optimal in the same way one would optimize a retirement portfolio. In the classic case of retirement plans, you can actually reduce the risk and increase the expected income of your portfolio (a usually impossible situation) by diversification. This suggests that for a country, there exists an optimal level of net exports which achieve the best balance of risk and reward. Some published studies have shown that a nation can increase its income by increasing the variety of its exports but with the increased income comes increased variance. Not all firms can withstand income variation equally so the risky impacts are not equally spread among participating firms.

Attempting to estimate just how much export sales is "worth the risk" is an interesting question, just ask the typical producer in Manitoba Canada. Besides the correlation among assets that is required to do this, which may not be present with the same meaning in exports (although I suspect it is), there remains the problem of multiple decision-makers. The federal government or Pork Board etc. does not decide nor can it enforce the level of net export sales which can be made, so nothing prohibits individual companies from ranging out and making deals in the export market under our current free market system. If pork producers wind up having to have a federal bailout due to the collapse of export markets, however, I suppose that could change.

Falling Exports Vs. Falling Supply: Which Will Win?

ddipietre — Mon, 09 Feb 2009 12:34:35 -0400

The total demand for US Pork can be conveniently broken down into two components: domestic demand plus net exports. Net exports is the excess of exports over imports of pork for the US. We seem to know that US production of pork will be falling in 2009. I say seem to know since this is based on projections by USDA (Hogs and Pigs Report). What we do not know is if the projections are correct (what is their error variance) and what will happen to productivity increases to offset this decline in farrowing intentions from last fall. We can surmise that the sows leaving the industry are the poorest performing ones (least productive) and that productivity gains from the remaining farms is likely to rise.

We also know that net exports are very likely to fall this year (compared to the record setting levels of 2008) but we do not know by how much. China came into the market in a huge way last year due to their catastrophic pig health disaster and the big earthquake which killed a lot of additional pigs. They vaulted to second place just behind Japan in taking US exports. They seem, however, to be recovering from the disasters some and their personal income, especially among those "new demanders for pork" (the Walmart Factory workers) will take a big hit this year with tens of thousands of manufacturing plants closing. Japan, Mexico, Russia and Korea are heading south big time in forecasted year over year GDP so national income is falling there too and with the exception of Japan, our currency has appreciated against the importers substantially making US pork more expensive.

Comparing January 2008 vs February 2009 monthly average exchange rates to the US dollar we find it took about 940 Won (Korea) in 2008 to buy a buck, now 1385, 10.9 Pesos (Mex) to buy a buck, 14.5 now, 107 Yen (Japan) to buy the buck, now about 89 (Good news at least with our largest importer!), for the Russian currency there is the new and the old but suffice it to say that we are an all time record devaluing of the current Russian currency against the dollar. Canada fell sharply too as we were trading about par with the Canadian dollar in January 2008 and now it takes about 1.24 Canadian to buy the buck. Mark China as about the same as last year. Their currency has appreciated a tiny bit but probably not enough to really impact purchases in and of itself.

Again, we are facing a projection by USDA that net exports of US pork will be about 14% down this year from 2009. One thing you should consider in all of this, and something that I have mentioned here before, is that all of the countries to which we export pork are themselves caught up in the global recession and are undergoing various degrees of contraction and demand erosion. Keep in mind that only seven countries account for over two-thirds of all imported pork regardless of which country it originates in. Supply down (maybe; but down more maybe in broilers and beef) and demand down both here and abroad (probably). Which one (supply or demand) down faster will determine the profit outcome for US pork producers this year.

U.S. Pork Exports Are Setting Up for a Tough Time in 2009 but Cross Your Fingers

ddipietre — Mon, 19 Jan 2009 20:06:49 -0400

We are facing the first year-over-year decline in net exports since the U.S. industry became a net exporter in the mid 1990s. Even with the potential prospect of fewer total pigs slaughtered in the U.S. in 2009, due to a potential decline in both U.S. production and imports of weaned pigs and finished animals from Canada, 2009 seems to be setting up to be a very tough year. Here are the reasons for caution and why the spring futures prices may fall to meet the slogging cash prices.

First, we now know that all of the major countries which are key importers of U.S. pork are facing substantial declines in GDP, declining land and home values, increased unemployment and in one case, the potential descent into political chaos.

Japan is in a tailspin. November industrial output fell over 8 percent from the previous month and over 16 percent from the same month last year. The offical forecast for growth is none, zero for 2009 with home values declining rapidly, unemployment rising and a proposed stimulus package that has failed to finalize funding. Korea is experiencing increased inflationary pressures and the demand for those cars and flat panel television screens are not real bright for 2009.

Mexico is having a big-time war with its drug lords and the U.S. military has listed it (along with Pakistan) as having a significant chance of disintegrating into chaos in 2009, though I wouldn't cancel that planned vacation in Cancun just yet. The Mexican Peso is deteriorating against the dollar and will make those hams much more expensive coming into the new year. Industrial output has declined for the past several months and a lot of what Mexico produces, like cars and car parts for export, are headed straight down in the coming year. We are keenly aware what oil prices have done in the last several months and guess what Mexico's biggest export item is?

China moved up to number two last year in total demand for U.S. Pork in export but even the Chinese government is only forecasting 6 percent growth in 2009, the minimum needed to forestall political upheaval and less than half of its growth rate in 2007. Thousands and thousands of factories are closing in the industrial areas of China due to the dramatic declines in western demand and the new labor laws which require severance pay for the newly unemployed. Rather than face those kinds of cash drains, factories are closing and the owners are disappearing into the night stranding workers who have come from hundreds of miles to find work.

Russia, despite its wealth of natural resources and real strengths in human capital (scientists and engineers especially) is not competitive in manufacturing. The sale of oil and its dramatic revenue flows in early 2008 continued to crowd out investment in a more diversified product mix capability. It faces double digit inflation, a continuation from 2008 in 2009, which is largely due to the fall of the ruble, read that as imports are getting more and more expensive.

Whether or not it happens, the forecast for 2009 in the U.S. is for the first reduction in percapita consumption of meat in more than a few decades. It is hard to tell if that is due to economizing or that coupled with the aging boomer population that is gradually eating less meat and a minor uptick in partial and principled vegetarianism. The COOL rules are flexible enough that most people (especially Canadians) believe that pigs will begin flowing again into the U.S. though admittedly, the total production will be less in North America, expect productivity gains to mute some of that.

Prospects for anything like a "V" shaped recession/recovery are beginning to fade. Nothing will turn around until demand increases. That won't happen until asset values stabilize and people begin to have a sense of where they are at financially. Before that happens expect a lot of continued cautionary buying and entrenchment. The U.S. led the world into this recession with a collapse of the financial markets but the rest of the world took the hit in manufacturing. Lenders seem to be looking at buying discounted assets and existing loans (heavily discounted of course) rather than taking on new risks of any size at face value.

Let's hope for better but get braced for some less than ideal outcomes.

Here is All You Need to Know About MCOOL

ddipietre — Wed, 14 Jan 2009 09:55:51 -0400

According to the USDA talking points released yesterday (1/12/2009) regarding the final estimates for implementing country of origin labeling:

1. The first year implementation costs for directly affected firms is estimated to be 2.629 billion dollars.

2. Costs per firm are estimated to be $370 for each producer, $48,219 for intermediaries, and $254,685 for each retailer.

3. The estimated cost in higher food prices and reduced food production in the tenth year after implementation is 211.9 million dollars.

Now for the benefits expected:

"The expected benefits from the implementation of this rule are difficult to quantify. The Agency's conclusion remains unchanged, which is that the economic benefits will be small and will accrue mainly to those consumers who desire country of origin information."

2009 and Beyond Part II

ddipietre — Sun, 11 Jan 2009 15:47:18 -0400

Worldwide demand for natural resouces, value-added food items and consumer goods is down sharply as a dramatic slowdown of the world's largest economies continues. The contraction phase of this worldwide recession is still underway at the beginning of 2009 and will likely continue well into at least the first quarter.

One of the reasons it is hard to predict when the recession will bottom out is that there are most likely still "land-mines" of hidden corruption yet to be exposed and absorbed as losses by the remaining productive sectors. These losses occur in business processes and supply chains that are linked, so that a kind of domino effect or snowballing contraction must take place before the full impact of each phase of the slowdown is fully realized. This takes time and tends to come in waves, as tipping points are finally breeched.

At the root of the current worldwide economic failure is a kind of fraud and corruption which began in government policy but was fully exploited by investment banks, mortgage companies and other financial institutions, as well as by companies large and small, owners of natural resources and by the largest group of all, consumers.

In layman's terms, a kind of "fake demand" was created by the extension of credit under terms that could not possibly be met. The definition of demand is the amount of a good a person or entity is both willing and able to buy at each price point. Willingness was there but "able" was not. The groundwork was laid by the FED after the terrorist attacks of 2001 with a loose money policy and the framework and fuel for exploiting it was created by Congress in Fannie Mae and Freddie Mac coupled with policies encouraging and guaranteeing lending to people who could not afford the homes and consumer goods which the resulting creative financing allowed them to purchase.

As we know, the investment banks and other financial institutions as well as hedge funds created financial instruments which were supposed to properly manage the riskiness of the expanded lending practices and ratings agencies improperly passed off on these instruments so that the trust within the system was maintained while a disaster slowly accumulated on the rot beneath.

This fake demand created fake earnings, fake land values, fake equity and fake employment. That is to say, many people's jobs, homes, cars and net worth were a mirage, created by and to support the unsustainable growth and purchase volumes being undertaken. All of that is now contracting, as it should, to restore integrity to markets and market mechanisms.

All of this creates a fundamentally different strategic environment for global agriculture which needs to be better understood and accounted for in future forecasts. Some of the elements of the new strategic environment are:

1. Credit availability will be tight and its extension will be reserved for well-documented enterprises who manage risk around profits, not just the risk of input costs or output prices independently. With the bankruptcy of Pilgrims Pride (which many agricultural lenders did not anticipate), regulators will press front line credit officers to limit risk dramatically and since there will not be a large number of alternative sources of investment capital to force their hand competitively, we can expect the conservative climate to linger for the next several years.

2. Countries where corruption is rampant in either government or the private sector will undergo more severe contraction and longer term lack of credit availability to build a new future. Relationships and trade with such countries and firms will be tempting but filled with risk.

3. There will be increasing pressure on free trade and free trade agreements as an effort will be made to replace them with conditional trade agreements. Conditions include increased bi-lateral equity in human rights, worker safety, wage equity, environmental safe guards, food safety assurances, animal welfare assurances etc. This may substantially slow but probably not eliminate the expansion of export growth by the United States since achieving these kinds of agreements and making them stick is very difficult.

4. There will be increasing pressure globally to establish supply chains or integrated processes across borders. The system of import/export companies acting as arbitragers and distributors will likely gradually give way to integrated supply chains between nations. What you have to imagine is what happened after 1998 in the United States pork industry. The conditions under which credit was extended post 1998 were dramatically redrawn to prevent the complete collapse of equity in the production sector. There exists today a similar risk for equity from export collapse for U.S. pork. It is not hard to imagine that a loss of export markets for the U.S. pork industry would cause an equity loss even greater than the events of 1998. Therefore, credit to operate will force the development of reduced risk mechanisms to keep products flowing. While a disease may overwhelm the efficacy of these mechanisms to keep products moving in export markets, integration allows for transparency of supply and demand, and a more perfect matching of attribute demand and supply, at least in theory.

5. Its back to the basics in food purchase and preparation. As unemployment in the U.S. moves closer to double digits and the media inflame a depression outlook, consumers can be expected to at least initially shun more extravagent value added and economically unnecessary food attributes like "organic", which is headed for a double digit decline in demand at the present time. More meals prepared at home will continue to dampen the restaurant outlook in many cities which tends to hurt beef and chicken more than pork simply because of their disproportionate representation on the lunch and dinner menu.

2009 and Beyond: The New Strategic Environment, Part 1

ddipietre — Fri, 02 Jan 2009 13:40:35 -0400

Sometimes its hard to tell if recent events, like the generalized global economic meltdown, cast a shadow that is a vapor and will burn off as the sun comes out again, or whether they are a harbinger of a more persistent, new strategic environment in the global market and political system.

There is certainly a feeling in the air that some substantial things have changed but time will tell if they are persistent or even fully realized. Some of the things which form the emerging global situation that U.S. agricultural will operate in include:

1. World population is growing dramatically, some analysts say at the current pace of about a billion new people every eight years. Don't get too excited about translating that into more demand for meat. The areas where most of these new lives are landing are the most impoverished regions of the globe. Developed economies and the emerging nations including China, with its harsh population control measures, are mostly stable or in slight declines with respect to population growth. So we will have a lot more mouths to feed but they will be in areas that largely subsist on coarse grains and have little income to purchase locally or on the global markets. They are no longer primarily in rural areas either as cities around the globe have swollen to the breaking point with the poorest of the poor. A new focus on locally produced, intensive agricultural methods is gaining ground and offers some surprisingly optimistic outlooks if implementation can succeed. Aid agencies are experimenting with providing vouchers for purchasing available food rather than free food since it is less disruptive to the local economy and small scale producers.

2. There is a kind of rejoicing throughout certain areas of the world regarding the financial trouble that is currently besetting and brewing in the United States. There is also some positioning to lay the groundwork for moving into the power vacuum left by the U.S. if it cedes its position on any number of financial, political and military fronts as a result. I suppose the good news in that regard for the U.S. is that the would-be climber nations are in no position to capitalize, in any sustainable way, on any weakness which currently besets the U.S. as they have their own challenges which in many cases make U.S. issues look small by comparison. However, self imposed and asymmetric economic growth restrictions and limitations such as new taxes, bans, tariffs and regulations by developed nations on themselves and their trading partners, will help emerging nations make advances which would othewise not be possible. The extent of that will depend on when developed nations come to their senses about what is happening.

3. Which brings us to the pendulum swing politically toward statism which is gaining ground afresh largely due to the false notion that capitalism caused the current financial problems throughout the world. One of the key tenents of Marxist political theory is that capitalism has within it, the seeds of its own destruction so it will naturally implode on its own because it cannot avoid extreme redistributions of wealth which eventually lead to insurrections (military or political). Historically, work on Henry Ford's assembly line and then the growth of unions in the U.S. in the early 20th century offered high wages and a true middle-class emerged, which granted an extended reprieve from the predicted outcome. Now, however, we live in what Marxist's refer to as "Post-Fordism", where the sustained migration of higher paying manufacturing jobs, which supported a middle class, to low-wage countries over the last several decades has let up on the brakes, fostering they predict, movement toward an eventual socialist outcome. The result is that free trade agreements, frictionless flows of capital on a global basis and the belief that free markets and global trading produce more wealth and prosperity for all (rather than the few) are all under challenge by an emerging political, scientific and an already entrenched academic mainstream. The near term outcome is that we see nations taking steps to protect their interests with more government intervention rather than market based solutions. This will make investments in promising areas of the world less attractive, free trade agreements will become laden with "conditions" and all of this will delay the return of reasonable credit standards and much needed long-term trading agreements of all sorts.

4. The global economic meltdown may at least temporarily save developed nations from the taxing, banning, and restricting that are already on the drawing board. The global growth restrictors are meant to stop us from drowning in a fearfully predicted polar icecap meltdown. However, man-made global warming is getting increasing criticism from credible voices who are coming out of the closet now that the steamrolling witchhunt for dissenters (I think the word is "deniers") has been mitigated by the recent destruction of discretionary global income and wealth. The recent slide in purchases of organic foods in the U.S. for instance shows how income elastic the demand for such attributes really is. Such attributes (organic, carbon-neutral, Certified Inefficiently Produced etc.) are currently in the marketbasket of the wealthy, and then only when wealth in growing. Forcing them into everybody's shopping cart everyday will be difficult, which is very, very lucky for the world's poor.

Don't count on the recession-induced slowing of the let's-make-everything-artificially-more-expensive-by-taxation movement to be permanent. The motive is to reduce the quantity demanded of all sorts of goods, which will make us more healthy, just, fair, equal and environmentally responsible (and, by the way, fill government coffers). It won't slow down because the religion of environmentalism is replacing mainstream Judeo-Christian religion in the western world. No matter how many religious cults and kooks of the latter have wrongly predicted the day the world would end, the next one in line seemed to take the baton almost effortlessly and with full credibility among adherents. Don't expect this to change just because nature is the new diety.

FED action and the Demand for Pork

ddipietre — Wed, 17 Dec 2008 01:15:14 -0400

As the US and global recession deepens, the monetary authorities in the UK, the EU and the US are driving interest rates to record low levels. Today the FED cut the Federal Funds rate, the overnight lending rate to banks, to a range of zero to 0.25 percent which is the lowest rate on record. The action is an effort to make holding cash by banks so disadvantageous that they are tempted to begin lending in order to earn a return. The action is meant to increase the money supply, an action which is deemed safe now since its primary danger (inflation) appears as no immediate threat due to slumping demand and rapidly falling prices for everything from housing to gasoline.

In a normal economic environment, interest rates at this level would so dramatically expand the money supply that inflation would almost certainly accelerate and climb rapidly. However, expansion of the money supply requires that banks lend money. The FED tries to stimulate more lending by reducing the cost of access to cash to next to zero but it requires lending to increase the money supply. Fear and the uncertainty of viability of borrowers is keeping bank vaults pretty tight. Without expansion of the money supply and without the debt fueled purchasing to boost demand, prices will show little upward pressure and in fact will deflate as they are currently doing.

The real danger of inflation will appear as the economy begins to recover. There will be a fine line to manage as the FED will have to then begin raising interest rates to contract the money supply and avoid the creation of another round of bubbles as cheap money begins to be invested in all sorts of activities and assets when the fear wears off. Ramping up the interest rate will need to be in a fashion which stops bubbles but doesn't choke off recovery. The fall in the value of the dollar which accompanies money supply expansion will be supportive of the export markets for agricultural commodities. The problem currently is that demand is disappearing as global unemployment rises and wage incomes are cut. Regardless of how cheap a commodity gets, if there is limited money for purchasing, prices will have a hard time being forced higher.

China and India will have the largest declines in growth in a decade or more and signs of recession are abundant there. Chineses exports in November actually shrank on a year over year comparison, which has not happened in many years. Reportedly, thousands of factories are closing, at least temporarily, and a new stimulus package along with allowing the Chinese currency to decline relative to the dollar are part of an emergency set of strategies being put into place to avoid widespread political instability. Again, the Chinese have the same problem as US pork producers. Their falling currency makes Chinese goods cheaper but there still may be little quantity demand response since US consumers have dramatically slowed buying.

Japan, our largest importer of US pork is also showing signs of a major contraction. Wages are stagnant or decreasing and the value of assets, especially homes is declining. The "wealth effect" which describes the correlation between current household spending and the value of household assets is in reverse in Japan, which will lead to a decline in spending, especially on discretionary items, which may very well include imported pork products.

The 50 billion dollar Madoff ponzi scandal is just another example of the "land mine" mentality which is gripping US and world financial centers. Fear of the future and wondering where the next blow will come from is continuing to cause a "siege mentality" among investors and lenders.

In agriculture, banking regulators are breathing down the neck of chief credit officers and their lenders making it very difficult to borrow for new enterprises. Increasing lines of credit to cover losses and to fund the high cost of production both in crops and livestock is about the limit to the risk most lenders are willing to consider, and that, only for their most durable producer clients.

All of this has brought us back from the many "stocks-to-use" crises which were driving commodity prices straight up. As demand falters amid production declines, the US pantry is likely to be well stocked with feed grains, gas and building materials for many months.

Living in a World Where Everything is an Externality

ddipietre — Fri, 12 Dec 2008 17:48:49 -0400

Nicholas Kristoff, an editorial writer for the NYT has recently written an opinion piece calling on President-elect Obama to take the bold step of changing the name of the Department of Agriculture to the Department of Food. http://www.nytimes.com/2008/12/11/opinion/11kristof.html

The main reason behind his recommendation is to unseat the powerful agri-business lobby from controlling government policy, that among other things has favored factory farms raising as many as 5,000 hogs and that these "large operations receive, in effect, a $24 subsidy for each hog raised. We face an obesity crisis and a budget crisis, and we subsidize bacon?"

We are moving into an era where all productive activity in the once celebrated American agricultural is being increasingly cast as a bucket load of externalities. Remember that externalities (cost related ones at least) occur when a cost incurred by the farm is not paid by the farm and is therefore forced out onto someone else or to everyone. American agriculture is increasingly accused of serious externalities that either must be internalized (read taxed), regulated or prohibited altogether.

For instance, the United Nations intergovernmental panel related to the climate has stated that animal production contributes more to global warming through the release of greenhouse gases than the sum of all the cars and trucks in the world. Antibiotic use is said to be threatening the building of resistence by microbes responsible for some human diseases, a so-called "corn-based" agriculture is causing obesity and an alarming increase in type II diabetes, and in addition, Kristoff mentions that the 5,000 hogs previously mentioned produce more waste than a town of 20,000 (the latter required to have a sewage treatment plant) etc., etc.

You should know that in economic theory, markets do not normally correct externalities so they are the province of government regulation, usually in the form of taxation but other control measures can be employed all the way up to a ban. Once you convince everyone that we live in a world where externalities are hiding under every rock, you can logically invite government in to "fix" them all.

"When You Are Out of Cash, You are Out of Business"

ddipietre — Mon, 01 Dec 2008 23:48:14 -0400

"When you are out of cash, you are out of business", is a truism which should be on the top of everyone's mind these days. With the bankruptcy filing of Pilgrim's Pride and VeraSun we are witnessing the turmoil and equity destruction which has been brought on by the tremendous volatility in commodity prices experienced over the last year. This volatility is directly related to (but not completely the result of) government policy interventions, especially ethanol policy.

When financial panic characterizes the global economy, and historic price volatility abounds, even sophisticated and very successful firms sail on very dangerous cross-currents. One of the lessons in these two firm's hardships is the need to focus risk management on reducing profit or loss volatility, rather than on reducing input cost or output price volatility independently. Hedging these days must focus on both sides of the profit margin. If you lock in what appears to be an historically high output price but leave your input costs unprotected, you can easily face an even more historic input cost shock which makes your nice output price look pale.

Many companies (and producers) locked corn prices earlier this year in the $5-$7/bu range to try to prevent purchasing corn at $10 a bushel. That would have been fine had they also locked the corresponding lean hog futures prices which were in the $80-$100/cwt range for late this year and early-to-mid next year when they locked the corn price. Many did not. While pork prices may again reach those levels in the spring and summer (as some are forecasting), these folks are feeding this very expensive corn to pigs selling currently in the low $50's carcass basis. Ouch.

On a related issue, having equity on the balance sheet is not a guarantee that you will have cash to buy inputs either. Credit is getting tighter in agriculture now and the typical rule prevails: If you don't need credit, there is plenty available to you. If you do need credit, there is less to none available.

Collateral values (asset valuations) are changing so fast that a clear reading on equity is hard to estimate. Translating that risky collateral value into more line of credit to fund losses will be a challenge for many producers and companies. The proliferation of subordinated debt (debt financing from feed companies, equipment companies, seed companies etc.) is drying up as the companies offering it are facing their own liquidity challenges and are taking a fortress mentality, holding higher cash reserves.

One good thing is that we should see a distinct reduction in price volatility as a result of the global slowdown. There will not be the same demand pressing animal feed ingredient stocks to the breaking point but world population is still rising at a break-neck pace. Agricultural production will very likely be down worldwide in 2009 (except for some isolated food and fiber crops) since livestock production is forecasted to fall and many producers of crops worldwide cannot obtain operating credit. Since planned production will be less, a short crop in any major production area around the world could set off a new round of trouble by mid-year. Enjoy the pause, it may be shortlived.

China and the Global Slowdown

ddipietre — Mon, 01 Dec 2008 23:02:51 -0400

China is facing some serious internal issues related to the global slowdown that is underway. Growth is certainly slowing in China as a direct result of weakening global demand for its products. This poses some significant problems for the Chinese economy since it is widely believed that China must maintain a 7-9% annual increase in GDP to maintain employment stability. Last year growth was almost 12% and has been double digit for many years. Forecasts for 2009 have been as low as 5-6% up to the minimum levels in the target range.

China is turning out a large number of college educated workers each year from both its own universities and graduates who are returning from abroad. In addition, millions and millions of the rural poor have moved to small factory towns and set up a middle class lifestyle highly dependent on continuing factory output. If unemployment begins to rise, educated Chinese young people will have no work which can lead to organized political instability. Adding to that, rural factory workers suddenly left without work will have a tendency to move to larger cities seeking employment rather than returning to the austere lifestyle of the deeper rural areas although a kind of reverse migration (returning to farm work from cities) is also a worry, see: http://online.wsj.com/article/SB122816637753369999.html.

This migration to the cities spells lots of problems for the Chinese, not only in terms of social welfare but in terms of increasing squalor, overloading sanitary systems and adding again to political instability. In recent days, reports of rioting in factories which have slowed down and strike-like actions by cab drivers in some medium sized cities have emerged.

Chinese government officials see that long-term heavy dependence on exports is a recipe for economic volatility. Manufacturing for export is a phase in the long-term Chinese plan for growth and ascendency as a world power. As they face this current downturn, the focus is on trying to think through the beginning of a move for the economy toward a high-tech future and toward more self sufficiency. In short, they are reliving the post WWII situation of the United States in a compressed time frame and it should be acknowledged that with a lot more time and more economic freedom, the U.S. has not made that transition from a manufacturing economy to a service and high-tech economy very smoothly to say the least.

Construction of all kinds has slowed dramatically in China and many report that new pig buildings (for instance) which were growing like mad under a huge subsidy program for pork have also slowed like the remainder of the economy as subsidies have been substantially and suddenly reduced. (See Dr. Steven McOrist Swinecast Forecast 2009 presentation on this site).

We are approaching a situation in both China and Russia where this current testing of economic policies is setting the stage for a potential transition in governance. Hardliners in both states are waiting in the wings to regain power if widespread economic failure or turmoil results. All see a future with less purchases of pork and other (especially) food items from the United States and other countries but current tension, global contraction and low output domestically will temper their ability to withdraw substantially from the global pork markets in the short run.

Global Downturn: How Will it Shape the U.S. Pork Industry?

ddipietre — Sun, 16 Nov 2008 17:49:05 -0400

With the news that the EU is officially in recession and all of the signs point to the same thing for the U.S., the swine industry in the United States is facing a critical challenge related to demand. After more than a decade of continuous growth in demand for U.S. pork, the industry is likely to face the inevitable leveling off or much more likely, a decline in demand for 2009. Some are forecasting up to 10% less exports for 2009. As the EU and the US enter recession, demand for consumer goods has already begun to fall, in some cases at record month over month rates.

The contraction in demand is multi-faceted. A large portion of it comes from increased unemployment and a decline in real income as raises and bonuses for the employed are curtailed. Another part of demand contraction comes from individuals and companies that are not currently affected by the downturn but are concerned they will be and a kind of fortress mentality has emerged to preserve available cash and cash flow.

With the decline in the availability of credit, businesses and individuals who might temporarily build debt to fund on-going purchasing are finding it difficult or impossible to obtain. On-going operations are increasingly being financed with cashflow which is either declining or threatening to decline.

The third factor is the loss of wealth which has occurred in both retirement accounts for individuals and real-estate wealth which is happening for both individuals, who see their housing values decline, and businesses who own land assets. There is a well researched link between perceptions of wealth and current purchasing, the "wealth effect". If consumers believe their wealth is growing (through real estate appreciation or savings interest) they are optimistic about the future and purchase more both in cash and by accumulating debt. If wealth is in decline, the opposite happens even though current income may not be affected.

The largest importing nations for North American pork are highly dependent on both the EU and the United States as importing nations for their consumer goods. As demand for goods produced in Asia decline, Asian income will decline as will their purchases of consumer goods, while food purchases are likely to be economized.

It is hard to conceive that 2009 will be a growth year for U.S. pork production or any U.S. produced meat product. Declines in pork production in Canada, Europe and in the United States which have occurred over the last 18 months position the industry to handle some of the decline in world-wide demand but will it be enough to spare the U.S. meat sector a bloodbath? Judging by the decline in the value of the stocks of publicly traded poulty, beef and pork companies, the market is guessing it will be a bloodbath. Could be general pessimism and uncertainty but the expectation is clearly for a recession in the U.S. animal production sector. This will come no so much because U.S. consumers quit buying pork but because as they slow down purchases of imported goods, those countries will have a decline in growth and slow down purchases of U.S. pork.

While food has not historically been purely "recession proof", its price cycle has not necessarily followed the consumer goods business cycle tightly. However, now that all of U.S. agriculture has become heavily dependent on exports to clear annual production, the correlation of U.S. pork, poultry and beef prices with the general or global business cycle is likely to strengthen. See: http://www.swinecast.com/hog-prices-0