Jim Long President, Baconmaker Genetics / Wood Lynn Farms, Inc.

As I'm writing this it is the July 4th holiday weekend, a time of year when pork producers in the U.S. get to celebrate the birth of their nation. July 4th marks the date of the beginning of grand experiment: Democracy. The rights of the individual would no longer be controlled by royal supremacy.

Farmers were there from the start. From its beginning, the U.S. agrarian base could produce food in excess of its needs. As production efficiency improved over time, the U.S. agrarian base required fewer and fewer people to meet and exceed the food needs of its population. By 1900, 85 of every 100 citizens in the labor force were agriculturally based. Over the next 100 years, mechanization and technology put that production capacity into the hands of just 3% of the population.

The triumph of modern agriculture is its ability to produce large quantities of cheap food with a progressively smaller work force requirement. The percentage of consumer income it takes to buy food has continually declined since 1900 in the U.S.. Now, it takes just 10% of the average consumer's income to buy food. The declining share of disposable income needed to buy food ushered in the era of automobiles, holidays and TV---with these goods and services produced by workers no longer required for food production. Farmers are, in deed, the goose that laid the golden egg.

The drive for cheaper food is not going to go away. If you think about it, the only way farmers can avoid being impoverished by this unrelenting force is to quit or become even more efficient. As we look at going forward in agriculture, but more specifically in the hog industry, we have to ask questions like:

• What pricing opportunities there will be.
• How can risk be managed better.
• How efficiency can be improved by adopting advancing technologies.

Pricing

Right now it's the beginning of July and with 41-cent hogs at terminals it is not a pretty sight. The Darwinian momentum of the fight to survive in the hog industry continues. Few producers can make money at 41 cents, let alone continue to sustain enthusiasm and economic viability after experiencing the hog markets of the last 5 years. Now, last week ag economist Glen Grimes, Professor Emeritus at the University of Missouri, projected an average 2004 hog price of around 36-cents/lb live weight (48 cents/lb lean). That kind of price would lead to continued losses for most, if not all, hog producers through the next year.

We do not agree that prices will be as low as Grimes' projection. But, unfortunately, past history makes a prediction of higher prices less than guaranteed. The recent history of improved hog production efficiency could continue to create pork prices that are less than stellar. Moreover, history tells us that the Darwinian implication of modern agriculture is fewer people producing more food. What we need is higher prices. But since that is not dependable, think about a program to provide price insurance to manage risk.

Risk

It's estimated that only 3% of farmers use Futures or Options to prevent downside exposure to commodity price declines. Agricultural producers will buy insurance on equipment, real estate, crops, liability and even their lives. But less than 3% make efforts to manage hog market price risk. What's interesting about this is price risk is the biggest, surest risk most pork producers face. It's not like a tornado or an accident. It's constant and unrelenting (Grimes' projection of average price next year being an acute example).

Meanwhile, right now October lean hog futures are $58.12. That's an October price projection that would be the highest price in years. How many producers are buying options to protect an October price like that? Options (think insurance) are beneficial if there is a price collapse. Can you afford the possibility of 10 cents less in October? Just like insurance, options don't guarantee profits. But unlike insurance, they could for producers who don't want to be a casualty of history. Take a look at using options. They cover the downside risk while leaving the upside potential.

We know one of the concerns of all producers about the Chicago Mercantile Exchange is the lack of trust we have in that system. The idea of how it works is too abstract. When you see it working in video bites it's usually the controlled chaos of the trading pit. We have the same feeling. But here's the bottom line: Get over it. Learn how to use options for the good of your business and your family. Look after yourself.

Technology

Ag history is one of continual gain in efficiency and productivity. In the hog industry, continual gains in litter size, farrowing rates, feed conversion, lean yield and growth rates have been joined by facilities and hardware that let fewer people manage more pigs. One of the main survival keys in the pork industry will be the ability to have a cost of production that is competitive with other meats. There is still room to reduce cost of production.

As you know, the combined Canada and U.S. hog slaughter divided by the combined 2-country breeding herd is 16 hogs marketed per sow per year. I recently had some real life exposure to how much better than the 16-hog average well-managed facilities could be. This was the result of discussions with Farms.com management, the owners of PigChamp (the world's largest swine record keeping system), about productivity and industry sustainability. Farms.com personnel told me of farms that were weaning over 26 pigs/sow/year on the PigChamp record keeping system. To tell the truth I didn't believe it. The upshot is last week I went to Manitoba, Canada to have a look for myself. I visited 2 production units there. Both were Hutterite colonies, one being Norquay (900 sows, farrow to finish) and the other being Milltown (850 sows farrow to finish). I went through both units and spend a good deal of time with barn personnel---seeing the pigs, discussing production and analyzing data. What I saw was production I didn't believe was possible.

In excellent facilities, with highly motivated and well-trained staff, data showed 26.5 pigs weaned per sow per year for the last year and a half. What I personally saw supported that data. I saw many litters of 12 and 13 pigs on the sow. I saw uniform hogs that got to market in 148 days at 250 lbs. I saw 2.6 feed conversions and 55% lean carcasses. I'm convinced the data is real. The productivity bar has been raised.

In my mind, I was in 2 of the best run hog production units in the world. It was exciting and scary. Barn and management people alike that I talked to knew their PigChamp data frontwards and backwards and used its element of feedback to push the productivity envelope even further. It was fascinating that much of the discussion was how to increase productivity higher than the 27 pigs/sow/year they had year to date. Their cost of production was 7 to 10 cents/lb less than most producers. An average sow was producing over 6000 lbs of hogs/year. To me, this is a huge wake up call to producers hovering around 16 pigs/sow/year. The units I visited are 10 head/year better.

The progress of agrarian productivity continues. We have to push the envelope. The marketplace has an unending appetite for a better deal. The challenge continues. The producers I visited have adopted the technology available. Others can, too. Not all producers have world class facilities. But the same world class methodologies I saw are available to everyone. So are the genetics to get it done.

Commercial Note: We are looking for 100-to-200-sow farrow-to-finish operations for genetic R & D. If you are interested or want more details, give Jim Long a call at 1-800-667-5326.

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Source: Jim Long, www.baconmaker.com. Reproduced courtesy Farms.com - 1st July 2003