Dr. Dennis DiPietre - Bacon Quality Dilemma - Production for Pigs and the DDGS

VARIABILITY  IN  THE  PRINCIPAL  DETERMINANTS  OF  COST  OF  PRODUCTION  FOR  PIGS  AND  THE  DDGS,  BACON  QUALITY  DILEMMA    

Dennis  DiPietre,  Ph.D.,  KnowledgeVentures,  LLC,  Columbia,  MO  Aaron  Gaines,  Ph.D.,  The  Maschhoffs,  Carlyle  IL    

FEED  INGREDIENT  PRICE  VOLATILITY    AND  ITS  EFFECTS  •  Feed  Ingredient  prices  are  in  a  period  of  high  volatility  •  Worldwide  production  and  supply  of  corn  and  soybeans  (SBM)  no  longer  can  be  depended  upon  to  exceed  demand  on  a  consistent  basis,  forcing  price  rationing.  

 $-­‐

 $1.00

 $2.00

 $3.00

 $4.00

 $5.00

 $6.00

 $7.00

 $8.00

 $-­‐

 $10.00

 $20.00

 $30.00

 $40.00

 $50.00

 $60.00

 $70.00

 $80.00

 $90.00

 $100.00

20022003

20042005

20062007

20082009

20102011

2012

Overview  of  Corn  Price  Pass-­‐through  to  Hog  PricesAnnual  Average  Prices  (Removes  Seasonal  Noise  etc.)

WCB-­‐PM 95%LS500 CMELHI-­‐$2.40 Corn

Large  LossesCorn  Prices  Rising/HogPrices Steady  then  Falling  (Decreasing  Exports  Post  Olympics)

Mostly  Normal

Large  ProfitsCorn  Flat/HogPrices  Rising(Increasing  Exports)

Counter  MoveUp  by  Corn  (Drought)Hog  Prices  DriftingDown(Global  Slowdownin  Demand  Since  11/2011+  IncreasedProduction)

ModerateLosses

“PAST  PERFORMANCE  IS  NO  GUARANTEE  OF  FUTURE  RESULTS”  

Future  Price  Distributions  of  Feed  Ingredients?  

 $-­‐

 $1.00

 $2.00

 $3.00

 $4.00

 $5.00

 $6.00

 $7.00

 $8.00

 $9.00

8/15/2003

12/15/2003

4/15/2004

8/15/2004

12/15/2004

4/15/2005

8/15/2005

12/15/2005

4/15/2006

8/15/2006

12/15/2006

4/15/2007

8/15/2007

12/15/2007

4/15/2008

8/15/2008

12/15/2008

4/15/2009

8/15/2009

12/15/2009

4/15/2010

8/15/2010

12/15/2010

4/15/2011

8/15/2011

12/15/2011

4/15/2012

8/15/2012

12/15/2012

4/15/2013

CORN  PRICES:  AUG  2003-­‐AUG  2013  

 $-­‐

 $100.00

 $200.00

 $300.00

 $400.00

 $500.00

 $600.00

 $700.00

8/15/2003

12/15/2003

4/15/2004

8/15/2004

12/15/2004

4/15/2005

8/15/2005

12/15/2005

4/15/2006

8/15/2006

12/15/2006

4/15/2007

8/15/2007

12/15/2007

4/15/2008

8/15/2008

12/15/2008

4/15/2009

8/15/2009

12/15/2009

4/15/2010

8/15/2010

12/15/2010

4/15/2011

8/15/2011

12/15/2011

4/15/2012

8/15/2012

12/15/2012

4/15/2013

DECATUR  HI-­‐PRO  SBM    AUG  2003-­‐  AUG  2013  

 $50.00  $75.00

 $100.00  $125.00  $150.00  $175.00  $200.00  $225.00  $250.00  $275.00  $300.00  $325.00  $350.00  $375.00  $400.00  $425.00  $450.00  $475.00  $500.00  $525.00  $550.00  $575.00

Jan-­‐08

Mar-­‐08

May-­‐08

Jul-­‐0

8

Sep-­‐08

Nov-­‐08

Jan-­‐09

Mar-­‐09

May-­‐09

Jul-­‐0

9

Sep-­‐09

Nov-­‐09

Jan-­‐10

Mar-­‐10

May-­‐10

Jul-­‐1

0

Sep-­‐10

Nov-­‐10

Jan-­‐11

Mar-­‐11

May-­‐11

Jul-­‐1

1

Sep-­‐11

Nov-­‐11

Jan-­‐12

Mar-­‐12

May-­‐12

Jul-­‐1

2

Sep-­‐12

Nov-­‐12

Jan-­‐13

Corn,  46.5-­‐48%  Decatur  SBM,  DDGS  (Prices/Ton)*

46.5-­‐48  SBM  Dec  IL Corn  AVG DDGS  AVG

*Source:  USDA,  ISU  Agricultural Marketing  Resource  Center

 $-­‐

 $25.00

 $50.00

 $75.00

 $100.00

 $125.00

 $150.00

 $175.00

 $200.00

 $225.00

 $250.00

 $275.00

 $300.00

 $325.00

 $350.00

Multi  State  Corn  ($/Ton)  and  DDGS  ($/Ton)  Prices

2008-­‐2012  Avg.  Corn  Price:  $5.24/bu  Avg.  DDGS  Price:  $169.12/Ton  CorrelaBon  Coefficient  0.942  

WHICH  PRICE  RANGE  REPRESENTS  THE    CURRENT  (likely  future)DISTRIBUTION  OF  PRICES?  

BIMODAL  DISTRIBUTIONS  ABOUND  

2003-­‐2013  (THE  TEN  YEAR  STORY)  

$1.73 $7.24

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

$1 $2 $3 $4 $5 $6 $7 $8 $9

Distribution of Southern MN Corn PricesLast 10 Years

FEED  INGREDIENT  PRICE  DISTRIBUTIONS  NOW  POSITIVELY  SKEWED  

2003-­‐2013  SOYBEAN  MEAL  PRICES  

$166.90 $482.00

0.000

0.001

0.002

0.003

0.004

0.005

0.006

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

BEAN  MEAL  CORRELATION  WITH  HOG  PRICES  IS  SHIFTING  

0.682

0.595

0.7250.689

0.404

0.329

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Corn  20 Corn  10 Corn  5

Hog  Price  Correlation  Coefficient  with  Corn  and  SBM  Prices  in  Three  Periods

MONTE  CARLO  SIMULATION  OF  CORN  AND  SBM  PRICE  PAIRINGS  FROM  LAST  5  YEARS  DISTRIBUTIONS  

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000

All  “Blow  outs”  are  On  the  upside  

ETHANOL  •  Subsidized  production  and  mandated  use  of  ethanol  as  a  public  policy  choice  to  reduce  US  dependence  on  foreign  sources  of  fuels  has  led  to  dramatic  increases  in  demand  for  corn  for  fuel  production  

•  Corn  use  for  ethanol  production  now  (as  of  2011)  exceeds  all  livestock  uses  and  takes  40%  of  an  average  US  corn  crop.  

 $-­‐

 $20.00

 $40.00

 $60.00

 $80.00

 $100.00

 $120.00

 $140.00

 $160.00

 $-­‐

 $25.00

 $50.00

 $75.00

 $100.00

 $125.00

 $150.00

 $175.00

 $200.00

 $225.00

 $250.00

 $275.00

 $300.00

 $325.00

 $350.001/4/20

08

3/4/20

08

5/4/20

08

7/4/20

08

9/4/20

08

11/4/2008

1/4/20

09

3/4/20

09

5/4/20

09

7/4/20

09

9/4/20

09

11/4/2009

1/4/20

10

3/4/20

10

5/4/20

10

7/4/20

10

9/4/20

10

11/4/2010

1/4/20

11

3/4/20

11

5/4/20

11

7/4/20

11

9/4/20

11

11/4/2011

1/4/20

12

3/4/20

12

5/4/20

12

7/4/20

12

9/4/20

12

11/4/2012

1/4/20

13

Multi  State  Corn  ($/Ton)  and  DDGS  ($/Ton)  Pricesand  West  Texas  Intermediate  Crude  Spot  Price/Barrel

COMMON  STRATEGY  DDGS  AS  A  CORN  SUBSTITUTE  •  Distillers  Dried  Grains  with  Solubles  (DDGS),  a  byproduct  of  ethanol  production  can  be  used  as  a  substitute  for  corn,  soybean  meal  and  inorganic  phosphate  in  swine  diets1  

•  DDGS  inclusion  rates  in  swine  diets  depends  on  its  relative  price  to  the  prices  of  corn,  fats,  soybean  meal,  its  nutrient  content  (which  can  be  variable)  and  its  effect  on  threshold  levels  of  unsaturated  fat  it  can  produce  in  the  pork  carcass  depending  on  timing  and  inclusion  level  in  the  diet.  

•  Unsatisfactory  threshold  levels  of  unsaturated  fat  are  beginning  to  be  estimated  by  processors  by  measuring  Iodine  Value  (IV)  in  carcass  fat  (most  often  backfat  or  jowl  fat).    

1Jerry  Shurson,  Benefits  and  LimitaFons  of  Feeding  Corn  DDGS  to  Grower-­‐Finisher  Pigs,  Dept.  of  AnSci.,  University  of  Minnesota    

Change from Prior Day: Receipts: NATIONAL DAILY PORK REPORT FOB PLANT- LM_PK602: Carcass Cutout Values 102.71 (-0.43)

Primal Loin 103.36 (-2.69) Primal Butt 97.12 1.45 Primal Picnic 66.83 2.75 Primal Rib 145.32 2.99 Primal Ham 84.00 1.19 Primal Belly 174.50 (-2.37) Total Loads 271.7 Pork Cuts 254.01 Lds Trim/Process Pork 17.68 Lds

YESTERDAY’S  PRIMAL  PRICES  

 0.80  0.83  0.85  0.88  0.90  0.93  0.95  0.98  1.00  1.03  1.05  1.08  1.10  1.13  1.15  1.18  1.20  1.23  1.25  1.28  1.30  1.33  1.35  1.38  1.40

1/4/2008

3/4/2008

5/4/2008

7/4/2008

9/4/2008

11/4/200

8

1/4/2009

3/4/2009

5/4/2009

7/4/2009

9/4/2009

11/4/200

9

1/4/2010

3/4/2010

5/4/2010

7/4/2010

9/4/2010

11/4/201

0

1/4/2011

3/4/2011

5/4/2011

7/4/2011

9/4/2011

11/4/201

1

1/4/2012

3/4/2012

5/4/2012

7/4/2012

9/4/2012

11/4/201

2

1/4/2013

Corn  Price  Per  Ton/DDGS  Price  Per  TonINDEX  

USE  OF  DDGS  LIMITED  FOR  CARCASS  FAT  QUALITY  AND  DDGS  PRICE  AS  SUBSTITUTE    FOR  CORN  IS  GETTING  LESS    ATTRACTIVE  

“THE  SQUEEZE”  

 -­‐

 0.10

 0.20

 0.30

 0.40

 0.50

 0.60

 0.70

 0.80

 0.90

 1.00

 1.10

 1.20

 1.30

 1.40

 1.501/4/2008

3/4/2008

5/4/2008

7/4/2008

9/4/2008

11/4/200

8

1/4/2009

3/4/2009

5/4/2009

7/4/2009

9/4/2009

11/4/200

9

1/4/2010

3/4/2010

5/4/2010

7/4/2010

9/4/2010

11/4/201

0

1/4/2011

3/4/2011

5/4/2011

7/4/2011

9/4/2011

11/4/201

1

1/4/2012

3/4/2012

5/4/2012

7/4/2012

9/4/2012

11/4/201

2

1/4/2013

Corn  Price  Per  Ton/DDGS  Price  Per  Ton  and  Corn  Price  Per  Ton/46.5-­‐48%  SBMINDEXES  

THE  TRADEOFF  Escalating  IV  as  Price  Rationed  Corn  (and  SBM)  is  Substituted  Out  for  DDGS  

FORMULATION  BACKGROUND  •  Increasing  levels  of  DDGS  (0,  10,  20,  and  30%)  •  Diets  formulated  to  be  isocaloric  on  a  NE  basis    

–  Rationale:    Equal  growth  and  feed  efaiciency  –  Required  supplementation  of  CWG  

•  NRC  2012  loading  values  were  utilized  –  DDGS  Source  (>  6  and  <  9%  oil)  –  Energy  value  of  DDGS  =  88%  of  corn  

Corn  Soy   10  %  DDGS  

20%  DDGS   30%  DDGS  

THE  DIETS  

THE  PRICES  (TABLE),  2008-­‐2012  SENSITIVITY  ANALYSIS  Baseline  ingredient  prices  with  DDGS  steps  0,  10%,  20%,  30%  

Feed Ingredient Average Price STDEV Min MaxCorn (ton) 188.03$ 55.77$ 107.73$ 295.33$ Corn (bu) 5.26$ 1.56$ 3.02$ 8.27$

SBM 46.5-48 Decatur 354.65$ 66.05$ 242.28$ 574.42$ DDGS 169.30$ 55.66$ $81.05 $305.96

Corn  Price  DistribuBon   DDGS  Price  DistribuBon  

46.5-­‐48%SBM  Price  DistribuBon  

THE  PRICES  (CORRELATED  PRICE  DISTRIBUTIONS)  USED  

Amount OF EACH VARIABLE AS DDGS INCREASED

Predicted BF IV COP $/Pig

Reduction in Corn lbs/pig

Reduction in SBM lbs/pig

Increase in DDGS lbs/pig

0% DDGS 66.31 69.92$ 375.14 81.68 0.0010% DDGS 69.28 68.79$ 333.80 73.60 46.8420% DDGS 72.25 67.68$ 292.54 65.54 93.5830% DDGS 75.22 66.56$ 251.36 57.49 140.23

CHANGE IN VARIABLE AS DDGS INCREASED

Predicted BF IV COP $/Pig

Reduction in Corn lbs/pig

Reduction in SBM lbs/pig

Increase in DDGS lbs/pig

0% DDGS 0.00 -$ 0.00 0.00 0.0010% DDGS 2.97 1.13$ 41.35 8.08 46.8420% DDGS 5.94 2.25$ 82.61 16.14 93.5830% DDGS 8.91 3.36$ 123.78 24.19 140.23

INGREDIENT  USAGES  ARE  ABSOLUTE  VALUES.      FOR  EXAMPLE  CORN  AND  SBM  USAGE  WILL  INCREASE  WITH  REDUCTIONS  IN  DDGS  LEVELS  IN  AN  EFFORT  TO  OBTAIN  A  LOWER  IV.  

y  =  0.424782x  +  0.004136R²  =  0.999993

 $-­‐

 $0.50

 $1.00

 $1.50

 $2.00

 $2.50

 $3.00

 $3.50

 $4.00

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

$/pig

Predicted  IV  Δ

IV  Δ  $/pig  impact  (NE  Basis)

y  =  13.892798x  +  0.042450R²  =  0.999999

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

lbs/pig

Predicted  IV  Δ

IV  Δ  Corn  Usage  impact  lbs/pig  (NE  Basis)

y  =  2.714450x  +  0.008294R²  =  0.999999

0.00

5.00

10.00

15.00

20.00

25.00

30.00

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

lbs/pig

Predicted  IV  Δ

IV  Δ  SBM  Usage  impact  lbs/pig  (NE  Basis)

y  =  15.738859x  +  0.048091R²  =  0.999999

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

lbs/pig

Predicted  IV  Δ

IV  Δ  DDGS  Usage  impact  lbs/pig  (NE  Basis)

CHANGE IN VARIABLE AS DDGS INCREASED

Predicted BF IV $/Pig

Reduction in Corn lbs/pig

SBM lbs/pig

DDGS lbs/pig

0% DDGS 0.00 -$ 0.00 0.00 0.0010% DDGS 2.97 1.13$ 41.35 8.08 46.8420% DDGS 5.94 2.25$ 82.61 16.14 93.5830% DDGS 8.91 3.36$ 123.78 24.19 140.23

0.00

0.05

0.10

0.15

0.20

0.25

0.30

-$ 8

-$ 6

-$ 4

-$ 2

$ 0

$ 2

$ 4

$ 6

$ 8

$ 10

$ 12

90%  Between  $0.16  and  $2.12  

90%  Between  -­‐$0.12  and  $4.07  

90%  Between  $0.00  and  $6.12  

$1.13  

$2.25  

$3.36  

SUMMARY  •  Demand  for  Corn  Now  Requires  Record  or  Near-­‐Record  Crop  to  Avoid  Very  Low  Stocks-­‐to-­‐Use  Ratios  and  Price  Rationing  

•  Favorable  Price  Relationships  Have  Allowed  Substitution  of  DDGS  for  Corn  and  SBM  in  Swine  Diets  But  Increasing  DDGS  Inclusions  Increase  IV  Values  Toward  Meat  Quality  Threshold  and  Raise  COP