Sort & Cull

The Zilmax story continues to grow as fast as a pen of steers ingesting the eponymous feed additive several weeks before slaughter.

Smart market reporters would probably wait until more smoke clears before suggesting any meaningful explanation and wisdom. Regretfully, intelligence has never stopped me before.

Merck's animal health division announced Friday morning that it will temporarily suspend sales of Zilmax in the U.S. and Canada. The suddenly controversial growth-promoter has been pulled off the market only days after Merck unveiled plans for a new quality control program to ensure the popular weight-adding drug is properly used.

Those plans included the recertification of all feedlots using Zilmax and the establishment of a comprehensive audit designed to track the critical path from feed bunk to kill floor. Nothing was said at the time about product suspension.

Indeed, the giant drug company coupled these new quality control initiatives with repeated emphasis of unwavering confidence in the product's safety and great effectiveness. That's why Friday's "oh yeah" post-script seems so strange.

If Merck wanted to minimize the perception of a temporary suspension, why wasn't the move just folded into the new quality control program announced on Tuesday.

Maybe it's just me, but this late-week addendum has a faint whiff of panic. But what do I know? There's a reason my drug-rep nephew drives a new Mercedes while I drive an old Ford.

Regardless whether news of the Zilmax suspension was handled properly or not, it's clear to me that the market really doesn't know what it means.

Live futures opened significantly higher, supported I guess by ideas that Merck's decision to stop sales would only hasten the demise in Zilmax usage, inevitably curbing carcass size and total beef production. But by the time the closing bell sounded for the week, this bullish train of thought had not really moved far from the station (e.g., deferred closed just 17 to 60 points higher).

The trading significance of the suspension was quickly muddied by the ambiguous word "temporary." Did that mean no longer than 30 days, the estimated time it would to recertify all feedlots? Or did it refer to a longer period, say until the ill-defined audit was completed?

The latter possibility could truly strap production potential. The former, not so much. It's simply standard operating procedure for big lots to maintain a running stockpile of 30-day drug needs.

But sorting through such iffy scenarios is probably unnecessary. I'd keep a tighter rein on speculation by focusing on more basic bedrock: It's in Merck's very best interest to get Zilmax back on the shelves ASAP.

Zilmax is one of Merck ag division's very best cash cows with 2012 North American sales totaling no less than $159 million. And unless scientific evidence suddenly makes a radical shift, forcing Cargill, JBS and National to join the Tyson boycott, it looks to me like Merck will do whatever it takes to keep Zilmax in the cattle feeding toolbox.

From more John Harrington comments, visit http://www.feelofthemarket.com/…

(AG)

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