To paraphrase Oliver Hardy: "Well, this is certainly a fine mess you've gotten us into, Alexei!" Alexei here is Alexei Gordyev, Russia's Minister of Agriculture, who announced on Thursday that Russia would suspend all chicken imports while it installs a new permitting system to cure a laundry list of import ills. That list includes shipments that were offloaded without permission, incomplete or false documents, fake products (what would someone use to make "fake" chicken?), and failure to observe storage regulations.

Most news reports state Gordeyev's position that the changes will only take a couple of weeks and imply that everything will be just fine then. A more interesting commentary is offered by Kommersant, a Russian daily online news service (http://www.kommersant.com/page.asp?id=670447), which claims that this move is driven far more by protests from Russia's poultry producers and poultry importers. Two of Kommersant's sources do not believe the disruption will be that short-lived. In addition, it appears that an inspection fee of $110 to $115/ton will be included in the new import permit system, thus driving up the price of imported chicken.

It does seem pretty fishy that this move comes just a few weeks after Russian producers and importers demanded that the government cut imports by 30% to bolster prices, which had dipped because of consumer concerns over bird flu. I know I am a biased economist, but the term "follow the money," certainly seems to fit here.

Regardless of the reason, we must now consider the consequences.

First, if this only lasts a couple of weeks, it may not be too bad. The "if" and "may" hedges in that statement are absolutely intentional and, I think, necessary. We simply do not know how this will unfold.

Second, the chicken situation going into this event is worse than it was in 2002, when Russia imposed a ban on chicken imports for alleged sanitary concerns, but probably more as retaliation to U.S. tariffs on steel. We currently have just over 867 million pounds of chicken in freezers whereas in March 2002 we had 808 million. That's not a huge difference, but it is in the bad direction, for sure. Chicken prices, though, are significantly lower now. NE boneless/skinless chicken breasts are in the area of 98 cents/lb. (vs. $1.31 in early-March 2002) while leg quarters are 18 cents (less if you want to buy a large quantity) versus 22 cents in March 2002.

Third, we have plenty of other meat. Beef production is over 5% larger than last year, while U.S. pork production is up nearly 1.3% and chicken is still 4.7% larger than in 2005. Interestingly, those numbers in 2002 were +4.5%, +2.8% and +4.5%, respectively, in early-March 2002. So we had plenty of meat available then, too.

The concern of course is that any slowdown in chicken exports will cause pork and hog prices to fall as they did in 2002. Figure 1 shows that the magnitude of the reduction on hog prices was considerably greater than the magnitude of the reduction in 12-city broiler prices. The second stoppage of shipments to Russia in August 2002 drove hog prices to cycle lows and caused some huge troubles with basis levels in September 2002.

Chicago Mercantile Exchange (CME) Lean Hogs futures did not react very negatively to the news on Thursday, with contracts losing 20 to 35 cents. Any indication of a lengthy delay in resuming chicken exports will be very negative for futures prices.

Canada's Sow Herd Slippage Continues
Statistics Canada released its April Hog Statistics report on Wednesday, and the numbers show a continuing slow decline in Canada's breeding herd from both last year and last quarter. The Canadian herd now numbers 1.641 million breeding animals, 0.4% fewer than on April 1, 2005. Ontario and Quebec accounted for the entire reduction in Canadian numbers.

The shocking numbers in this report, though, are the market hog numbers and especially those for pigs weighing less than 20 kg. (45 lb.) Those numbers are 5.7% smaller than last year, with inventories in Ontario coming in nearly 9% smaller. We expected lower numbers in the east due to well-publicized problems with PMWS (since renamed porcine circovirus-associated disease or PCVAD). What we didn't expect were 8.8% fewer lightweight pigs in Manitoba!

A good portion of this decrease, though, is attributable to elevated pig exports to the United States -- most likely due to duties on imported corn. Canadian exports of lightweight pigs to the United States during February and March (roughly the time period in which pigs weighing 20 kg on April 1 would have been born) exceeded last year by 174,623 head. Had those pigs stayed home, Canadian light pig inventories would have been down only 1.9%. These trade spats matter.

I look for these pig exports to slow now that the duties have been ended, but I also expect the Canadian sow herd to continue to shrink slowly. Canada will remain a major supplier of weaned and feeder pigs to the United States, but that just isn't as attractive with an US$0.87 Canadian dollar as it was with a US$0.63 Canadian dollar back in early 2002.




Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com