The talk of the meat/poultry complex this week is about avian influenza H5N1. The disease is now moving rapidly across Europe and has been identified in several countries in Africa. It appears the disease will affect all of Europe and Asia, and control measures such as vaccination are now being employed to limit its impact.

The question I have been asked most often is, "What will happen if and when it hits here?" From what I know, the proper answer to that question is "when" not "if" it will strike the United States. In spite of the fact we are an ocean away from infected areas, this virus is going to be quite widespread, and modern mobility will almost certainly carry it to the Americas.

The answer regarding H5N1's market effects is, to me, dependent on one factor: consumer reaction.

If consumers react in fear of contracting the disease from chicken meat, chicken demand will fall, and pork, beef, turkey, seafood, etc., will fill the protein gap. Demand for those products will rise and prices will increase.

If consumers do not fear chicken meat, they will likely respond to larger domestic chicken supplies (all or most exports will be blocked at least momentarily and exports from some regions may be blocked for a longer period of time), and resulting lower domestic chicken prices, by buying more chicken, and thus reducing the demand for other proteins.

We have a model for this behavior: European and North American reactions to bovine spongiform encephalopathy (BSE). Europeans reacted to BSE by reducing beef consumption and increasing the use of other proteins. North American (especially Canadian) consumers did just the opposite -- they did not fear BSE, saw lower beef prices and took advantage of them, thus reducing demand for pork and other proteins and driving hog prices down.

There are good reasons for the different reactions. Europe's governments botched the BSE situation badly by withholding information and dragging their feet on taking action. Add that to Europeans' apparent general mistrust of their governments and one can understand the fearful reaction.

On the other hand, the governments of Canada and the United States were more open and above-board and reacted immediately and publicly to the BSE situations. In addition, Canadian and U.S. consumers had the benefit of knowing that Europe had seen no widespread epidemic of supposedly BSE-related new variant Creutzfeld-Jacob Disease (nvCJD). They thus reacted quite rationally to lower-priced product: "We'll buy more, thank you!"

So will North American consumers react the same way to avian influenza H5N1? They will have the same benefit of hindsight, but we don't yet know how the human side of H5N1 will play out in Europe. On the other hand, H5N1 doesn't have a multi-year incubation period, so any infections that come will be visible quickly, and thus have a more immediate impact on consumer behavior.

I don't know the answers but those are the kind of factors I will be watching over the next several months.

Roller-Coaster Hog Market Possible
The market result is likely to be high levels of volatility. That's not all bad since it probably means some peaks to go with the valleys. Getting from one to the other may be rather hard on the nerves, so get ready. Are you fond of roller coasters?

Figure 1 shows daily charts of Chicago Mercantile Exchange (CME) Lean Hogs futures for June, August, October and December as of Wednesday, March 1. After very tough sledding for all of December and January, all of those contracts had gotten within $2 of the contract life highs this week, and the technicals point to continued strength. Most or all of those summer contracts could get into the $70s if cash hogs continue to strengthen seasonally.

The fall contracts are back in the black for good producers and historic data tell us that they normally peak in April so producers should watch those as well.

Follow Futures Markets Closely
For the umpteenth time -- watch these futures markets closely and know what a given price means for your margins. Beginning in 10 days, you will be able to sell spot-month futures contracts for five months. During that time, you won't have to deal with the often-erratic behavior of basis in non-spot months.

Think of your decision process this way: Every day represents a buyer for all of the hogs you will produce over the next year. You can sell part or all of them or hope a higher-bidding buyer comes along. Wait long enough and you will have to put the inventory on "Blue Light Special" to the highest bidder in order to clear the space for new inventory. That may or may not be a good thing.

You didn't realize you were making the same decisions as the Wal-Mart or K-Mart manager, did you?




Click to view graphs.

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