Tuesday's release of export data for July was a bit of a shock for the pork industry in that it showed the first year-over-year monthly decline (-4.1%) since November 2003. While negative numbers for export growth are never good news, I don't think this is anything to get alarmed about, at least not yet. Consider:
- Year-over-year comparisons for exports to Japan returned to the minus side of the ledger in July after June finally showed year-over-year growth. But the decline in July vs. last year is not a big surprise given the extremely high level of shipments to Japan last year. It's obvious from Figure 1 that the month was unusual -- July exports are usually lower than June exports. Last year, though, July shipments were extremely large because some product was delayed as importers tried (successfully!!) to avoid triggering Japan's safeguard tariff at the end of Japan's fiscal first quarter. We heard that pork was sitting on ships in Japanese harbors in late June so it could be offloaded after June 30 and thus, not count in first-quarter safeguard computations. It should be noted that this year's exports in July were the second-largest on record.
- Japan's imports of chicken from the United States nearly doubled in June and July vs. one year ago. Industry sources report that shipments from Brazil grew even more. I still contend that the data in Figure 1 do not support bovine spongiform encephalopathy (BSE) as being the reason for excellent export performance to Japan in 2005. The trend line in this graph is based on monthly data for January 1996 through December 2003. I think actual exports should be deviating from this trend consistently if BSE was the cause for the increase. A much more plausible explanation is Japanese fear of chicken due to human deaths in Asia from avian influenza. That explains the surge in 2005 and the recent return to more normal trend line growth --- albeit below the 2005 levels.
- U.S. pork prices rose significantly in late May and June. While we ship a lot of high-value products to Japan, I'm confident that the demand curve for pork slopes downward (i.e. less product is purchased when prices are high) in Japan just like it does in the United States. It is quite possible that the quick increase in product prices cooled some orders.
- Finally -- you just can't win them all by six touchdowns! The U.S. pork industry has had an unbelievable run of export growth and year-to-date shipments are still 12.4% larger than last year. We have already shipped more pork products overseas this year than we did in all of 2003.
Any slowdown will, however, cause prices to move back toward expected levels. Hog prices have outperformed expectations for much of this year, but output growth in 2007 (USDA pegged it at 2.8% in Tuesday's World Supply and Demand Estimates (WASDE)), and a slowdown in export growth could increase domestic per capita pork availability next year.
Corn Crop Pegged at Second-Largest Ever
The good economic news this week came in the form of further confirmation that corn will be plentiful -- for at least one more year! USDA's September Crop Production Report pegged the average yield at 154.7 bushels/acre, the second-highest yield ever. Even with this year's lower planted and harvested acres, that yield will give us a corn crop of 11.114 billion bushels, just larger than last year's crop and the second-largest ever. Some changes in predicted exports and carry-in stocks lowered predicted 2007 carry-over stocks slightly, but USDA now predicts '06-'07 corn prices will be about 17.5% higher than this year.
Chicago Mercantile Exchange corn futures have adjusted in recent weeks to reflect a more normal "carry" for the 2006 crop into late 2007. A few weeks ago, there was a significant premium in corn futures for 2007 and beyond. Producers should get as much cash corn as possible in hand at harvest lows. Corn demand is going to do nothing but grow over the next two years as ethanol plants are built on every other corner. All right, that is an exaggeration -- but not much of one! The corn market will buy acres, but the predicted tight 2007 carryover will still make corn markets explosive if dry weather of any significance develops.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.