U.S. pork exports continue to grow at a torrid pace this year -- much to the benefit of U.S. producers and packers. Commerce Department and USDA data released last week show total U.S. exports for March were 23% larger than last year. That number is right in line with January and February (+20% and +23%, respectively) and the entire year of 2005 (+22%). All of those numbers represent muscle meat shipments on a carcass weight equivalent basis.
Figure 1 shows exports by destination and one thing is clear: This year's excellent export performance has not been helped at all by trade with Japan. Shipments to our largest foreign customer have been lower than 2005 in each month thus far, and stood 7.8% lower for the year at the end of March.
That's bad news and good news. The bad news, of course, is that sales to Japan are down and we have to wonder why. For those who attribute recent strength of pork exports to Japan to their lack of U.S. beef, this downturn cannot be credited to the resumption of those exports since they were quite short-lived back in January. It is also not likely to be a currency issue, since the yen was basically steady near its most recent peak in mid-December through the end of March. It has actually strengthened since April 1 -- a development that bodes well for shipments from here forward.
I have argued for some time that the surge in business with Japan was more a function of avian influenza fears than of the lack of U.S. and Canadian beef. I can't prove that since the answer lies within the minds of Japanese consumers. However, there is anecdotal evidence that fears of chicken are waning, thus shifting some pork consumption back to chicken. U.S. chicken exports to Japan were 34% higher in March this year vs. March 2005, and year-to-date chicken exports to Japan are up 7.4%.
Readers should note, though, that our chicken exports to Japan so far in 2006 are only 6% as large as our pork exports. The -7.8% for pork and +7.4% for chicken represent vastly different actual amounts. One must always be careful with percentages!
The good news of the Japanese situation is that U.S. pork exports are becoming more and more diversified. The biggest volume growth in 2006 is to Mexico, the destination for nearly 37,000 metric tons more U.S. pork thus far this year. That represents an increase of over 38%, after only 1% growth in 2005. Other growth countries through March 31 are Russia (up 148%), Taiwan (up 72%), Korea (up 59%) and China-Hong Kong (up 50%).
Through March, Japan represents 31.7% of U.S. pork exports vs. 39.3% for 2005.
What's on the Horizon?
Export business is just one factor that has supported hog prices in recent weeks. Some stability in beef prices and very slight improvement in chicken prices have removed some of the negative sentiment in the meat complex. Rising cutout values resulted in some $50 live hog quotes this week and Chicago Mercantile Exchange (CME) Lean Hogs futures have held their late April gains and, in a few instances, most notably December, are challenging contract life highs.
Where will futures go now? Well, history says that they may well begin their seasonal decline. Figure 2 shows weekly futures prices since 1996. The small arrows are positioned on the second week of May for each year. They are also positioned in almost every case very near the seasonal high for futures.
Note that the arrows are pointing to a time when the nearby contract is June, and that contract trades for another 20 or so days before the bars represent the July contract. But in just about every case, July and then August futures prices are lower than were the June prices (and often significantly lower), even though they were nearly as high in mid-May of those years.
Will this year be the same? Good question, but remember that chicken companies have been producing a lot of product and their "cutback" announcements have basically been "we're not going to expand by quite as much as we had planned." Feedlot inventories remain record large and those cattle will definitely come to town at some point.
The recent rally has been good and has carried all contracts to potentially profitable levels depending, of course, on feed costs. Think about what the current margins would mean for your profit and loss statement come December.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com