Watch your e-mail this weekend for our summary of today's USDA Hogs and Pigs Report. The report will be released at 3 p.m. eastern standard time.
I have spent a good deal of time over the past few years trumpeting the exporting success of the U.S. pork industry. It is a record of which producers and packers are duly proud: 15 consecutive record years, growth of nearly 75% over the past three years, and nearly $27 worth of products (both pork and pork variety meats) exported for every pig slaughtered in 2006. Those all add up to a significant contribution to producers' and packers' bottom lines.
I don't talk much about Canada's success but it is, if anything, even more impressive.
The Role of Disease Prevention
Audiences have rightfully questioned, especially in the aftermath of the Bovine Spongiform Encephalopathy (BSE) disruptions on both sides of the border, "How much is too much dependence on exports?" In true economist fashion, I have responded, "That depends." Of course, that answer isn't too satisfying, and audiences have unreasonably wanted to know, "Depends on what?" It's funny how people want to know the whole story when they get a small taste, isn't it?
In fact, determining the optimum proportion of sales, which are dependent on exports, is a very difficult undertaking. I will not attempt to arrive at a magic number since I doubt that one exists and it will change rapidly as a host of underlying variables (exchange rates being a big one!) change. There are a few relationships, though, that I believe we can count on.
First, the optimum proportion of production devoted to exports will be higher if the probability of having an export-disrupting disease is lower. This means that as the industry depends more and more upon exports, it should devote more and more attention and resources to biosecurity at our borders to keep diseases out.
Second, the optimum export level increases as our ability to identify and control a disease outbreak improves. A key strategy in handling diseases such as foot-and-mouth disease or classical swine fever (hog cholera) is to quickly regionalize the disease so animals in other parts of the country can move and exports from those non-infected areas can resume. Diagnostic systems and animal tracking (premise and animal identification) are key components to enable relatively quick regionalization.
Third, controlling a disease outbreak must take priority over virtually every other goal, at least in the first few hours and days of an incident. That's not a comfortable position to be in because some "innocent" people are going to get hurt, animal and product flows are going to be blocked, and markets are going to be disrupted. And all of that could happen even though no trade-disrupting disease is actually found.
Foreign Animal Disease Impact
Some readers may not know it, but we looked into the abyss of this matter on Wednesday when a load of Canadian pigs was quarantined at a Minnesota packing plant under suspicion of foot-and-mouth disease (FMD). Laboratory test results showed the pigs only had enterovirus and circovirus, but USDA's Animal and Plant Health Inspection Service (APHIS) was apparently quite concerned. APHIS head Dr. Ron DeHaven pointed out that USDA investigates 400-500 potential trade-disrupting disease outbreaks each year and that the agency does not usually report negative test results. But this one occurred at a packing plant, and word had spread that a potential problem existed, so APHIS felt compelled to respond.
And what might have been the impact had FMD been confirmed? I'm no expert but FMD in Canadian pigs on U.S. soil would, I presume, mean that exports from both countries would have been blocked. In 2006, the U.S. exported 2.397 million metric tons (mmt) or 2.642 million tons of carcass-weight pork, 14.2% of total production of 9.562 mmt or 10,540 tons. Using a hog demand elasticity of -.25 (and thus a price flexibility of -4), forcing that much product back on the U.S. market would drive prices downward by roughly 57%.
So, we would have to deal with about 20% more product in the Canadian-U.S. market for the short run if a foreign animal disease outbreak affected both countries. Using a hog demand elasticity of -.25 and thus a quantity-to-price multiplier of -4, this would imply an 80% drop in hog prices. That is a very shocking number and it is possible that consumers would rally to the aid of producers just as Canadians did with the beef industry in 2003 -- but the impacts would still be catastrophic.
I hate using poultry analogies, but we indeed have a lot of eggs in this export basket. It is imperative that everyone on both sides of the border do everything possible to reduce the probability of a foreign animal disease outbreak. The price of failure is quite high.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.