My optimistic nature was rejuvenated and rewarded this week as the hopes for a change in market direction for hogs and pork were actually fulfilled. This week's rally wasn't a real bell-ringer, but daily moves with plus signs in front of them were a welcome respite.
Gains of $1-$3 for Chicago Mercantile Exchange (CME) Lean Hogs futures prices certainly help the outlook for hog prices. The biggest gainer, of course, was this year's previous biggest loser -- February. That contract goes off the board on Tuesday and is still selling at a $3.48 premium to the CME Lean Hogs Index. The Index, by nature of its construction (a trailing two-day average), usually lags moves in the futures market, but something will have to give to reconcile that difference -- and cash is king, especially in the latter days of a cash-settled contract.
While the rally hasn't been as marked in contracts from April onward, their prices have improved and suggest some recovery in this complex. There still appears to be plenty of risk and, while most producers may have the strongest balance sheets they have ever had, some risk protection is likely prudent. Watch these rallies for selling opportunities. Summer futures could be back above $70 soon. How many times have you actually sold very many hogs for live prices of $50 or better and done it in the third year of a hog cycle?
Animal Health Concerns Continue
Animal health situations continue to affect world meat markets. Argentina announced today that they have identified 70 animals infected with foot-and-mouth disease. Argentina was the sixth-largest net exporter of beef in the world in 2005, so any disruption to their exports would be a major issue in world beef trade. The case is in northern Argentina, and that has prompted Brazil to announce that it will step up border-monitoring activities. Brazil is the world's largest beef exporting country.
In addition, the highly pathogenic H5N1 strain of avian influenza has been found in Nigeria. This presents a real threat to European poultry flocks since there are several species of birds that migrate from western Africa to Europe.
How will Europeans react to chicken and turkey if H5N1 is found there? That's a hard one to read. Consumers in Asia backed away from poultry when bird flu became widespread, and affected humans there, and the same trend appears to have happened in eastern Europe in recent months. European consumers are likely better informed and more highly educated than some of these other groups, but they are also the ones who brought the world the precautionary principle in their apparent effort to avoid all risk.
Perhaps the more important question is "What will the European Union (EU) do if it has to destroy a large portion of Europe's poultry flock?" It's hard to imagine the EU opening its doors very wide to imported poultry to fill the production gap that such a depopulation might cause. The last time I checked, they still weren't too keen on any kind of food imports. I don't really expect this situation to change that.
Canadian Pig Imports Climbing
Pig imports from Canada are on the rise. While the import totals of the past two weeks have been lower than the week that ended Jan. 21 (the largest week of imports since before the antidumping duties were imposed in October 2004), the trend is definitely up (see Figure 1). That trend dates back at least to last summer when the duties were lifted, but it appears to have picked up steam since Canada's corn duties were announced in December.
A more telling story may be that of pig prices (see Figure 2). Spot prices for weaned pigs have fallen by more than $15/head since Christmas. While pig prices usually peak in mid-winter and fall into the spring, this decline is both early and severe. I had expected the price graph to send us the first signals of more pigs being available in Canada, and I think that expectation is being met. Whether the pigs come across the border or not, the fact that they might can have a negative effect on U.S. prices. Contacts in Canada believe that some pigs will be sold here, but that many producers are trying to custom feed pigs in the United States.
Downers Latest Japanese Trade Ploy
And finally, a senior agricultural official in Japan now says that the United States must explain reports of "downer" cattle being used for meat in the United States before exports of U.S. beef to Japan can continue. That doesn't make much sense to me, and appears to be another step by Japan to use the goofed-up beef shipment as a reason to call the United States on the carpet. Each of these public statements will slow down both the process of reopening the border and the recovery of Japanese consumer confidence. I still think the latter will be the more critical issue for U.S. beef -- and could take awhile for sure.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.