USDA’s quarterly Outlook for U.S. Ag Trade, released last week, contained some very positive information for U.S. pork producers. The quantity of U.S. pork exports is expected to grow by 1.6% in 2011, but USDA predicts the value of those exports to jump by nearly 20%. As I have pointed out before, exporting large volumes is nice, but bringing back even larger amounts of cash pays the bills! Should those two figures come to fruition, 2011 exports will be very close to the 2008 record, and 2011 export values will shatter the existing record, also set in 2008.
The report also contained forecasts (or perhaps a better characterization is “assumptions” for this report) regarding macro-economic variables which are so important when one is dealing with trade issues. The forecasts for U.S. and Canada gross domestic product growth were 1.6% and 1.5%, respectively. Those percentages are a bit conservative relative to some that we have seen. Europe is forecast to grow at roughly the same rate as Japan. Mexico and Korea are both near 3.5% for 2011 growth, while Brazil (+4.0%), India (+5.9%) and China (+8.6%) are, as expected, predicted to be the areas with the most robust growth (Figure 1).
Exchange Rates Bad News for Canada
Figure 1 also includes forecast/assumed changes in exchange rates for 2011, and those are all down for the U.S. dollar. Of particular interest, of course, is the estimate that Canada’s dollar will appreciate by 7.5% vs. the U.S. dollar. That number is larger than any I have seen in other places and would put the Canadian dollar at an average of US$1.05 for the year, meaning that some weeks would almost certainly be above the weekly record of US$1.07 back in November 2007.
That, of course, is not good news for Canadian producers since it means fewer Canadian dollars in revenue. The decline will be large enough to offset most or all of the feed cost advantages currently seen in the prairie provinces.
We hope these forecasts/assumptions are a bit overdone, but the truth is that higher oil prices will put continued pressure on the U.S. dollar relative to Canada’s currency. As the University of Missouri's Dr. Ron Plain points out frequently, there is a lot of oil and gas flowing south from Canada to the United States. As prices rise, more U.S. dollars flow northward and those opposing flows almost guarantee a depreciation of the U.S. dollar and appreciation of the Loonie. Don’t expect this pattern to change materially any time soon with crude oil futures now above $100/barrel. We Yanks still love driving our cars – a lot!
Cold Storage Reflects Larger Inventories
Last week’s Cold Storage report indicated higher inventories of both meat and poultry vs. one year ago (Figure 2). Total meat and poultry in U.S. freezers amounted to 2.054 billion pounds on Jan. 31. That is 9.6% higher than last year but it is important to note that last year’s inventories were very low on a historical basis. Looking at the top line in Figure 2, which is read off the right-hand vertical axis, one can see that current frozen product inventories are still relatively small from a historical perspective. They are certainly not large enough to be overly concerned about at this time.
Chicken stocks did decline during January, but every product category except thigh meat showed an increase over year-ago levels. Leg quarters, wings and “other” chicken accounted for over 70% of the increase in chicken inventories from last year. The 35-million-pound increase in wing inventories (up 229% from last year!) is truly shocking given the run that this high-quality (written with dripping sarcasm) product has been on. And wing prices reflect the buildup. They were $94/cwt last week vs. $168/cwt one year ago! Maybe they need a new sauce.
Pork inventories were 10% larger than last year and nearly 14% higher than in December. Part of that increase is higher output, but January production was only about 3.4% higher than in 2010 so that is not the complete explanation. Ham stocks accounted for nearly 60% of the year-on-year increase and were up 39% from last year and 49% from December. January’s increase of 65 million pounds for frozen pork stocks was not significantly larger than the normal December-to-January increase of 52.2 million pounds.
In and of itself, the Cold Storage report was not good but not alarming, especially given that beef, pork and chicken production are still larger than one year ago. I expect year-on-year growth to end as we go into this summer and for meat and poultry in cold storage to remain in the lower half of the historical levels.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.