Last week’s news that Russia and China will reopen their markets to U.S. pork was certainly good news. It should provide yet another opportunity to sell hogs at very profitable prices this summer and, by most estimates, at a profit even for the fourth quarter of this year.
The reality, however, may not be quite as great as the good feelings that followed the announcements. And, there is the underlying question about whether actual demand this summer will live up to the expectations of the futures market.
Here’s the reality check. Our tariff rate quota to Russia is about half as large as it was last year. While some believe we will be competitive enough to ship pork at the out-of-quota tariff of 75% that could be a tough trick if hog prices climb into the $80s.
Pork supplies in China are substantially larger this year as the government’s efforts to overcome the pig death losses of 2005 and 2006 come to fruition. In fact, hog profits in China are reportedly at their lowest level in 15 months. And remember, a fluctuating dollar has little impact on the price of U.S. pork in China since the yuan (or renminbi) is pegged to the U.S. dollar. The yuan/dollar rate was slowly reduced by the Chinese government from 2005 through mid-2008 (the yuan was allowed to gain strength), but has been flat since. Thus, there is no advantage for U.S. product vs. domestic product.
Hog Supply Considerations
It is always a bit risky to say too much about hog supplies one week before a quarterly Hogs and Pigs report, but last week was a bit of a milestone. The weekly federally inspected (FI) slaughter total exceeded the 2009 level for the first time this year. Part of the “mini-surge” was, of course, the result of the fire at Tyson’s Logansport, IN, plant and the subsequent one-week shutdown. That lost capacity no doubt pushed some hogs from the week of March 13 into last week.
But slaughter runs have been creeping higher and higher (Figure 1) since mid-January, and have been only 0.18% below the levels I expected since the first week of February, based on the December Hogs and Pigs report. My discussions with producers this winter have overwhelmingly confirmed that pigs were backed up in December and January as they learned to manage this year’s poor quality corn. One sizable producer told me that his pigs are running nearly 20 days behind their normal marketing schedule.
The historical relationship of 180-lb. and over and 120-179 lb. inventories to the pig crop two quarters prior suggest that next week’s numbers should be 2.4% and unchanged, respectively, from one year ago for those two categories. Don’t be surprised if they are higher, because some pigs have simply not grown as well this year.
The big question is whether this slow-down in marketings will be rectified before new crop corn becomes available this fall. The answer, of course, depends on how well the corn in storage can be managed and what the weather conditions will be this summer. Even with good management, I think it is safe to say that corn quality certainly will not get better until new crop corn arrives. In some areas, it may get worse. The chances of duplicating last year’s summer temperatures are quite remote, as well, so this back-up of hogs will very likely continue.
This winter’s poor performance should be reflected in next week’s Hogs and Pigs report, so we will get a new picture of expected hog supplies for the remainder of this year. I would not be surprised to see the new forecasts very close to and, perhaps, ahead of 2009 levels. Lower market weights this summer could take 1-2% off of year-on-year pork production figures, but it still appears that demand will have to carry the day if current futures prices are to be matched by cash prices this summer.
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Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com