As I begin this week’s column, I’m reminded of two different “flip side” statements that may help characterize the topic at hand. The first is the old Archie Campbell schtick – “That’s good – no that’s bad,” which I have used before. The second reflects President Truman’s frustration with economists’ incessant use of the qualifier – “on the other hand” – to introduce the contrary opinion on a given topic. President Truman once demanded in his usual colorful language: “Will someone please find me a *!&%$*?>
At the risk of again being accused of being such an economist, let’s talk about the value of the U.S. dollar and its implications for U.S. pork producers.
To say the dollar is cheap is an understatement. Figure 1 shows the weekly chart for the nearby dollar index futures contract. As can be seen, the index has fallen by roughly 15% since March 2009, and is once again approaching the lows of March through July 2008.
Those lows, of course, coincide with the remarkable run-up of pork exports last summer and pre-dated the collapse of credit markets and the worldwide economic crisis last fall. Just when U.S. dollars looked worthless, the entire world decided the United States and its currency, in spite of our problems, were still the best safe haven available. The dollar gained 20% in four months.
But dollars are a commodity, too, and when the supply of a commodity grows faster than the demand for that commodity, its value falls. The U.S. Treasury and the Federal Reserve Bank pumped trillions of U.S. dollars into the economy last fall and winter. But the dollar’s value did not fall because demand for those dollars was growing just as quickly as the supply. Much of that demand came from banks that needed cash to shore up very shaky balance sheets. Thus, dollars flowed out and bank reserves grew and many asked: “Where are the dollars that are supposed to be freeing up the credit market?” The answer from banks was: “In our vaults, where they are needed.”
Those dollars are now entering the economy and the dollar’s value is falling. Good news, right? Yes, indeed, if you are an exporter like the U.S. animal protein sector. The weaker dollar should push more U.S. beef, pork and poultry into export markets. No doubt, that’s a plus.
Competing for Corn
But on the other hand, the weaker dollar also means that oil prices are rising. The weekly nearby crude oil futures chart (Figure 2) broke through $80/barrel last week, reaching its highest level since October 2009. In addition, the weaker dollar has made other U.S. commodities such as corn, soybeans and wheat, more competitive in world markets, which has contributed to recent price strength there as well.
The impact is a double-whammy for corn, however. Not only does the weak dollar encourage corn exports, but higher oil prices have put ethanol refineries firmly back in the black, encouraging higher bids for corn from them as well.
So, who will win in the coming year – hog prices or feed costs? I don’t know the answer to that. There are simply too many factors at play here to make that call. I do think U.S. livestock and meat prices will be higher, but I do not think they are going to result in profits of any significant magnitude. Costs are likely to rise as fast as revenue – much like they did in 2008.
Chicago Mercantile Exchange (CME) Lean Hog Futures held up well this week in the face of the news that a pig tested in August had indeed been infected with the novel H1N1 influenza. The facts that a) the case was isolated and b) it happened two months ago were fortuitous to say the least. The fact that the story broke the same day as the “balloon boy” fiasco was positively wonderful! Futures prices, cutout values and hog prices have held their own in spite of an onslaught of H1N1 cases and stories. Those are all good!
Futures markets are still offering some profits in 2010. Watch them closely for opportunities to put some black ink on your bottom line. CME Group Lean Hogs futures are still trending upward, but producers should watch closely for signs that the market is making a top.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.