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June 11, 2018
In the wake of World Pork Expo, let’s explore some of the things that were hot topics and try to put some structure between the “what” and the “why”.
For starters, we entered WPX on the heels of Mexico issuing a tariff on hams. Great timing. Everyone knows that Mexico is our No. 1 client for U.S. pork, annually taking roughly half of the hams we produce. This is seen as The Big One when it comes to importance to U.S. exports, and I think that is a valid assumption. When our president is seemingly on a mission to alienate our friends and provoke our enemies regarding trade, our industry is caught in the flow and it is probably no surprise that retaliation follows.
What do we know about this situation?
First, remember that Mexico is accustomed to receiving fresh product from the United States. Product from any other major exporter (Chile, European Union, Brazil, Canada), sans our friends from Canada would arrive frozen. The Mexican ham processing industry is not currently equipped to manage a frozen product.
Second, Mexico was buying hams from the United States for a very good reason — we were and are the most reliable, long-term, price-competitive supplier of product. Of all the major exporters, the one most plausible to pick up the business is Canada. Wait! You would have to drive all the way across the United States to get there. Let’s just assume that the current 10% tariff (ostensibly moving to 20% on July 5) is in place and then let’s assume that hams are worth 60 cents per pound, originated in St. Joseph, Mo., and are being replaced by product from Maple Leaf in Hamilton, Ontario. The difference in mileage is about 800 miles. At $2.40 per mile with a 40,000-pound load, the freight alone is roughly $0.05 per pound. That is only $0.01 per pound net spread from where we sit right now with the 10% tariff in play.
Remember when I shared that we were already the cheapest supplier to the Mexican market? By how much? Probably more than $0.01 per pound. Even if the hams do move from Canada to Mexico, that means that wherever the Canadian hams have been going is now short and will need to buy something.
I have walked through some of this mathematical mastication to make a point. If Mexican buyers thought this tariff situation was permanent, they may change some of their thought processes regarding long-term logistics and freight. If they think it is a short-term item, like I do, then it is little more than an inconvenience with minimal real money implications. In my opinion, the biggest damage from all of this posturing is putting a doubt into our customer’s head of the reliability of supply from the United States going forward. That would be enough to get stirred, not shaken.
The second most talked about topic seemed to be one of expansion or the cessation thereof. Are we backing off expansion plans? Not as far as I can tell. Conversations with a couple of different construction folk indicate plans still in place through 2019. If you have initiated a project, you are likely to see it through. If you are considering a project, it may be put on hold. It seems to me that we simply have not experienced enough economic difficulty to change direction. What looked like $20-plus per head profits coming into the year have been fading to closer to $5 per head, but have not turned red enough long enough to change the trajectory of expansion. Let’s hope we remain profitable (even if it is light green), but I have my doubts.
The third thing that was talked about as I roamed from tent to tent eating free ribs and chops was the nice rally in the summer months. I wish I had a dollar for everyone who asked me “why”. Here is what I suspect. The heat we had in May slowed down hogs much earlier than we typically see. Des Moines had its earliest records for 100-degree heat (actually, two days in May eclipsed 100). Weights are falling by, perhaps, a slightly quicker pace than we would normally anticipate as we approach the summer months which begs the question — are we pulling pigs forward and that is why the weights are falling — or — are we simply experiencing slower growth and there are enough animals in the barn to keep the March Hogs and Pigs Report square? I suspect it is the latter combined with something else we normally do not expect — the cutout value trading on par with the cash market. Packer margins are razor thin yet they keep numbers rolling through their plants. Why would they do that? I suspect it is a labor situation. You know you are going to need every person working long hours through the fall and winter, so you do not want to deprive them of hours and income now in a tight labor market, and thus you operate a little closer to breakeven than you would normally expect. This is, of course, a double-edged sword as packer profits squeezed now will be eyed for later in the year to keep the stock price and corporate stakeholders happy. I also suspect that none of them is willing to voluntarily forfeit market share at a time when the field of players in the processing industry is getting a bit more crowded.
This brings me to my next point. When asked if it is advisable for producers to participate at $80+/- for the summer months versus holding out for something better, I revert to our economic models that show fair market value somewhere in the neighborhood of $5 per carcass hundredweight lower than current values. Yes, I think we need to reward the recent bump on the board at profitable levels.
The last thing I wanted to address in this column was the informal survey I conducted during my presentations in a very warm tent. When asking the audience about corn conditions, not one hand went up for the opportunity to respond to “things do not look so great in my area.” I do not think we can assume that the group of free pork chop eaters all came from the same place and the crop progress reports share the same theme of good crop conditions. We are off to the best start in history. I believe achieving a national average crop of 180 bushels per acre is not out of the question and the market seems to believe that, too. We have a crop report out on Tuesday. A quick review of history has two incidents where we amended our yield projections from the May report to the June numbers, both of them downward revisions (2009, 2013) when things got off to a poor start. I am not looking for any fireworks from the Tuesday report, July precipitation is now the key (only?) thing to concentrate on to determine yields and price direction. As of this writing, the July contract is under pressure to a degree that should dry up farmer selling. You are not allowed to go to sleep on this one, it is just not your primary concern.
Bottom line: things are getting better for the pork producer, both in terms of a nice little revenue bump and a fade in input prices. Head East had a song a few years back with a verse along the lines of “save my life I’m going down for the last time”. While we have a chance to operate with our head above water, seems to me to be a good time to act and secure profits.
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