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Export Expectations Adjusted

Article-Export Expectations Adjusted

Export sales in May 2007 continued a disappointing trend. Year-to-date export volume through May was down 4.7% vs. one year ago (see Figure 1). As we've seen all year, the biggest problem for U.S. exporters is Mexico. May shipments there were 24% lower than last year. That is a slight improvement relative to April, but it's still disappointing for our second-largest market in 2006. Year-to-date shipments to Mexico are now 30% below those of January-May 2006.

It still appears that higher tortilla prices are the main driver for lower pork exports, but another factor may be weighing on U.S. shipments. Fiona Boal of Rabo International pointed out to me this week that Rabobank representatives in Mexico report that Mexican producers have been reducing the size of their herds due to higher feed costs. Those reductions have put more product on the Mexican market, driving down prices and reducing the need for U.S. product. This reduction is likely to wane as hog numbers reach more optimal levels and feed costs fall in light of a larger expected U.S. corn crop. Both of those may help exports later this year but will probably not drive shipments to Mexico up on a year-over-year basis by year's end.

Year-to-date shipments through May were also lower to Russia (-26%) and Taiwan (-42%). Japan has purchased 10% more pork this year while 3% more U.S. pork has been shipped to Canada. Both China and Hong Kong (still kept separate in USDA accounts) have purchased 38% more U.S. pork this year.

China has purchased 19.442 thousand metric tons (21,431 tons) as of May 2007. If the rumors are true, China will buy two to three times that much in the near future. That would be a large shot in the arm indeed -- if the United States and China can solve this week's troubles over ractopamine and alleged food safety issues. I find it almost laughable that China would throw such a fit over food safety given the nature of the country's food system. But this spat is as much about melamine (and our negative but true statements about adulterated feed ingredients) as it is about ractopamine.

The good side of the export news is that the value of exports is still higher this year. Just over $1.086 billion of U.S. pork was exported during January-May, a 6.1% increase over a year ago (see Figure 2).

Exports to China Drive Futures Rally
The rumors of significant exports to China and last week's slaughter run that was just barely larger than one year ago helped continue the increase in Chicago Mercantile Exchange (CME) Lean Hogs futures this week. Contracts for October, December, February, June and July all hit contract life highs yesterday, while April and May 2008 are within $1 of their contract life high. The eight futures contracts that cover the next 12 months averaged $73.66 carcass ($55.25 live) at Thursday's close.

The rally of the past two weeks has added $10 to $15 to the value of every hog. The rally shows no technical signs of being over, so there may be more to come, especially if we see some actual shipments to China.

More Acres, More Rain Helps
USDA's increase in harvested acres for corn and rains across the Midwest this week also helped the feed cost situation. As can be seen in Figure 3, the costs of soybean meal and corn to make a 16% crude protein hog diet has fallen by $20-30/ton over the past month. Allowing roughly one-third of a ton of feed for a market hog means that the feed cost reduction has added $7-10/head to producers' bottom lines.

Put the two together and we have seen potential producer margins for the remainder of 2007 and all of 2008 increase by $15-25/head in recent weeks. Those margin increases may persist and be reflected in cash markets next year but, then again, they may not. Look carefully at your potential costs and income given this change in futures prices. It may well pay to lock those margins in on at least a portion of your production for the next 12 months. The rally at least begs you to pay attention!

Click to view graphs.

Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: [email protected]