farmgate: Niche Markets, The Olympics, And The US Pig.
Thousands of farmers who have tired of producing a commodity for minimal return and ventured into specialty crop production have found a niche market to fill. Surprisingly, pork producers across the Cornbelt have found a niche market for their product and may not even realize it. Today’s pork producers are benefiting from a surprising development.
Pork producers are well aware that record high slaughter rates and record high corn prices have collided in a sea of red ink on their balance sheet. But several prominent livestock economists have cited a significant increase in pork exports that has pointed toward a recovery of profitability. Purdue economist Chris Hurt in his weekly newsletter says cheap US pork, subsidized by producer losses and the weak dollar have made the pork export market more important than the corn export market. To prove his point, Hurt says 19% of US corn was exported last year, and 16% will be exported next year. Pork producers exported 23% of their production last year and 22% next year.
Missouri livestock economists Glenn Grimes and Ron Plain, in their latest newsletter, say, “For the first six months of 2008, pork exports are up 193% from the same months of 2003 or a growth of nearly 39% annually on average.
The interesting phenomenon pointed out by Hurt is that US pork production continues to increase, but less pork is available for the domestic consumer market. He says production has increased 9% since the first of the year, but there is 6% less pork available at the meat counter. It is being shipped abroad with the help of the exchange rate that makes US commodities relatively cheap. Likely to continue is the decreasing availability of pork. Hurt says supplies will be down 8% in the current quarter and 9% in the next quarter, with 2-3% less pork available in 2009, supplies will be tight for the US consumer over the next 18 months.
What does this say about pork values? Grimes and Plain say, “In the first six months of 2008, pork exports in value have amounted to $35.14 per hog slaughtered. Pork variety meat exports added another $5.10 per hog slaughtered. Total exports amounted to $40.24 per head for January-June of 2008.” That is significant for a $55 hog price, which Hurt predicts for this year based on lean hog futures.
Will this trend continue? When Hurt looks at one of the primary reasons for the increase in pork export trade, he’s not certain that it has a long tenure ahead of it. Much of the business has come from China, which has not only suffered disease within its pork industry and lost that production, but has made significant political purchases in connection with the Olympics. More pork in Chinese grocery stores makes the citizenry happy and more pork in restaurants makes visitors happy. Additionally, Russia has also been a significant buyer by making 13% of the US purchases. Hurt says Russia shops for values, which the value of the dollar has provided. A stronger dollar or a competing market would shift the Russian purchases away from the US.
Will profitability return to pork? Hurt says yes, with an asterisk. He says hog producers can compete if high corn prices hold. He calculates that hog producers will be able to pay about $6.25 per bushel for corn in 2009 and still breakeven compared with only $4.00 in calendar years 2007 and 2008. However, pork production must decline, foreign demand must continue, and the price of crude oil must hold steady and not push ethanol and corn prices much higher.
Summary:
The pork industry has received significant benefits from foreign demand that have helped keep pork prices as high as they are. The value of the dollar has been attractive enough for importers to purchase US pork to the point that domestic supplies are expected to tighten up next year if the trend continues. Profitability in the pork industry will depend on continued strong exports, curtailing production, and stability in the price of crude oil.
Posted by Stu Ellis on August 27, 2008 12:48 AM to farmgate