Looking at a plot of hog prices for the last several months, one can clearly see that the industry is essentially in a deflated holding pattern – muted to next to zero. This is with seasonal price patterns, which originate from both seasonal supply and demand factors. It’s as though the industry has taken repose on a fainting couch and is lying there hoping it doesn’t slip off of the couch and hit the floor. There are widely varying profit/loss performances throughout the farms that produce U.S. pigs, largely due to previous hedging or margin-locking strategies. However for the most part, the overall doldrums and “death by a thousand cuts” advances everyday like some kind of macabre replay of the movie “Ground Hog Day.”
One thing is for sure; the medium-term fundamentals (two years ahead) are not encouraging, but such forecasts are always seeded with the often evaporating assumption of “all things remaining constant.” Here is a summary of the good and the bad as we look ahead.
Countries that depend on significant exports for their price level stability face a very uncertain and complicated future. The major pork importing countries (of which there are only a handful), remain in guarded condition economically and could easily fail to experience a significant recovery in the next couple of years. Japan is a classic example. Its economy collapsed in a bigger way than the United States over the last year, and while it has returned to a flat line, the big question is whether the massive stimulus it tried (like almost all modern economies) will peter out without stimulating real, underlying growth by business.
All of the signs of recovery in the world today are mixed signals. Future forecasts are heavily clouded by the current effects of one-time stimulus injections, which are in various stages of playing out. When they are done, we are left
with the real and sustainable economic activity, and at this point, there is very little sign it is on the road to recovery. The best that can be said today is that “collapsing” has abated. Even China, which has its own touted “green shoots,” has substantially cut back its forecasted demand for raw materials associated with growth for 2010, fearing overcapacity already exits (i.e., when its stimulus runs out). We will likely get a good lesson in what works in a serious recession—government spending to stimulate demand or government policy to stimulate business growth.
The path of the dollar over the next several months is almost certainly down as borrowing to fund deficits will force low returns on dollar-denominated holdings. And if rates have to rise on U.S. debt to continue to get takers, we face the daunting challenge of inflation and stagnation. Falling dollar values against foreign currencies raise commodity prices since many, like oil, are currently traded in dollars. Oil prices rise as the dollar gets weaker and tend to shut off further investment as the cost of recovery rises. While on the surface, this is an apparent good thing for U.S. exports like pork, we can clearly see that the commodity fuel of livestock production (feed prices) will rise with oil, so margins remain muted and illusory.
Additionally troublesome is the persistence of new purchasing habits. The longer the worldwide economic languishing, the more likely individuals will reset their purchasing patterns to the new reality and not change them quickly as incomes and employment return. Those of you with Depression Era parents and grandparents will get the idea quickly. Agriculture is certainly not recession-proof. While people have to eat every day (unlike postponing durable good purchases), the mix of calories on the plate can certainly take on a new and persistent look. Unsustainably low prices clear the meat markets today but they also create expectations about the price of food that will potentially make sustainable prices look exorbitant. Economizing behavior can then signal that a new, even lower level of production is required.
The good news is that recessions are historically always followed by recoveries sooner or later. Forecasts in the deepest part of a recession are always the most dire and unrealistic as the immediacy of the situation overpowers a longer-run, objective viewpoint. We will have a huge feed supply this year and that will take some of the worry out of a stocks-to-use crisis, which looms every year now that ethanol is a permanent part of the landscape. We will need record crops every year and this year we will be close enough to call it a winner. Feed costs should be more or less stable and predictable, but never use the word “cheap” again.
We are certainly headed for a lot more people on this globe and that means a lot more food and other goods will be required. Realistically, we know that population growth is largely taking place in the poorest countries on earth, where people subsist on diets largely made up of grain. This is certainly bullish for crop producers, but we have probably passed the point where the ratio of meat production to crop production globally hits its peak. There are a lot of forces, especially global governance and policy forces, seeking to restructure market fundamentals with taxes, prohibitions and legal limits of every kind. However, I never sell human ingenuity short. In the long run, it will triumph over the good intentions of governments.
Editor’s Note: Dr. Dennis DiPietre is a swine consultant in Columbia, Missouri. His monthly commentary is sponsored by Elanco Animal Health. For more information, go to: www.elanco.com
This commentary is for informational purposes only. The opinions and comments expressed herein represent the opinions of the author--they do not necessarily reflect the opinion of Farms.com. This commentary is not intended to provide individual advice to anyone. Farms.com will not be liable for any errors or omissions in the information, or for any damages or losses in any way related to this commentary.