It's rather disgusting to think that pork and hog prices are affected so dramatically by chicken prices, but the evidence certainly says it is so. The first half of 2006 saw hog prices driven to, or below, breakeven levels on two occasions. While there were a few deviations from year-ago and expected slaughter levels, the cumulative total at the end of June was only 0.26% larger than one year ago.

The difference, of course, was very low chicken prices. Boneless/skinless breast meat at a record low $0.98/lb., leg quarters at rendering value, and the lowest wing prices since the Russian embargo days, all added up to vicious competition in the meat case and drove pork prices downward.

This has been repeated several times over the past few years and bears out the results of checkoff-funded demand research -- chicken is our main competitor.

The large demand analysis conducted in 2003 by Texas A & M University will likely be updated next year. It will be interesting, indeed, to see how this relationship is faring. Market prices from 2006 suggest to me that the competitive relationship is even stronger now and that means pork producers have much at stake in the decisions of chicken company executives.

Ham's Back

Study the cut prices in this week's North American Pork Industry Data table. As of last week, the pork cutout value was 1.9% higher than one year ago, while Iowa-Minnesota prices were up 5.5% and national average prices were up about 3%. Those positive numbers are being driven by one cut -- hams.

It wasn't long ago that we were all lamenting the lousy performance of the lowly ham. They had become a big albatross for cutout and hog values and spent a lot more time near $40/cwt. than it did near $60/cwt. The devolution of "ham" into a product consisting, to a great extent, of some meat and a lot of water, had many of us wondering just how we were going to improve that performance.

The answer, of course, was just south of our border. Several years of promotional work, bovine spongiform encephalopathy (BSE), and some changing price relationships, all converged in 2004 and Mexico became a major factor in the ham market. Brisk shipments in the summer of 2004 reduced cold storage stocks and set up a rally to over $85/cwt. in October.

Shipments to Mexico fell in 2005 and ham values took the brunt of the cutback. Seasonal highs last summer never got to $71/cwt., $15 lower than one year earlier.

It is really no surprise to see ham prices nearly 14% higher than last year as exports to Mexico have picked up by 30% in volume and 21% in value (see Figure 1). Summer buying has set hams up to have a great run in the fall.

Ham stocks of just under 80 million pounds are the lowest for July since 1996 and 22% smaller than last year. Prices of 23- to 27-lb. hams are already above $75/cwt. (see Figure 2). Historical prices suggest, however, that hams do not, on average, get much higher as we progress through the processing season for U.S. holidays. Still, hams within $5 or so of $75 from now through late November (when the last of the holiday fresh ham orders are placed) would be great for fall hog prices!

More Canadian Pigs Sent South

Finally, this week, imports of feeder pigs from Canada have been very large this year (see Figure 3). In fact, 15 of the 20 largest weekly totals on record have occurred in 2006. Put that data alongside numbers showing a smaller breeding herd, and significantly smaller pig crops, and it is plain to see that hog feeding is a declining occupation in Canada. Caught in the squeeze is Canada's processing sector, which is running significantly below capacity.

Why is this happening? At the risk of sounding like a broken record -- it's the exchange rate. The value of the Canadian dollar reached 90 cents (US$) recently and some analysts believe it will continue upward past par value before it stops. Budget surpluses by the conservative government in Ottawa and budget deficits by the allegedly conservative government in Washington are the main drivers of the change and there is no end in sight for either. The U.S. deficit may be smaller than once thought, but it is still a deficit and still large.

An exchange rate effectively assigns relative value to the capital and labor of two countries. This shift has made capital and labor in Canada relatively more expensive, and provided an advantage to the United States in supplying those factors of production -- especially where the unit of production, the pig, is so mobile.

I expect the level of imports to remain high, but the growth to slow, as the Canadian sow herd slowly shrinks. Pig demand will remain high in the United States due to the construction of many finishers and wean-to-finish barns the past two years. I just don't think Canada will have enough pigs to fully respond to that demand given its shrinking breeding herd and current economic conditions.