Market Preview: MCOOL Compromises

US - Weekly U.S. Market Preview w/e 3rd August, provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 4 August 2007
clock icon 5 minute read

The Agriculture Committee of the House of Representatives passed a farm bill that contained, among other features, some compromise language on mandatory country-of-origin labeling (MCOOL). There was a bit of compromising done but, unfortunately, meat and livestock groups did most of it.

That may sound critical, although that's not my intent because I know those groups worked hard to get more changes made. However, it appears that the current Congress is listening much more to protectionists and populists in their decision-making.

The biggest value of the compromises to U.S. pork producers is that it limits the records that USDA can require for verification of origin to those records kept in the normal course of business. Further, it appears likely that producers will only have to provide their customers with a statement indicating: a) the origin of the pigs, and b) that the producer has records showing where he/she got the pigs. In other words, the trail of those records would lead back to the origin of the pigs.

In addition, the new language allows ground meat to be marked with a "may contain" label that lists all of the countries from which ingredients either actually came from or could reasonably come. That is not a big deal for pork, but it is huge for ground beef.

There is some disagreement about how the House bill will change the actual labels applied to pork other than the fact that there will be only three labels as opposed to the four or more presented in the original rules. Those rules required actual combinations of where animals were born, raised and slaughtered.

The law is clear -- imported meat is to be labeled as product of the source country. My reading of the law says that animals born, raised and slaughtered in the United States must be labeled "Product of the U.S." Animals born or raised in another country and slaughtered in the United States will be labeled "Product of Country X and the United States." Some observers believe that product from animals born, raised and slaughtered in the United States can be included in that latter label, basically lumping everything other than imported meat into one label. USDA will have to interpret the law during the rulemaking process.

Finally, the language exempts any animals that are in the country on Jan. 1, 2008. Products from those animals would be allowed to move through the channels of commerce without a label even if they are sold after Sept. 30, 2008, the date MCOOL becomes effective. It also means that any animal born or entering the United States on Jan. 1 or after must have "normal business documents" that show its origin so products can be accurately labeled.

Of course, there is no guarantee that any of this will survive the floor debate in the House or the deliberations in the Senate. House Republicans are already up in arms because of a funding provision in the bill, and the administration has threatened to veto this version of the farm bill if it makes it to President Bush's desk.

Tyson Announcement Puzzling

Five of the six weeks -- from late May through early July -- saw slaughter 3-6% larger than last year. The three weeks prior to last week saw slaughter runs much closer to year-ago levels (See Figure 1). It appears to me that this is more a matter of large slaughters last year than it is a reflection of small slaughters this year.

Federally inspected (FI) slaughter was up 3.6% from the 2006 level last week and up 4.5% this week (through Thursday).

Tyson's announced cutback was somewhat puzzling when it came out last week. The reduction totaled 24 hours in its six plants reportedly spread over the end of last week and the beginning of this week. Pork packer margins had gotten very low in late June and early July, but spiked upward two weeks ago. As you review Figure 2, keep in mind that these are estimated gross margins. Packers must still pay all of their non-hog costs from these funds.

The rise two weeks ago was driven by a $2.40 increase in the cutout value, a $1 drop in the national net price of hogs and a sixth consecutive weekly record for per-head byproduct value ($17.04/head). Last week saw another byproduct record ($17.26/head) and a rally in cash hog prices that reduced packer margins.

What is driving the byproduct value? Fat. The price of fat is more than double one year ago. Anything with energy in it is pretty valuable these days.

Why did Tyson cut back on slaughter runs last week? Probably because they were trying to look ahead and because there are lags between when hogs are purchased and product is sold.

Looking ahead at pork product markets in late July hardly ever provides a pretty picture. Except for a minor blip in August ribs and loins in preparation for Labor Day, the price of virtually every cut declines. It could well be that Tyson managers are just trying to manage the cost of future inventories relative to cutout realizations that will almost certainly fall.

And, it could be that they share my concern about supplies and see plenty of pigs that are now going to get bigger since corn is an "affordable" $3.06/bu.

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