Market Preview: Hard Lessons for Industry Economists

US - Weekly US Market Preview provided by Steve R. Meyer, Ph.D., Paragon Economics, Inc.
calendar icon 1 December 2009
clock icon 5 minute read

Why are we analysts more mushy-mouthed than usual about the hog price and profit forecast? Well, maybe the old adage about laying all of the economists in the world end to end and never reaching a conclusion contains a great deal of truth. Actually, there are several reasons – none of which are probably good enough for those of you seeking our hopefully wise council – but consider:

  • The world has changed. Sure, sure – blame the world around you when you can’t get it right! Yes, it is somewhat flimsy, but it’s nonetheless true. When new policies regarding biofuels and gasoline oxygenate took effect in 2005, everything changed in the US corn market. A quantum increase in corn demand could not be matched by a quantum increase in corn supply year after year. In fact, corn supply has yet to catch up with corn demand at prices anywhere near the pre-ethanol levels. And when corn prices changed, so did the cost structures of every livestock species, setting off the adjustments that are still underway. Economists and analysts had not dealt with a permanent change in costs since the early 1970s. There were a few of us in the business at that time, but I was in high school and my interests were far more focused on FFA and girls, not necessarily in that order. I did not learn much about either markets or girls in those days, it seems.

  • The world has changed again. Just when we were getting a bit of a handle on the dramatic production cost increases and, thus, long run supply decreases, along comes the economic crisis and the novel H1N1influenza virus to screw things up on the demand side. It is true that neither factor has damaged domestic pork demand badly, but the soft economy has reduced demand for both chicken and beef and various export difficulties have contributed to pork demand that is nearly 5 per cent lower than one year ago through October. The export situation is complicated by last year’s pork exports being off the charts through July – masking a supply-demand situation that would (or should) have resulted in lower prices and much larger losses had it not been for extraordinary trade impacts.

  • And, pork producers are just not behaving according to our models and assumptions. Now I realize that this factor is much more our fault than it is yours. Besides, you are the economic agents and we are the observers. It is our responsibility to use our observations to model you. It is not your job to conform to our prior notions, but cumulative losses of the magnitude we are now seeing should have caused a greater response – right? Apparently not. Again, this is a different world – in terms of industry structure, production facilities, financial expertise and management, and a host of other factors. Add them all up and the old response hypotheses are out the window as well.

  • The futures market continues to hold a profit carrot in front of what would otherwise be a very reluctant industry. That profit carrot has been more than just an enticement over the past few years as many producers have actually caught the carrot by using packer contracts and hedges. Some are no doubt doing the same today and the carrot got sweeter last week as summer futures reached the mid- to upper-$70s. It appears that commodities in general and agricultural commodities in particular are again attracting investment money looking for a hedge against inflation. Outside money taking long positions provides great opportunities for sellers – and further deteriorates the incentive for the output reductions that I still think are necessary to return cash markets to profitable levels. The obvious response to that situation is: “And the problem is????” My answer would be: “Nothing, as long as you actually catch the carrot!” Merely following the carrot as it dangles in your path will not pay bills.

So, as usual, we economists and analysts are begging for you patience while we try to match the real world to theory. When the relationships that have underlain your models and decisions for years change, it takes a while to figure out the new relationships and develop new models that mimic a new world. There is a lot of “news” in that sentence. We’re trying to catch up to them and become better help as soon as we can.

In the meantime, you will have to put up with something even worse than the two-armed economists once detested by President Harry S. Truman who famously asked for a “one-armed economist” because he was tired of hearing “on the other hand”. I fear we may more closely resemble the many-armed Hindu goddess Kali or Kalika who is called in Wikipedia the “goddess of time and change.” Isn’t that a coincidence?

Sorry, No Tables this Week

The data for our weekly Price and Production Summaries were not available this week due to the US Thanksgiving holiday. The summaries will return next week.

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