Market Preview: Pork Trade Forecast Looks Good

by 5m Editor
1 March 2011, at 10:38am

US - This week, in National Hog Farmer's Market Preview, Steve Meyers discusses the trade outlook for pork.

USDA’s quarterly Outlook for US Ag Trade, released last week, contained some very positive information for US pork producers. The quantity of US pork exports is expected to grow by 1.6 per cent in 2011, but USDA predicts the value of those exports to jump by nearly 20 per cent. As I have pointed out before, exporting large volumes is nice, but bringing back even larger amounts of cash pays the bills! Should those two figures come to fruition, 2011 exports will be very close to the 2008 record, and 2011 export values will shatter the existing record, also set in 2008.

The report also contained forecasts (or perhaps a better characterization is “assumptions“ for this report) regarding macro-economic variables which are so important when one is dealing with trade issues. The forecasts for US and Canada gross domestic product growth were 1.6 per cent and 1.5 per cent, respectively. Those percentages are a bit conservative relative to some that we have seen. Europe is forecast to grow at roughly the same rate as Japan. Mexico and Korea are both near 3.5 per cent for 2011 growth, while Brazil (+4.0 per cent), India (+5.9 per cent) and China (+8.6 per cent) are, as expected, predicted to be the areas with the most robust growth (Figure 1).

Exchange Rates Bad News for Canada

Figure 1 also includes forecast/assumed changes in exchange rates for 2011, and those are all down for the US dollar. Of particular interest, of course, is the estimate that Canada’s dollar will appreciate by 7.5 per cent vs. the US dollar. That number is larger than any I have seen in other places and would put the Canadian dollar at an average of US$1.05 for the year, meaning that some weeks would almost certainly be above the weekly record of US$1.07 back in November 2007.

That, of course, is not good news for Canadian producers since it means fewer Canadian dollars in revenue. The decline will be large enough to offset most or all of the feed cost advantages currently seen in the prairie provinces.

We hope these forecasts/assumptions are a bit overdone, but the truth is that higher oil prices will put continued pressure on the US dollar relative to Canada’s currency. As the University of Missouri's Dr. Ron Plain points out frequently, there is a lot of oil and gas flowing south from Canada to the United States. As prices rise, more US dollars flow northward and those opposing flows almost guarantee a depreciation of the US dollar and appreciation of the Loonie. Don’t expect this pattern to change materially any time soon with crude oil futures now above $100/barrel. We Yanks still love driving our cars – a lot!

Cold Storage Reflects Larger Inventories

Last week’s Cold Storage report indicated higher inventories of both meat and poultry vs. one year ago (Figure 2). Total meat and poultry in US freezers amounted to 2.054 billion pounds on 31 January. That is 9.6 per cent higher than last year but it is important to note that last year’s inventories were very low on a historical basis. Looking at the top line in Figure 2, which is read off the right-hand vertical axis, one can see that current frozen product inventories are still relatively small from a historical perspective. They are certainly not large enough to be overly concerned about at this time.

Chicken stocks did decline during January, but every product category except thigh meat showed an increase over year-ago levels. Leg quarters, wings and “other“ chicken accounted for over 70 per cent of the increase in chicken inventories from last year. The 35-million-pound increase in wing inventories (up 229 per cent from last year!) is truly shocking given the run that this high-quality (written with dripping sarcasm) product has been on. And wing prices reflect the buildup. They were $94/cwt last week vs. $168/cwt one year ago! Maybe they need a new sauce.

Pork inventories were 10 per cent larger than last year and nearly 14 per cent higher than in December. Part of that increase is higher output, but January production was only about 3.4 per cent higher than in 2010 so that is not the complete explanation. Ham stocks accounted for nearly 60 per cent of the year-on-year increase and were up 39 per cent from last year and 49 per cent from December. January’s increase of 65 million pounds for frozen pork stocks was not significantly larger than the normal December-to-January increase of 52.2 million pounds.

In and of itself, the Cold Storage report was not good but not alarming, especially given that beef, pork and chicken production are still larger than one year ago. I expect year-on-year growth to end as we go into this summer and for meat and poultry in cold storage to remain in the lower half of the historical levels.