Pork Prices in Mexico are Flying Higher!

With demand for meat, and protein products set to grow as incomes rise, consumption of feed grains is also increasing.

Concerns have, however, been growing about price inflation as the costs of food, fuel and electricity prices have increased. In the first two quarters, 2011 the sharp spike in corn futures on the global market led to fears of a new 'tortilla crisis' in Mexico. In an attempt to keep corn prices in check, the Mexican government hedged against corn price inflation, buying futures contracts to fix the price of corn on behalf of tortilla makers and other domestic processors.

Unexpected frosts in the northwestern state of Sinaloa in February 2011 have hit the Mexican corn crop, with the agriculture ministry warning of losses of a projected 1.8mn tonnes. Despite this setback, BMI still forecasts corn output to reach 23.98mn tonnes in 2010/11, a y-o-y rise of 17.7 per cent.

The threat of a new 'tortilla crisis' has also been averted by the government's decision to raise spending on a grain hedging program, which will provide financial support of about MXN8.5bn (US$700mn) in subsidies to farmers, the food industry and grain traders to hedge risk through purchase futures options on the Chicago board of trade.

On another resolved issue last week’s resolution of a long-simmering dispute between the US and Mexico over long-haul, cross-border trucking represents a milestone in the economic integration of North America. US pork producers, cheese and other goods, are now looking forward to reduced Mexican tariffs with the resolution of the trucking deal.

The end of the trucking dispute will help. Transporting goods across the Mexican border is a complicated business, involving customs brokers, warehouses and lengthy inspections for drugs and illegal immigrants. Under the current system, Mexican truckers haul their merchandise to the border, where a transfer truck takes it across. A US truck picks it up on the American side. In time it will be possible for a Mexican driver to haul goods directly from any Mexican city straight through to Phoenix or even all the way to Boston. (They will be prohibited from handling shipping within the US) Such efficiencies will yield savings to US businesses and consumers.

The last crisis in the pork industry in Mexico as in the USA, Mexican producers have been losing money in large amounts for a period probably six to eight months longer than those in the USA or Canada.

The southern and central parts of Mexico largely produce to serve the domestic markets in large cities such as Guadalajara and Mexico City. Much of the Sonora area produces pork both for domestic consumption and a sizeable portion for export. Sonora uses corn from the United States and buys it at west coast prices so their price per bushel is over a dollar higher than in the Midwest USA. Many producers have switched to sorghum as a replacement for wheat or corn.

Unless a producer is aligned with a plant that is exporting, the typical way selling is done is on the cash market through intermediaries (like order buyers for cattle). These guys know the plants, prices and where opportunities are and bid hogs to supply those opportunities. Often little feedback is given about quality, but poor quality production is bid down by the buyers as it was in the USA before grids were widely in use. Often a range of acceptable weights, such as 110-120kg (240-260 lbs) is given and producers must weigh hogs to hit that range. While leaner hogs are desired, payments based on lean are not usually explicit and sometimes is confusing to understand different measurements in different states.

Newer and larger units operate all-in all-out, but the predominant production is continuous flow, though frequently on separate sites. The hot season is coming in the Sonora (July, August) when temperatures often reach 120F or hotter during the day. Many producers report pigs lose weight in the month of July despite misting and ventilation to reduce heat.

Many producers are multi-meat or poultry producers, especially in the Jalisco area. It is not unusual to have layers, broilers, hogs and some cattle--all at decent scale. Just like the USA, eggs and milk in Mexico have increased in cost dramatically in the last year which it was offsetting the hog loss problems for these producers who are diversified. Mexican red meat consumption is forecast to increase in 2011 as the economy and consumer purchasing power recovers.

Hog prices in Mexico have spiked over the last quarter as a reflection of higher feed costs passed onto consumers. But the higher hog prices are not only because of high feed costs but also because the national breeding herd has shrunk by 30 per cent in the last 3 years causing a current shortage of pork in the domestic market. These two factors paired to an increased consumption and improving of income of the population have resulted in better prices for the producer. However the giant black cloud ahead continues to be the volatile prices of grains in international markets. Today’s hog prices are typical ($22 MXN/kg) 85 US cents per pound liveweight in Mexico City and cost of production around ($18.50 MXN/kg) 71 US cents/lb liveweight. So an average decent producer in Mexico is making around $35/head.