There is a set of important variables that all could impact the current situation of pork producers in the U.S. and worldwide. Keeping them all in view is a wise thing for you to do on a daily basis.
1. The Growth of Ethanol Distilleries and the resulting oversupply which is beginning to hit the market will have a big impact on the price of corn and really all grains, both directly and indirectly in the coming year. Will the government step in and up mandates and will all the players (like automobile companies) agree to 20% inclusion in unleaded gas? Some plants are already stopping production and others are stopping construction. It looks like lenders and outside investors are getting smarter about this. (http://www.sacbee.com/103/story/796178.html).
2. Oil price increases seem ready for a rest but if the U.S. economy skates past a recession and begins to grow in the 2nd quarter, the dollar will strengthen. Remember that falling oil prices sink the Canadian currency and that will improve their pork industry situation. There is a debate about how much of the $100 a barrel oil price is increased global demand or free-falling value of the dollar.
3. Lots of investors have moved money out of the stock market and into commodities and land partly to offset the extreme risks of the subprime mess and partly to escape intense, shearing volatility and downward drift of the dollar. It was reported last week that some little change shops in Amsterdam were not exchanging dollars. They didn't think they could turn them around fast enough to avoid another daily drop in value. Commodities have been going up, up, up and it looked like a good place to park some cash. Late last week we saw some of those players sell some of their commodity positions to free up cash to pay back debt (debt incurred to make investments), so called "de-leveraging". This took some of the wind out of commodity price increases and sent gold, oil and a host of commodity prices plummeting. There is likely a substantial additional move downward that could take place in commodities if speculators take flight. As prices fall, producers with stored grain will sense they have missed the high and dump some grain, leading to a buying opportunity.
4. Flooding rains across the southern part of the U.S. have put a lot of the early corn planters behind schedule. This doesn't mean much yet but if we have a bad Spring planting season, volatility will be greatly increased in corn and soybean prices. I think that a horrible Spring is the only way we will get policy makers to look at the ethanol situation a little more soberly.
5. Liquidation seems to be underway in pork but not yet at the pace that will bring prices up very much. Expect that to continue and to build but the near term impact will be depressed pork prices and a year of waiting to get the channel cleared out. If liquidation is vigorous, we will have some price bumps that are very positive even prior to the meat channel getting cleared out. Hedging opportunities will certainly develop in the deferred contracts but you have to be careful. Prices are relative. Remember: Not so many months ago, wheat at $7 was very high.
5. If today's news about the housing market picking up continues and is a harbinger of an early recovery for the U.S. economy, expect the value of the dollar to strengthen as mentioned and export growth to be tamed a bit. Also watch the EU. If producers in the EU liquidate at a relatively faster rate than in the US we will pick up some export business. If stagnation continues and the EU does not cut its rates, their industry may contract hard at some point in the next six to nine months.
6. Some countries are pulling out of the global economy, especially in pork and feed grains to try to keep prices under control. Thailand just announced a ban on all exports of pork to try to stabilze its domestic prices. (http://www.earthtimes.org/articles/show/192505,thailand-to-impose-pig-export-ban.html) and China is controlling the use of corn in industrial applications and will monitor and/or reduce or curtail its export. Russia and Argentina are controlling the exports of wheat to save supply for domestic users and Argentina is limiting exports of beef for the same reason.
Remember, the answer to any economic question is always, "It depends."
