Optimal Exports as a Portfolio Problem

If you think about it, each dollar of expected pork revenue, as we look at 2009, has a variance around it. That is to say, not every lb of forecasted sales has the same likelihood of being realized. It is safe to say that the anticipated level of demand from domestic consumption is well known and relatively low variance. The demand which originates from the export markets is highly variable and can come from surprising places. Because of this, there is no doubt that the expected income variance is much higher for export sales than it is for domestic purchases and as you might suspect, it has a higher expected value. Those two attributes tend to go together.

In a sense, as the US pork industry faces its 2009/2010 sales, it faces a set of risky propostions with regard to both domestic consumption and net demand from outside the US. This leads us to the question, "What is the optimal level of pork exports for this country?" I use the term optimal in the same way one would optimize a retirement portfolio. In the classic case of retirement plans, you can actually reduce the risk and increase the expected income of your portfolio (a usually impossible situation) by diversification. This suggests that for a country, there exists an optimal level of net exports which achieve the best balance of risk and reward. Some published studies have shown that a nation can increase its income by increasing the variety of its exports but with the increased income comes increased variance. Not all firms can withstand income variation equally so the risky impacts are not equally spread among participating firms.

Attempting to estimate just how much export sales is "worth the risk" is an interesting question, just ask the typical producer in Manitoba Canada. Besides the correlation among assets that is required to do this, which may not be present with the same meaning in exports (although I suspect it is), there remains the problem of multiple decision-makers. The federal government or Pork Board etc. does not decide nor can it enforce the level of net export sales which can be made, so nothing prohibits individual companies from ranging out and making deals in the export market under our current free market system. If pork producers wind up having to have a federal bailout due to the collapse of export markets, however, I suppose that could change.