pass-through

     I just returned from about a week in Mexico, in the Jalisco and Sonora regions (western side of Mexico from the USA south to about the level of Mexico City).  Jalisco is the Tequila distilling area and the Agave plants in various stages of development are clearly visible wherever you travel in countryside.  Sonora is prodominately cattle country but the isolation especially has led to many larger swine units developing there in the last 30-40 years.  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.

The consumer price index is based on a bundle of goods and services purchased by consumers in the U.S. and is a measure of the changing cost of such items. http://www.bls.gov/cpi/ Dr. Elizabeth Hoyt was instrumental in the foundational work leading to the creation of this index and I had the pleasure of being officed near her at Iowa State University during the final year of so of her life and career when I arrived there in the late 1970's. She was in her upper 80's at the time of her death but still came into her office frequently.

According to the most recent release of the index for January 2008, energy costs are on track to rise over 40% (based on an annualized average of the last three months) and food costs are rising at an average rate of about 4.3%. Of course averages betray the distribution beneath.

            Pass-through is the economic term for how higher (or lower) prices in a chain wind up effecting prices up-chain, say at retail. All outcomes are possible for a price rise such as we have experienced in the corn market due to the government transfer payments for corn producers. Input price increases can lead to complete pass through up chain, more than complete pass through or something less than complete pass through.

Part of the problem in the meat case at retail is there is so much special pricing, loss leader pricing and the like that it is hard to tell exactly what happens for every input price change down the chain. In addition, price changes at retail for products made from agricultural products tend to be very small compared to the change at the production level. This is due in part to all of the value added as the chain progresses (i.e., a few cents worth of wheat in a $4.00 box of wheat breakfast cereal.) Small changes are sometimes unnoticed by consumers as they are lost in the noise of other price changes, the hassles of shopping and plain inattention.

If you want to know the impact of increased corn prices on your cost of production, chose a forecasted corn price (take your pick of forecaster between $3.40 and $3.85 with some as high as $5.00+ if drought develops) and crank through your feed cost calculation. If you do this and it actually turns out to be your new cost of production, you will be one of the last few producers in the pork industry with absolutely no imagination whatsoever.

One thing we know for certain is that people do not face adversity sitting still. All kinds of secondary strategies, impacts, cost cutting, substitutions, new research and experiments, adjustments in weights and plain ingenuity immediately move to the forefront. In addition, poultry producers and other meat animal species that consume corn are making similar adjustments as are tortilla makers, users of high fructose corn sweeteners and even elevator/feed mills that used to get the corn. As they do, the prices of their products change relative to the price of pork and demand shifts begin to take place at the grocery store and throughout the chain.