Russian Roulette with Three or Four Chambers Loaded

     The pig production business has always had its ups and downs but developments over the last few years have resulted in the structuralization of increased levels of price and financial risk.  By structuralization, I mean that these factors are now regular, recurring added risks that are no longer random, isolated events which no risk management process can adequately predict or mitigate effectively.  The factors include the predicted and now realized reduction in the average level of the stocks-to-use ratios for corn and soybeans placing feed prices in a continuing, annual, heightened state of price risk volatility.  Bob Wisner, retired crop extension professor from Iowa State University told World Pork Expo attendees that we will end up the soybean year with as little as 2.2 weeks of the supply remaining.  The cold, rainy corn belt conditions which delayed the corn planting period in the U.S. and now has resulted in lots of replanting is resulting in USDA forecasts of likely below normal yields and a situation in the coming year where world corn demand will exceed world corn supply.  Biofuels policy has contributed to the structuralization of these added risks and buffers their cause from market mechanisms which would likely eliminate them.

     World economic conditions have lowered per-capita income world-wide through dramatically increased unemployment rates and will soon likely result in markedly higher energy costs.  Add to this the spectre of inflation risk associated with the chosen policy path to correct the global recession and it seems unlikely that the coming decline in the value of the dollar will stimulate enough increased export demand for U.S. produced meats to overcome the inflation in input costs.  Reaching a 20% of production export level has created tremendous benefits but also subjected a sizeable portion of the future revenue stream for U.S. meat to wide swings.  

     Random shocks such as the emergence of H1N1, while not necessarily a new structuralized risk, represent the tipping point events which when combined with increased structural price and cost risks result in a kind of "lighting a match near a gasoline spill" explosion which lands on the balance sheets of U.S. meat producers.

     We could go on with the coming regulations, increased enforcement actions, renewed in-roads by animal welfare activist groups and so on to realize that one day in the next several months or short number of years, the pass-through of these risks will substantially impact the price of meat from U.S. markets.  As always, many events could happen which roll back these mounting risks but they are not currently registering on the "likely outcome" meter.