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|May 25, 2007|
Table of Contents
Exchange Rate Shifts Leave a Mark
In the Black?
Livestock Subcommittee Marks-up Farm Bill
World Pork Expo Career Center
Exchange Rate Shifts Leave a Mark
The importance of exchange rates in matters of international trade has been noted in this column on several occasions. While the supply and demand for a commodity are the primary determinants of price within a country, exchange rates are the method for translating that price into a value from one country to the next. No discussion of trade is complete without at least considering the impacts of exchange rates.
There are a few basics to keep in mind. First, if you are an exporter, you are always better off to have a cheap currency because it makes your goods less expensive to foreign buyers. Another way to look at it is that foreign currencies have more buying power when an exporter's currency is low. So, strengthening currencies in customer countries is a good thing.
Second, the same relationship applies to the currencies of countries with whom you compete in the export market. If your currency is lower-valued, your goods are less expensive to importers.
Third, it is not necessarily the level of the exchange rate, but how the rate is changing. A steady exchange rate allows the countries' separate economies to adjust, but a changing exchange rate will cause constant changes in competitive position. When exchange rates fluctuate, these gains in competitive position ebb and flow. But when exchange rates follow one trend for long periods of time, the competitive position effects are one-sided and can eventually be very detrimental to countries on the unfavorable side of the trend.
Figure 1 shows the exchange rates of three major competitors to the United States in international pork markets. Note that the construction of this graph in units/U.S. dollar ($US) means that the slopes of the lines indicate the change in the value of the U.S. dollar. A declining line means that the U.S. dollar is falling in value relative to the subject currency. It is obvious that these changes are favoring the United States.
Figure 2 shows the exchange rates of three major pork export customers of the United States. Korean customers are clearly gaining buying power relative to the U.S. dollar. That, in part, explains the terrific performance of U.S. exports to Korea in 2006. In addition, the currencies of Japan and Mexico have been relatively stable vs. the U.S. dollar, while the exporting countries' currencies in Figure 1 have gained value compared to the U.S. dollar in recent years. That means that those exporting countries were losing competitive position relative to the United States, even when the importers' rates vs. the U.S. dollar were more or less constant.
Then There's Canada
University of Missouri agricultural economist Ron Plain gave a great example at last week's Pork Management Conference sponsored by Pork Checkoff. I'll use Plain's basic idea as the basis for this next discussion.
Assume that a Canadian producer in early 1997 built a hog farm and signed a contract to deliver pigs to the United States for $100 ($US). At the time, the exchange rate was roughly $0.75 for each $1.00 in Canadian currency ($Can), meaning each pig generated about $134 ($Can).
By January 2002, the Canadian dollar had weakened to about $0.62 for each $1.00 ($Can). The Canadian producer's pigs still fetched $US100, according to the contract, but that now converts to over $160 ($Can). Not a bad deal since a good portion of the producers' costs (all fixed costs and labor) would still be denominated in $Can and have not risen as the Canadian dollar devalued. This was a tremendous incentive (among others) for the Canadian industry to grow.
But now consider what is happening to a production unit built by the same producer in 2002 with the intent to sell the same $100US pigs. First, it took far more of the less-valuable Canadian dollars to build the unit in 2002 than it did to build the one in 1997. Second, instead of bringing in $160 ($Can), the pigs coming out of this new unit are now generating only about $110 ($Can). While the stronger Canadian dollar makes some inputs (grain, medications) less expensive, since they are generally priced off the U.S. market, it makes those fixed costs and labor far more expensive. This illustrates the flip side of the effect of the cheaper Canadian dollar from the '90s into 2002.
Adding insult to injury, the "improvement" of 2006 that saw the Canadian dollar lose about 6% of its value vs. the U.S. dollar from June through February, has now been wiped out.
The weekly average for the week ending May 11 was $0.9054US/$Can. That is just shy of the highest ($0.9077) level in my data set that goes back to 1992. June Canadian dollar futures are trading this morning at $0.9266 -- a new record on the weekly chart.
None of this is news to Canadian producers, but U.S. producers need to clearly understand how exchange rates impact the world in which they work every day.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
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In the Black?
It looks like April for many pork producers was a breakeven month. However, many were in the black. The average price for May has been over $70/carcass, with average costs landing close to $65/carcass. It appears many pork producers will average $5-10/head profit for the month. To date, most producers are still in the red, but the cash and futures prices for the next 3-4 months should be in the black. This should help producers get to breakevens or some profits before going into fall.
What's Ahead? -- Many producers that I talk to and work with are struggling with what to do about their feed needs and future prices for hogs for the fourth quarter of 2007 and first quarter of 2008.
Today, corn in southern Minnesota averages around $3.40-3.50/bu. Is this a good price going forward? Just a couple of months ago, we were paying $0.30/bu. more for corn. We also know that there has been a lot of corn acres planted. If weather is good, we should have a very good crop this year. So, if we do have a good crop, how much will corn prices come down and how much can we buy?
Naturally, we don't know how good the crop will be, so we are dependent on many factors that are out of our control. If you look at October and December hog futures -- they have fallen $5-7/cwt. off their contract highs. Still, today, if you locked in everything for the fourth quarter and the first quarter, 2008, you would lock in a loss. No one wants that, so the hope is that the situation will improve. If it doesn't, we will see red ink the fourth quarter this year and also the first quarter of 2008.
What to do? As noted above, hog futures have dropped the last 60 days on the deferred months and producers are hoping for a recovery. That is my hope, as well, but as we move forward in this industry, it will be more important than ever for producers to have a sound marketing plan. You will need to know your costs, understand your risks and be able to make decisions that can make your operation competitive. There are very few, if any, marketing agreements that have a feed cost matrix, so being a sound marketer will be very important in the future.
Conferences -- I attended a PIC conference and the National Pork Board's financial conference recently. Both events featured sessions about sow gestation housing -- stalls vs. pens. There is a wide array of opinions on this topic. Some say they will convert to pens, while others say they will stay with stalls. I came away from both conferences believing that our industry is entering a period of dynamic changes. The way we raise our product will be scrutinized more closely in the future. I also believe we are raising economical, high quality, safe food for the world in a humane way. We need to educate the public about our accomplishments and provide reliable data that supports them.
Swine Industry Consultant
Contact Greenwood at firstname.lastname@example.org
Livestock Subcommittee Marks-up Farm Bill
The House Livestock Subcommittee considered the livestock and dairy section of the farm bill this week. The subcommittee passed an arbitration amendment that requires both the buyer and seller to agree to arbitration before it can be used as a tool to mediate contract disputes. A number of amendments were discussed but were delayed until June when the full House Agriculture Committee considers the farm bill. The amendments included:
Implementation of Price Reporting -- A number of Senators have written Secretary of Agriculture Mike Johanns urging him to expedite the rulemaking process to carry out the Livestock Mandatory Reporting Act. The Senators said, "The Agricultural Marketing Service (AMS) is writing a rule, but until an interim final rule or final rule is published, the mandatory reporting system will remain a voluntary program. We ask that you expedite this process and publish an interim final rule without delay." Signing the letter were Senators Tom Harkin (D-IA), Max Baucus (D-MT), Jeff Bingaman (D-NM), Sherrod Brown (D-OH), Byron Dorgan (D-ND), Michael Enzi (R-WY), Chuck Grassley (R-IA), Ben Nelson (D-NE) and Craig Thomas (R-WY).
Groups Call for COOL -- A number of organizations have called upon Congress to provide sufficient funds for USDA to "immediately implement mandatory country-of-origin labeling (COOL)." In a letter to the chairmen of the House and Senate Agriculture Appropriations subcommittees, the organizations said, "The integrity and safety of the nation's food supply is in serious jeopardy with our citizens eating an amalgam of food produced elsewhere, with no idea of its source. It is critically important that our food consumers be provided with information on the source of the food because the Food and Drug Administration (FDA) and USDA have not established a food safety inspection system sufficient to deal adequately with the tidal wave of food imports included in our food supply." Those signing included National Farmers Union, National Farmers Organization, Organic Consumers Association, Organization for Competitive Markets, R-CALF and World Hunger Year.
U.S. Classification by OIE -- The world Organization for Animal Health (OIE) formally classified the United States as a controlled risk country for bovine spongiform encephalopathy (BSE). USDA indicated this classification confirms the U.S. regulatory controls are effective for beef of all ages. Secretary of Agriculture Mike Johanns said, "We will use this international validation to urge our trading partners to reopen export markets to the full spectrum of U.S. cattle and beef products. We are notifying our trading partners of our expectation that they commit to a timeframe to amend import requirements and expand access to their markets to reflect this controlled risk determination. We will use every means available to us to ensure that countries rapidly take steps to align their requirements with international standards." The OIE also classified Canada as a Controlled BSE Risk country.
P. Scott Shearer
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World Pork Expo Career Center
National Hog Farmer and the National Pork Producers Council are excited to announce the 2nd Annual Career Center at this year's World Pork Expo. Career Center will be held June 7 & 8 (9:00 a.m.- 3:00 p.m.) at the Iowa State Fairgrounds in Des Moines, IA. You will have the opportunity to meet representatives from pork production companies to learn about career opportunities they currently have available. There will also be representatives from colleges that offer swine production programs for those interested in pursuing more education.
The May issue of National Hog Farmer will feature the companies who are participating in this Career Center. If you represent a company that would like to participate and/or have questions, please e-mail Lisa Peterson at email@example.com for more information.
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