Exports have a role
After supply estimates, the next real issue on the balance sheet is the trade picture. The economic health, food needs, currency values and trade relations with other countries all play a part. There are tremendous hopes for the long-term meat demand picture for the world (see “Purchasing power,” below).
As incomes improve, diets improve. Usage of vegetable oils, dairy products and eventually meats increases. The relative purchasing power of the two most populous nations has doubled over the past 10 years. Gains in many developing countries also have been impressive. At the start of this 10-year period, Japan, Canada and Mexico took 77% of our pork exports and 87% of our beef exports. Due to new markets for our product, those same figures are 52% and 58%, respectively.
This year has seen a number of export-related developments. Russia and China have discussed problems with our use of a popular animal feed additive in hogs and cattle. Canada and Mexico have raised concerns with a U.S. meat labeling law. They may eventually retaliate against our meat exports. A good example of the importance of these numbers was the recent announcement of the intended purchase of the largest U.S. pork processor by a Chinese firm.
Throughout the summer, we heard wildly inflated estimates of U.S. pork export growth from traders not familiar with actual numbers. Last year, China accounted for only 14% of our total exports. Before we even discuss increases over last year, we first have to fix our current sales problem. Exports to China in May (the latest data available at this time) were 14% lower than last year. While we don’t fight the initial move made from irrational hopes or fears, a fact-based approach to fundamental analysis can signal clear mispricing opportunities.
U.S. demand conundrum
Most discussions in the meat complex revolve around supply. There is a great deal of quality information for supply through daily, weekly and monthly slaughter reports. Future production levels can be computed from the various government surveys of producers.
The industry calls the last line of the balance sheet we have shown either per-capita disappearance or per-capita consumption. That is incorrect terminology. A much better term would be product supplied. Essentially, we put the meat on their plate whether they asked for it or not. Their method of telling us acceptance is through price.
In the example above, let’s say we project a 16.46 lbs. per-capita consumption (product supplied). Depending on consumer demand for it, that could trigger a price from $62 to $102. Though the majority of price changes in livestock come from supply, we cannot forget about the year-to-year changes in consumer demand. Consumer income/employment and the economy/asset appreciation are all factors to consider. For 2013, specifically, consumer spending on meats is up slightly over last year.