Some Observations

Export Sales

Obviously, the lean hog futures are counting on reborn export sales to deliver expected prices. Year to date through May, US exports are down 4.7%. The biggest set back is Mexico, down Jan-May 30% in 2007 compared to 2006.

Mexico

We have been involved in doing business in Mexico the last 15 years and count many Mexicans as friends and customers. Since the corn price spike last year, Mexican pork producers have struggled. Corn has reached over $5.00 a bushel, driving up cost of production. The main starch for the Mexican consumer is corn based and the rapid increase of corn prices has challenged many Mexican consumers’ budgets for meat protein. We believe two factors are at work in the Mexican market. Some Mexican producers are liquidating their herds due to economic and confidence factors (ag loans are almost non-existent in Mexico) and this is putting more Mexican pork on the market cutting back the need for imported pork, but in our opinion, the greatest Mexican market problem is the amount of disposal income Mexican consumers have for meat protein. We believe high corn prices are depriving many Mexicans and others, the affordability for all food. The burning of food for fuel (ethanol) is a global social and political issue and last time we checked hungry people are not happy people. First World societies could regret the day of the infrastructure manipulation that made food harder for many in the world to afford.

China

The market is fixated on China. It is the Goliath of the pork industry, with half of all the hogs in world. We calculate China slaughters 2 million head a day, dwarfing the US industry. China’s production is made of 100’s of thousands of little producers and small slaughter facilities a stark contrast to the less than 200 producers in the US that produce over 64% of US production. China’s economy is growing, US exports to China and dependents are up 38% year to date. The rally in the lean hog market is being driven by the expectation that disease in China has driven real prices to $1.10 US lb. We believe the overriding factor in China’s lower pork supply is the impact of high feed prices that started to trigger herd liquidation last fall, China’s official swine inventory at the end of June was 476 million head, only .15 of 1% lower than a year ago. Are we to believe that when hogs are bringing $1.10 U.S. lb? If disease and liquidation has increased mortality 5% in China, that’s 500,000 head a week on a weekly slaughter of 10 million. If China imports 100,000 a week from US it’s almost nothing in the big scheme of things. Brazil is the only other option. Europe has little supply. Canada might jump in, but any hog that goes to China is one less for the North American market. Heck, China sells lots to North America. Maybe all those containers Wal-Mart brings from China can take back some Pork, instead of going back empty.

Feeder Pigs

Spot feeder pigs, last week $37. Early weans at $25. Ag Dayta Livestock Margin shows that you can pay $58 for a feeder pig. Increasing Lean Hog Futures and lower feed prices have enhanced small pigs’ value. The market usually follows the livestock margin calculation. In our opinion, the floor is in the small pig market and the only way this can go will be up.

Corn

Only if you have been in Mars for the last month could you have missed the collapse of the corn price. September, at one time, was $4.35. Last Friday it closed at $3.18. The total amount of acres planted in the US and the world are coming home to roost. We would not be surprised to see $2.50 corn, this fall.

Summary

Lean Futures are at excellent prices through the next twelve months. Corn prices have dropped significantly. The market is counting on big export numbers to China. Likely, but not guaranteed. China always marches to its own drummer.