Mexico gained the right to place retaliatory tariffs on US products after winning NAFTA complaint case regarding the US prohibition on Mexican trucks operating beyond our border region. The products on the retaliatory tariff list are changed from time to time and pork was added to the list in August. Exports to Mexico have remained good but not as good as before the tariff was put in place. Year-on-year export growth had been between 20 and 45 per cent from January through July. Year-on-year export change has been only as high as 5.7 per cent in August and was –11.6 per cent in September. With the one exception of May 2009 when the H1N1 scare was at its worst in Mexico, August 2010 marks the first time since January 2008 that monthly exports to Mexico had not grown on a year-over-year basis— so the tariff appears to have had a definite impact on US shipments. The major beneficiary of this slowdown in US shipments has been Canada, whose exports to Mexico grew by 74.5 per cent, year-to-date through October 2010. The tariff is just large enough to offset the transportation cost advantage of US packers and processors and make Canadian product price competitive on a delivered basis.

The irony of this situation is that the US pork industry worked diligently to keep a cross-border trucking programme going and to push the US government to find a solution that would allow Mexican trucks to operate into the interior of the country provided, of course, they were safe. Those efforts paid off with pork not being on the original tariff list. Mexico is our largest pork/pork variety meat market in terms of volume and our second largest in terms of value.

The last of USDA/DOJ’s December “Competition Workshop“ was farm-to-retail price spreads or what was once commonly referred to as “marketing margins.“ USDA’s Economic Research Service publishes these spreads each month but many question their accuracy and usefulness. The ERS data involves weighted average prices of beef and pork at the retail, wholesale and farm level with all of the prices converted to a retail weight equivalent. The charts below show monthly data for beef and pork from 1986 onward. Data are available back to 1970.

Accuracy concerns arise primarily over the retail prices which are based on a very small number of cut prices obtained from the Bureau of Labor Statistics. In addition, USDA’s factors for converting wholesale to retail weight and prices data to the early 1990s.

It is important to realize that the prices and their differences (ie. margins) do not represent profits at the various levels. They represent only revenues per retail pound equivalent. So, the level of the producer’s price and the downstream spreads depend, over time, highly on the cost of producing the product or performing marketing service such as product fabrication, further processing, packaging, transportation, merchandising, etc. If more of those services are demanded by consumers — ie. the consumer -level product looks less like an animal or a part of an animal — it follows that more must be paid to the party that performs those services.

The question remains “What is the right level of these costs — and thus the spreads?“ Many think they should always be smaller but that is not necessarily true. The reason, of course, is that consumers want certain characteristics or services that must be delivered. An absurdity makes the point: We could guarantee that marketing margins are zero and that farmers receive 100 per cent of the consumer’s dollar by simply requiring that consumers must buy only live animals and do all of the processing themselves. How many hogs or steers will actually be sold? Probably not zero but pretty close.

Watch these deliberations closely in the coming months as they may have an impact on regulatory actions by USDA or DOJ.

Please see page 2 (link below) for a CME Group Special Executive Report regarding the expansion of the strike price range for Live Cattle Options.

Further Reading

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You can view the full report by clicking here.