By Dennis DiPietre and Lance Mulberry
It’s a painful journey, but the rewards will likely be greater. It is beginning to look like the most severe part of the fear-based reaction to tariffs is easing, as negotiators on NAFTA for the U.S. and Mexico near a new deal. One thing you must always keep in mind is, just like you cannot turn off the spigot on pork production once overproduction is in full-blown mode, countries importing U.S. commodities cannot turn off purchases of feed ingredients and other supporting input buys just because a trade dispute has made them more expensive.
Yes, quantity demanded adjusts to price, but unless you are willing to slaughter a significant portion of your herd to avoid feeding it when prices of feed ingredients rise, there is some very limited room to use substitutes and a little more room to reduce weights. Then, you simply keep going and take a profit hit until the new deals are reached.
Business Versus Political Negotiation
Everyone is getting a great education in the difference between political deals and business deals. Both of them are fraught with the frailties of the humans executing them, but they have some very interesting differences. It takes more space to unpack this than we have here, but these teachable moments don’t come around very often. In the most abbreviated form of comparison, political deals tend to get packed with extraneous items, add-ons and demands that often bear no real relationship to the underlying and principle focus of the trade. In fact, these add-on items often form the great majority of the agreement. It’s like politicians attaching their favorite amendment to a big spending bill so it slides through without notice.
Getting Down to Economics
Business deals tend to cut to the chase. What you are seeing is the slashing-out of these past extraneous motives and side deals that have muddied the ability to understand the true value proposition in trade deals like NAFTA. Agree or not, this is the motive with trashing multilateral deals in favor of bilateral negotiations, since the real value propositions between two parties are much easier to see and properly evaluate than huge omnibus deals that accept cost-raising and unintended consequences, just to get the massive deal struck.
Normal Export Uptick Delayed
It does appear that the normal upswing in pork exports, which accompanies the price decline off the summer peak, has been delayed. Most of what you are seeing now is a combination of gamesmanship and a smattering of true economic pressures. We see all of this as very temporary and very close to full resolution. Of course, there will be some time lags due to the inexperience of some countries in business-style negotiations, but resolutions are inevitable because the current situation is lose/lose and there are essentially irresistible forces that will overcome the histrionics.
By the way, how many of you remember when there were a lot more players in the U.S. pig industry? And when overproduction set in, there were campaigns to convince everyone to simply reduce weights by 10%. This never materialized, due to the huge benefit that would accrue to cheaters who kept weights high when everyone else voluntarily lowered their own. All of that now seems to take care of itself as the industry has shown tremendous self-discipline in keeping national average weights down. Think about that for a bit and see if you can explain why it never seemed to work but does now.
Back to the Present
Back to the problem for buyers of U.S. commodities around the world who cannot really postpone purchases much, and why the cash market probably overreacts in a speculative and often exaggerated way in the short run. People tend to “think” their way through the likely outcomes and then act to avoid their imagined full consequences. Strategies like this often backfire and cause additional or more severe self-fulfilling, prophecy-type reactions until market forces self-correct and punish overreactors. It’s similar to when small countries ban exports when their production is lower than expected. It seems so compelling and logical but it usually makes things much worse. If I believe prices are going up, I hoard and thereby participate in driving them up higher than would normally be the case. If I believe prices will fall, I dump product as fast as possible and down they go. You have to keep in mind these things are always operating in the background so that your reaction to some shocking price moves is tempered.
We continue to remain cautiously optimistic and believe things will be significantly better than many people have come to accept. The U.S. crop production sector is in the middle of rationalization of the ethanol policy. Crop conditions have been particularly good except in a smattering of Corn Belt areas where drought has emerged (northwest Missouri, for instance). So far, both corn and soybeans are on track for very large crops, meaning feed ingredient costs will help cushion the year-end gauntlet pork producers must run every year. No one wants crop prices below the cost of production, but it is fortuitous if they coincide with low hog prices.
Dennis DiPietre (far left) and Lance Mulberry are economists with KnowledgeVentures, LLC. They consult with producers, processors, pharmaceutical companies, genetics firms, nutrition experts and technology providers, throughout the global pork chain. The focus of their consultation is driving client innovation and optimization in precision agricultural processes through bio-economic modeling. Call (573) 875-7890 or email: [email protected]