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Hackett Advisors in the News


Mexican pork tariff adds to market’s uncertainty

By MICHELE F. MIHALJEVICH
Indiana Correspondent
09/01/2010

WASHINGTON, D.C. — Mexico has put a tariff on U.S. pork products exported to the country, as the trucking dispute between the two nations continues.

Processed hams will be charged a 5 percent tariff and pork rinds, 20 percent, according to an updated list of U.S. goods subject to tariff by the Mexican government. The tariffs went into effect Aug. 19.

In addition to pork, other new U.S. products on the list include meats, fruits and vegetables, chocolate and chewing gum. The list now totals 99 items.

Mexico originally instituted the tariffs in March 2009 in response to the discontinuation of a pilot program by the United States that was designed to meet the country’s North American Free Trade Agreement (NAFTA) obligations, according to the U.S. Chamber of Commerce.

Under NAFTA, trucks from both countries were supposed to be granted full access to roadways in each country, but the U.S. did not give access to Mexican carriers until the pilot program began in 2007. The program granted access to a limited number of Mexican trucks that were required to undergo a rigorous inspection program, the Chamber said. The program ended in March 2009 after Congress terminated the funding.

Mexico is the largest market in volume for U.S. pork, accounting for 20 percent of U.S. pork exports, said Nick Giordano, vice president and counsel for international affairs for the National Pork Producers Council. Processed hams are the single largest U.S. pork product in volume exported to Mexico, he added.

“This tariff makes us less competitive,” he explained. “While pork rinds are a much smaller percentage of trade, with the 20 percent tariff, we’re getting whacked pretty hard on that product.

“It’s not a positive development. Canadians and Chileans can continue to ship their goods to Mexico at a zero tariff. This makes Mexican domestic producers and foreign competitors more competitive.”

The pork industry’s success in exporting to Mexico under NAFTA is one of the reasons pork was added to the tariff list, Giordano said. “It’s a miracle we weren’t on the original list. This is detrimental to the interests of pork producers. More in the U.S. will lose jobs and exports associated with it.”

Mexico was within its rights to begin the tariffs, he said.

“The U.S. needs to implement its obligations under NAFTA on trucking,” he explained. “The U.S. needs to live up to its trades deal. Less exports because of this retaliation by Mexico equals less jobs.

“Mexico has shown a lot of restraint, but they finally threw up their arms and retaliated. We’re on the list now and that’s not a good thing.”

The tariff situation brings uncertainty to an already bearish outlook for pork, said Shawn Hackett, president of Hackett Financial Advisors, Inc.

“While this won’t impact the market as much as other things, it will reduce the demand for pork even more,” Hackett noted. “Overall in the world and in the U.S., we have a challenged and decelerating economy. There’s a rough patch coming up and there will be a lower demand for pork and beef.”

Prices had rebounded recently from 12 to 18 months ago when they were historically low, as the industry dealt with the economy and the H1N1 flu – also called the “swine flu” – he noted.

“That forced a massive liquidation (of stock), and created a lot of hardship,” he said. “Then, demand started to get back to normal but the supply was less. It created a bullish market.

“We’ve had pretty positive prices for a while, but now we’re starting to see a bulge in supply again. Some are saying demand will remain pretty good, but I think they’re wrong.”

Hackett recommends producers lock in prices now, at a higher level, before they begin to fall.

Ron Plain, extension economist in the Department of Agricultural Economics at the University of Missouri-Columbia, is bullish on the industry, at least for the next year or so.

“The industry is good right now. We lost a lot of money raising hogs in 2008, 2009, but we tightened the meat supply. While production will increase from summer into fall, and prices will fall, I expect to see production drop off again in 2011 and prices go back up,” he said.

Prices are about 80 cents a pound for lean carcass weight and 61 cents a pound for live, he said, adding he expects carcass prices to drop to about 70 cents in November and December, with live prices dropping to about 52 cents.

“We’ll be making good money this summer and break even at the end of the year,” he said.

The problems the industry had in the last couple of years came at a time when there were a lot of hogs, he said. “Lots of things went wrong in 2008 and 2009. There were high feed prices, and low demand due to the recession and the ‘non-swine flu scare.’ But feed costs have moderated, demand has picked back up and a lot of herds were downsized, so there’s a lot less pork.”

In 2008, 116.5 million hogs were slaughtered in the U.S., Plain said. This year, the forecast is for 109.65 million hogs to be slaughtered, a decrease of 5.9 percent from 2008. While Plain is bullish for the next year or so, he said he expects changes by the second half of 2011 and into 2012.

“It’s been said that pork producers can’t stand prosperity, so when they make money for too long they decide to raise more hogs,” he said.

Slaughter numbers will start to go up in the second half of next year and will increase significantly in 2012, he said, adding he expects to see lower prices by 2012. The tariff issue will cause Mexico to buy less pork from the U.S., he added.

“Mexico targeted a variety of products in hopes those industries would put pressure on our government,” Plain explained. “You don’t put a tariff on a product and keep buying more. They’ll buy a little less, but I don’t see it falling off the table by any means.

“They buy a lot of pork from us because we’re close. Others will be glad to sell them pork. But with other countries, it’s a question of if the tariff is high enough to offset shipping costs from another country.”

The pork tariff will cause an impact but it shouldn’t be a huge one, said Shane Ellis, extension livestock economist at Iowa State University. “It will be an issue, but I’m not saying the sky is falling. It’s a little dip in the road that may cause a little bit of a ripple,” he said.

Mexican consumers and U.S. producers will all be affected, he said, adding consumers might have to pay a bit more for U.S. products.

The reduction in hogs over the last year or so will help the industry, Ellis said. “The supply of pork will be down in the fourth quarter, and we’ll have better prices and maintain some profitability. Projections show it looks profitable through the end of this year.”

Futures prices are currently in the low 80s-cents per pound for lean carcasses, and are projected to be in the upper 70s in September and October, Ellis noted. He expects them to run in the low 70s from November through January, but expects them to increase to the mid-70s in early spring, and to the mid-80s by June.

U.S. pork exports are up 8 percent over a year ago, he said, adding exports will continue to look strong unless there’s a global recession.

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