Steiner: 5 drivers to U.S. pork market National Hog Farmer

5 drivers to U.S. pork market

The expanding U.S. pork industry creates marketing opportunities and challenges as more pigs and pounds of pork are hitting the market — domestically and globally.

U.S. pork producers are expanding their production, resulting in a record-breaking supply of pork this year. This record number of pigs, as well as a record amount of pork being produced, is expected to continue into 2017. This expanding supply creates marketing opportunities and challenges for the U.S. pork industry.

The Pork Checkoff hosted a teleconference Tuesday with experts addressing the current trends and impact on the U.S. producers.

Len Steiner, Steiner Consulting Group, in Manchester, N.H., presented five main points playing key roles in driving the U.S. pork industry.

1. U.S. economy growth, good for meat
“The U.S. economy is growing and a growing economy is generally good for meat demand,” says Steiner. He went on to list some positive indicators to support that notion. A stock market that has hit all-time record highs in the last few weeks, consumer confidence that remains good during a “brutal” presidential election, and “now that we know who the next president will be we expect consumer confidence to further increase. The American public likes certainty and dislikes unknowns, with certainty should come good meat demand.”

Another positive indicator is that U.S. unemployment is at 4.9%, “so the U.S. economy is at or very near full employment at this time.”

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2. Increased corn supplies mean more meat for consumers
Corn production in 2012-13 was 10.7 billion bushels, and the three years that followed averaged 13.9 billion bushels, and this year “we’re going to harvest over 15 billion bushels, and most of it is in the bin at this time.”

Corn prices peaked at $8 in 2012, and currently around the Corn Belt corn can be priced at $3 to $3.50 per bushel. “You can see the impact of lower corn prices in total meat protein output as producers convert the mountains of corn into meat.”

Total meat production for 2014, two years following the corn price spike, was at 90.9 billion pounds. By 2018, “we expect beef, pork and poultry output to exceed 101 billion pounds. You have to back to the mid-1990s to find a similar four-year jump in meat production.”

In 2016, U.S. pork production will set an all-time record at 24.96 billion pounds, with more pork estimated in 2017 at 25.6 billion pounds.

3. Sticky retail prices impact wholesale pork prices and hog values in short term
“As much as we would like prices at retail to adjust quickly so consumers can increase their meat consumption at least when prices are coming down,” Steiner says, “history tells us those adjustments take time.”

October 2016 retail pork price is about $3.74 per pound, about 5.8% lower than year ago, but “still some 8% higher than we were some five years ago.” The value of the pork cutout, an indicator of the wholesale pork prices, is currently 16.5% lower year-over-year in October and 26% lower than five years ago.

Steiner explains that “sticky” prices occur because retailers have learned that consumer do not make abrupt changes to their eating patterns. “If they (retailers) were to lower prices say by 15 to 20%, it is unlikely that consumers will immediately increase their consumption greatly. But retailer revenue would suffer. Rather retailers initially will focus on special holiday promotions and then, over time, lower the overall base price for the various items they sell in the meat case.”

Larger foodservice operators are even slower to adjust prices due to printed menus and fixed menu boards. “It takes several months for larger foodservice operators to develop new menu items and coordinate with their marketing.”

Steiner points to good news that retailers and foodservice operators feel more secure about pork supply prospects in the medium term. “This means continued declines for meat prices at retail and broad promotion activity. For a number of years, the decline in meat supply availability (in part because of high feed costs) forced end-users to steadily increase prices to ration out supplies.”

Domestic red meat and poultry per capita disappearance (or consumption) was 275.1 pounds per person in 2007. Then the recession hit, feed costs skyrocketed due to increasing ethanol demand and export demand increased. Domestic meat consumption by 2014 had declined by a little over 10% to 246 pounds per person.

In 2016, however, the per capita disappearance of the four species is projected at 259.0 pounds per person, 5% higher than two years ago and the first increase in seven years. “And we expect per capita meat consumption of these four major species to be up again in 2017 at 262.3 pounds and then up again in 2018 at 264.6 pounds.”

Pork per capita disappearance has been in a sideways band between 58.7 pounds per person per year and 68.1 pounds per person per year since 1982. This year’s pork consumption is expected to be 63.2 pounds, “so we have plenty of room to move up to the higher end of the 34-year range in the next few years.”

4. Short-term challenge: processing capacity not in step with supply growth
U.S. pork producers have shown resiliency, overcoming the challenges of record high feed costs, the outbreak of porcine epidemic diarrhea virus to the loss of some key export market in recent years. Steiner says pork production exceeding beef production last year, and is expected to repeat that trend this year. “As supplies have expanded, processing capacity has lagged a bit behind. In the short term, this has put downward pressure on hog prices. But new plants are scheduled to be opened in the next 18 months, which should alleviate some of the pressure and help narrow the gap between hog prices and the price of pork at wholesale and retail.”

5. Exports remain key
This year, more than 20% of U.S. pork will go to export markets, compared to 16% for chicken and less that 10% for beef and turkey. Robust exports remain key for a healthy and profitable pork industry as the pork industry expands.

“While there are certainly headwinds for U.S. exports, the strong dollar, weaker demand in some emerging markets and increased 2016 competition from Europe which we expect to subside in 2017. The reality is that U.S. hog producers are some of the most-efficient and low-cost in the world, and should be able to successfully compete in the global marketplace with their internationally recognized safe and nutritious products,” Steiner says.

Brett Stuart, Global AgriTrends, says the United States is the No. 2 global pork exporter, behind only the European Union. Last year, the export of pork and pork products totaled $5.3 billion, the equivalent of $47 per head of benefit to the U.S producer. While Mexico, Japan and South Korea are the top three markets for U.S. pork, last year U.S. pork found its way to 121 countries.

“U.S. pork loins to Japan and offal such as ears and tails China, those products generate substantial profits to the U.S. industry. Pork exports allow each cut or product to be sold to the highest bidder, bringing maximum value to the U.S. pork sector,” Stuart says.

Much has been said about how Trans-Pacific Partnership would create better access to the Japanese market, “a major lucrative market for U.S. pork,” as well as to lesser TPP nations, but President-elect Donald Trump has stated that he plans to pulls out of the U.S. possible inclusion in the trade pact.

Regardless, Stuart says U.S. pork and variety meat exports are now up 5% year-to-date in tonnage. “That’s a pretty good growth year, and that growth has been fueled by China where an actual physical pork gap has led to high prices and import surges in 2016.” Those high prices in China have also led to increased production, so that cycle is starting to turn, and the China market may start to slow into the short term and even into 2017, “but the market provides excellent long-term prospects for U.S. pork.”

Mexico is a key ham buyer, and really important to the U.S. supply and demand as the industry expands.

Stuart says rising dollar rates have challenged exports since mid-2014, as a stronger dollar makes U.S. goods more expensive overseas. While some key currencies, such as the Japanese yen and Korean won, have corrected back this year, the peso is a concern. It is down 33% since July 2014. Though that’s a concern, Stuart says, “our export market may not be as sensitive to exchange rates as you may think.” As an example, Japan imports half of their pork consumption. “They’re not going to quit importing pork if the currency moves higher or lower,” he says, and Mexico is a good example, even though the peso value has declined, “we are doing really good ham business in Mexico.”

Stuart forecast U.S. pork exports will be up 1-2% next year as shipments to China and Hong Kong slow.

Looking ahead, global population is rising by 78 million per year, “think about that, every four years that’s the equivalent of the United States,” he says. Yes, most of that population is in poor countries, “but everyone has to eat. The future of food production is very good.”

Not only is the overall population growing, so is the global middle class. Researchers with the Organisation for Economic Cooperation and Development forecast the global middle class to increase from 2 billion in 2015 to 4.9 billion by 2030. “I think that is enormously positive, not just to the pork industry, but to the food industry in general. This rising middle class is focused in Asia, and it opens new opportunities for a wide variety of pork items including processed, value-added and convenience-oriented products.”

Stuart sees all of this adding up to global markets holding “enormous” potential for the U.S. pork sector. 

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