Over the past two months pork producers have been receiving better cash markets. While the cutout dropped $2.31 over that time, the western Corn Belt base price is up $13.62 and the CME index is up $10.13. This would indicate packer margins have decreased by some $26.37 per head over that time. In early February the CME index is measuring at 91% of cutout; pretty good for this time of year.
This is probably reflective of new packer capacity ramping up, fewer hogs (than expected) available for slaughter and really good pork demand. I want to further expand on pork supply and pork demand.
U.S. pork production was relatively flat from 2008 to 2014, with production between 22.4 billion pounds and 23.3 billion pounds (carcass weight) in each of those seven years. However, since the end of 2014, we have seen production grow by 7.3% in 2015, 1.8% in 2016 and 2.6% in 2017, equating to nearly 25.6 billion pounds. According to USDA Hogs and Pigs reports we have accomplished this by growing the breeding herd at an annual rate of 1.8% over the past four years and the balance by improved production. We will likely continue to grow the breeding herd for the next year or two, and it’s likely that production will continue to improve as well.
Growth in the breeding herd appears likely to continue based on the number of new farms that are currently under construction or are being planned for the next 12 months. We have discussed the displacement of current hog supplies as the new plants are ramped up, and that is a key driver for growth. In addition, the industry has had reasonable returns over the past several years providing added incentive. Productivity gains will continue, as we see it reflected in our portfolio. Yes, there are setbacks due to the challenges of disease; but producers are continually getting better at dealing with them and continuous improvement in production is the norm.
This is a time when the market is clearly being driven by robust pork demand. Domestic demand for pork has been extremely good with record levels of production in the fourth quarter of 2017 and retail prices, based on USDA scanner data, averaging 4% higher compared to a year ago. Retail prices for pork were up 1% for the year. For the most part in 2017 belly prices have driven the change for the cutout. Bacon demand in the United States has been nothing short of amazing.
Exports are up 7% year-to-date through November of 2017. Strong exports to Mexico, Japan, South Korea, Columbia and others are partially offset by weaker exports to China. Everyone reading this knows how critical continued growth in exports is to this industry, and to agriculture in general. Our producers depend on it.
Challenges to demand will come from growing pork production and supplies in the United States in the next several years. In addition, beef supplies, after recovering from significant drought and high grain costs in the feedlot, have now neared the end of what could be one of the biggest cow herd rebuilding in history. Beef production will continue to grow over the next several years with the heifers that have been saved over the past few years. U.S. beef production has seen an average annual increase of 5.2% over the past two years and indications are that growth will continue.
Broiler production also continues to grow. Broiler production growth has been more consistent in the last decade, but significant projects are on the horizon. The Costco broiler project in eastern Nebraska is under way, Sanderson Farms is building in Texas, and Tyson announced western Tennessee as the location for their broiler expansion. These are major projects that will likely add to the growing meat supply in the United States.
We have come to expect volatility in the market, risk management has become one of the core competencies of successful producers. That volatility will continue as pork demand is complex and very difficult to project.
Bang is vice president of Swine Lending at Compeer Financial. Click here for additional insights from Bang, and the rest of the Compeer Swine Team.