What last year’s hog markets mean for the future

In preparation for writing this column I looked back at one I wrote in August of 2014, and the change in times is definitely evident. I wrote on the run up to $72 per head margins and the fall back to $36 per head projected 12 months margins at that time. Today we’re looking at breakeven projections, and that’s after continued downward pressure on corn and meal.

The reasons for reduced margins are numerous, but the largest being the increase in production. Recently we’ve been able to hold near $90 cutout on hogs, and we’ve only seen a 1.3% increase on total harvest versus 2013 for the week of Aug. 15. Weights are also playing a role with last week’s average carcass weight running around 209.

There’s a wide spread between October lean hog futures and the current cash prices, as would normally happen this time of year, so it will be interesting to watch how these markets merge as we move into September. This is not all that uncommon, but given $90 cutout, it leaves some optimism that domestic demand will remain strong enough to hold cash hog prices higher than what the futures project for the fourth quarter.

Domestic ag relationship with Chinese markets

Domestic demand has appeared to remain strong, despite exports being weaker than hoped for. The great hope is that the Chinese market would open up given all the liquidation that has occurred.

However, a limiting factor is their economy. All signs point to a much weaker Chinese economy than in previous years when their food inflation ran up and turned to the United States to buy large amounts of pork. One has to wonder how bad it might be and if the Chinese consumer is able to afford as much pork as in the past. We hear Chinese economic growth may be limited to 5% versus already lower 7% predictions for 2015. The other limiting factor with the Chinese is the import limitations on U.S. pork due to ractopamine. We’re hearing more rumblings of packers looking to be able to secure ractopamine-free product. How could this affect your production costs? The reality is it is impossible to know how much export market share we could be giving up because of ractopamine use so there’s no easy answer.

Expansion in all sectors

There’s still hope that given the relatively large reduction in their herd, that at some point the Chinese will need to import product from somewhere and that should open markets to U.S. pork. When the time comes, and we see improved margins, producers will need to be diligent in sticking to their plans to capture margins. Given the expansion taking place in the United States, the opportunities could be fleeting. As always it will be important to know your costs and what kind of returns you want for your business.

The recent USDA report shows a higher projected yield for corn and soybeans than originally expected. It appears clearer now that lower cost inputs are here to stay for the next year That is evident in the northern states but not as clear in others. There’s still a lot of time to fill out the crop but it appears that there’s no major risk of shortages, which comes as a relief to all the sectors in expansion mode.

With expansion under way, in most all of the protein sector, it is more important than ever to be on the free trade bandwagon. For pork producers that means mandatory country-of-origin labeling, and its repeal, remain important as any retaliation and reduction in exports to Mexico would be a big problem. On top of that we need to support the opening of new markets through agreements like the Trans-Pacific Partnership. That will be vital long-term given both the increase in numbers we see coming through expansion and the continued improvement in production annually. It’s important for all of us involved in the livestock industry to be advocates for not only selling our product abroad but also what we do and how we do it.

Roelofs has worked in the hog industry his entire life and has been with AgStar Financial Services since 2008. For more insights from Roelofs and the AgStar Swine Team, including their weekly video Hog Blog, visit AgStar.com. If you’d like more information on AgStar’s Margin Manager Tool check it out at AgStar.com/MarginManager.

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