“What’s the matter with this hog market?” has been a frequent question over the past couple of months. Many believe this wasn’t supposed to happen after the futures market had flirted with $90 for the summer contracts and painted a rosy picture for 2018.
Some of us, however, have warned for some time that all was not well. My analysis of supply numbers implied that demand had to be excellent this year for us to get much into the $80s, much less the $90s, this summer. And by excellent, I mean off the charts good since demand last year wasn’t weak by any means.
The reason demand had to be so strong, of course, is that from last year until today, 2018 supplies have looked huge. The owners of the two new vertically integrated plants had all increased their output to supply their shiny new hog-to-pork conversion ventures. They made deals with some others to raise some extra hogs as well. Hog suppliers shopped around for better deals as new plants took hogs from existing plants and existing plants took hogs from other existing plants to fill the holes created by the defections. Growth was coming and coming hard!
Our forecast for 2018 commercial slaughter stands at 124.895 million, 2.95% larger than last year. That doesn’t sound like a shocking increase until you put it at the end of the past five years: down 4.6, up 8, up 2.4, up 2.6. Part of that huge 2015 increase, of course, went to offset the setback caused by porcine epidemic diarrhea virus, but the net of those two years is still +3.4% or an average of 1.7% over the two years. Put in 1.7% for a “normal” 2015 and we have a four-year total of 9.95% or 2.5% per year. Dressed weights have been flat since the big PEDV-driven jump in 2014 but we think they will add 1% to output this year bumping the 3% slaughter increase to 4% more pork.
Demand has not stepped up to the lofty levels needed to handle this additional increase in output. But demand — both domestic and international — has clearly lived up to “normal” expectations so I don’t think we can blame St. Ceteris Paribus, the patron saint of demand. (If you’ve never heard of this one, don’t feel bad. I just made it up.) Consider:
• Real per capita expenditures for pork have equaled or exceeded its respective year-ago monthly level for each month so far in 2018 (Figure 1). The year-to-date change now stands at +1.6% while beef and chicken RPCE are down 1.8 and 2.8%, respectively, through March. Remember, a good’s own price does not impact demand. It determines the quantity demanded. The shifters of demand are prices of competing and complimentary goods, income and tastes and preferences.
Beef prices remain positive for pork demand though we think that help will wane as we move through 2018. Chicken prices are neutral to slightly negative but have actually been stronger than we expected in recent weeks. That rally was too late to help March, of course. Incomes are becoming a larger positive factor as tight labor markets (sub-4% unemployment!) push wages higher. And tastes and preference are, from everything we can tell, still much better than in the past regarding protein, animal protein, animal fat, etc.
We think the problem with beef and chicken demand and perhaps pork demand, too, in March was something else: Demand opportunity. Now that’s not an Econ 101 term. I invented it, too. But it describes what happened in late winter and spring as storm after storm moved through highly populated areas of the East Coast. People had to stay home and what showed the biggest impact? The two species with the largest exposure to foodservice usage. It fits our hypothesis pretty well. Or at least our biases. Pork RPCE may have been even better had it not been for these demand interruptions.
• Exports were larger than one year earlier for the seventh month in a row in March at up 2.7%. March marks 21 of the last 22 months for which that claim can be made. More important, U.S. pork exports were record large on a carcass weight basis. March’s year-to-year increase was smaller than those of January and February so the year-to-date increase slowed slightly but it is still 5.8% even with Mexico and Japan down (by 2% and 2.1%, respectively) for the year.
Those declines have been made up for by huge growth for Korea (+34.5% and record large in March), the Caribbean (+18.4%) and “other” markets which include Australia, Colombia, Hondurans and Chile (+17.5%).
• It is important to note that exports to China and Hong Kong fell 8.8% short of last year’s level in March. That is well before any tariffs had been imposed on U.S. pork. This decline is symptomatic of China’s hog supply and price situation. They have plenty of pork and it is cheap. That is the reason we have stated that we think the tariffs will do little to impact our exports to China/Hong Kong because those exports were already going to be much lower than in recent months.
One soft spot in exports has already been revealed. Pork variety meat exports were down 10% in volume and 7.2% in value, year-on-year, in March. Year-to-date, variety meat exports are down 15% in volume and 8.6% in value. While shipments to Hong Kong, China and Mexico — our three largest variety meat markets that typically account for about 90% of all variety meat exports — are all lower, the decline for China through March is much larger than for the other two. Year-to-date shipments to China are down 31% in volume and 25% in value so far this year. Note again that these are through March, before any tariffs were imposed. They are likely the result of higher Chinese hog supplies.
So what’s wrong with these markets? It appears to us that the main (and perhaps only) culprit is supply. Those will tighten seasonally as warm weather has its impact but year-on-year increases will remain large through the end of 2018 and in to 2019. Supplies for the first half of ’19 are already pretty well programmed. We will have another shift at one of the new plants and another large, modern packing plant operating next year. But those help hog demand relative to hog supply. They exacerbate the pork supply versus pork demand challenge. And that challenge could get worse if the situations with the North American Free Trade Agreement and China are not reconciled successfully.
Look at your costs, your balance sheets and your risk preferences. It is likely time to play defense. St. Ceteris Paribus has done his job so far. Let’s hope he continues.