November 7, 2022
This month as I focus on the hog market I have far more questions than answers. However, many times it's critical to be focused on the right questions, especially when making business decisions.
Global meat production is projected to be flat for 2023 which is a very rare occurrence. Typically, global meat production increases every year to meet the demand of an ever-expanding population. So, with a broad brush, one should expect higher wholesale meat prices over the next 12 months that should also translate into higher cattle, hog and poultry prices.
Pork production is projected to decline substantially in Europe while holding near steady in the United States. In my opinion, U.S. pork production is currently being over-estimated by the USDA. No doubt there is very little expansion underway. I've heard of a large Midwestern pork producer shutting down their sow operation via the sale of sows to Seaboard Farms. Speculation is that Seaboard needs more pigs to slaughter in an effort to maximize capacity. This will reduce the availability of negotiated pigs and obviously increase the number of packer owned pigs. Other than this development, I've not heard of anyone or any type of expansion occuring in the U.S. hog industry.
With corn prices remaining stubbornly elevated and with porcine reproductive and respiratory syndrome virus and porcine epidemic diarrhea virus still problematic, slight contraction is likely to show up in the next Quarterly Hogs and Pigs Report due out Dec. 23. This leads to my first critical question; what are the odds that corn prices remain elevated near $7/bushel during 2023?
The other main issue on the supply side of the pork market is Chinese production. We know that over-production in China sent prices sharply lower over the last 12 to 16 months, creating huge losses for all Chinese pork producers. We also know that the massive liquidation is now complete and pig prices have rallied sharply in China over the last few months. Indeed, prices are now thought to be back above the cost of production and expansion is once again occurring. My assumption is the possible easing of COVID restrictions in China coupled with the onset of expansion (gilt retention), will drive pig prices higher in China next year.
The above assumption leads to the second key question; will China become a large importer of U.S. pork in 2023? The math determining whether China will import U.S. pork is clouded by continued tariffs on U.S. pork. The current situation appears to be as follows. U.S. pork is about 15 cents/lb too expensive for China to import. Wholesale ham prices, butts and loins are all priced near $1/lb. Should any of these primal cuts decline to 85 cents/lb or lower, it would be profitable for China to buy the pork and pay the tariff. Of course, a combination of rising pork prices in China coupled with declining pork prices in the U.S would trigger Chinese imports quicker. In my opinion, this is likely to happen sometime early next year.
U.S. pork exports are down 14% year-to-date mostly because Chinese imports are down over 60%. A substantial increase in Chinese pork imports is critical for U.S. pork producers. This will be the driving force taking hog prices higher in 2023.
The third and final critical question facing hog producers in 2023 is; will recession hit in 2023 and will this impact domestic pork consumption severely? In my opinion, the United States will avoid recession until sometime in 2024 and thus domestic pork consumption will not be impacted severely during 2023.
Turning specifically to the U.S. hog futures market, managed money has been getting jerked around big time over the last few months. In the second half of September, approaching the fall hog runs, December futures took a nosedive. The funds were the huge sellers driving futures from $89 to $73 over the course of 10 sessions. The $16 break was followed by a 1680-point recovery over a 14-day period. Funds appeared to completely reverse positions from holding large short positions to holding long positions. Prices are in retreat once again. I'm expecting December futures to stabilize within the $81-$82 range on this downward correction. This price level should be discounted enough to stabilize the market, in my opinion.
Longer term, the summer hog contracts have potential to move from the current base of support that I'll define as the range from $101-$102 back toward the highs achieved last year, or $120. Such a move will not occur unless the Chinese enter the U.S. pork market early next year. If this happens, and if corn prices do not remain elevated near the $7 level, profitability will return to most U.S. pork producers by mid-year.
Dennis Smith publishes his evening livestock wire daily for clients and subscribers. For a free 30-day trial send an email to [email protected].
Source: Dennis Smith, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.
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