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Changing fundamentals

Exports have been improving in 2023 as the U.S. pork market is gaining share of world exports, mostly at the expense of the EU.

Dennis Smith

December 4, 2023

4 Min Read
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There has been clear evidence of a downward shift in the demand for fresh pork in 2023 compared to last year. Production is pegged at 27.217 billion pounds, up just under 1% compared to last year.

There are two bright spots, however. Exports have been improving in 2023 as the U.S. pork market is gaining share of world exports, mostly at the expense of the European Union. There is clear evidence that major pork importing countries including Japan, South Korea and the Philippines have shifted buying patterns to the U.S. at the detriment of the EU. These trends are expected to continue into 2024.

Pork production in the EU is projected to decline 3% in 2024 compared to 2023. This actually represents a slowdown in the production decline of recent years. While profitability has returned to most producers in the EU, environmental issues and political pressure is expected to keep contraction underway, although at a much slower pace. High pork prices will continue to weigh on exports and domestic consumption in the EU.

Sow slaughter has been elevated in the U.S. market since June. The most recent Hog and Pig inventory report showed a very modest herd contraction that was completely offset by improved breeding efficiencies. Indeed, a surge in the average pigs per litter, in the face of herd contraction, forced the USDA to raise pork production for 2014. Herd contraction but rising production is not what we need to if profitability is going to return to the U.S. hog market.

The situation in China is a bit more complicated. What we’re sure of is that pig prices have been below the cost of production for 22 of the past 29 months. Due to the struggling Chinese economy, domestic consumption has slowed rather dramatically.

In addition, my sources believe that African swine fever remains a major problem in China. These sources are speculating that massive herd liquidation over the last several months has contributed to the gross overproduction, keeping pig prices well below the cost of production. If this is correct, one should expect, at some point during 2024, a sudden and dramatic decline in Chinese pork production.

While large Chinese pork imports looks extremely remote currently, my sources believe the Chinese may be forced to import large quantities of pork by mid-2024. So, what I’m discussing is contraction in the EU, in the U.S., and most likely massive liquidation in China. The U.S., China and the EU account for 75% of world pork production. The lower production in the EU is well documented and will happen. Lower production in the U.S. is currently not projected but herd contraction, due to large and long-term losses in the industry is likely to occur. Finally, if ASF is ripping through the Chinese herd, the pork fundamentals have potential to change rapidly in the months ahead.

The lean hog futures market, by its very nature, is highly anticipatory. Currently the market is anticipating a continued decline in cash and cutout. For example, December futures settled last Friday at $68.60 compared to the most recent lean hog index of $71.35. The two will converge Dec. 14. December futures have been in a downward trend. I’m wondering, and preparing to speculate, that December futures may indeed bottom out and trend upward into expiration.

This would likely be fueled by a peak in slaughter and improving demand, both domestic and export demand for pork. I’m anticipating a seasonal low perhaps by the end of the first full week of December (this week). I’m wondering if deferred futures contracts will begin anticipating bullish developments as discussed in this article. How will you know? Well, June lean hog futures have been trading sideways for months. Last April June hogs were trading between 9300-9500. The trade range last week was from 9000 to 9300. A close over the September high settlement, or 97.07, would signal that the market is anticipating changes, bullish changes in the pork fundamentals.

The next key fundamental report will be the December Hog and Pig inventory report, scheduled for release on Friday, Dec. 22. This report will be released in tandem with a monthly cattle on feed report and monthly cold storage report. I’m anticipating a major bottom in lean hog futures prices by the end of the first quarter, assuming the December Hog and Pig report confirms significant contraction in U.S. breeding numbers and intentions to contract the herd further into the middle of 2024.

Smith publishes his evening livestock wire daily. For a free 30-day trial please contact him via email.

About the Author(s)

Dennis Smith

Archer Financial Services Inc.

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