Let’s start with the big picture in the meat situation and then work our way back to the hog market. As outlined in the May 10 USDA supply/demand report, meat production is projected to continue rising.
Beef: While beef production was revised downward from the April projection, total beef production this year is projected to come in at 27.2 billion pounds or up 4.2% from last year and record large. Beef production for next year is projected to be 27.7 billion pounds, once again record large and up 1.8% from this year. While exports are projected to rise both this year and next, per capita beef supply is projected to be 58.1 pounds (compared to 56.9 in 2017) this year and swell to 58.8 pounds in 2019.
Pork: Pork production for this year was revised down just slightly (35 million pounds) from the previous month. So, production for this year is pegged at 26.7 billion pounds or up 4.7% from last year and record large. Production for next year was projected to come in at 27.6 billion or up 3.1% from this year and of course record large again. Pork exports for this year are projected to be 5.916 billion pounds which is up 5% from last year. The USDA is projecting that exports will rise again next year, reaching 6.125 billion pounds, or up 3.5% from this year. Because production is increasing faster than exports, per capita pork supply at the end of this year is estimated to be 51.9 pounds compared to 50.1 last year. In addition, per capita supply at the end of next year is projected to be 53.1 pounds.
Broilers: Chicken production for this year is pegged at 42.3 billion pounds which is up 1.6% from last year and record large. Broiler production for next year is projected to come in at 43.3 billion, up 2.2% from this year. Broiler exports this year are pegged at 6.9 billion or up 2.3% from last year. Exports for next year are projected to be 7.1 billion pounds, up 2.3%. Per capita broiler supply is pegged this year at 91.9 pounds compared to 90.9 last year. Per capita supply for next year is projected to be 93.2 pounds or substantially higher than this year.
Total per capita meat supply: Per capita supply is calculated by taking U.S. production, plus imports, less exports and then divided by the U.S. population. This provides a feel or measurement for how much meat needs to clear the consumer channels. Lower per capita supply would imply higher average meat prices. Higher per capita supplies imply it will take lower meat prices to clear the product. Total per capita meat supply in 2017 was pegged at 216.8 pounds. This year it is pegged to be 220.4 pounds and for next year total per capita meat supply is projected to come in at 223.7. Clearly this implies that lower prices and possibly sharply lower prices may be necessary to clear this much product.
Clearing this much meat without experiencing lower prices could only occur under continued strong economic growth. While this is certainly possible, we’re becoming very concerned about the continued growth of the U.S. economy. We follow several indicators suggesting a peak in U.S. economic activity may be close at hand. One indicator is that copper prices have not been trending upward. Another is acute labor shortages and, more specifically, labor issues in the packing and trucking industries. Rising interest rates are another obvious indicator that economic growth may be near a peak.
Turning our attention specifically to the hog market and pricing structure, several warning flags have been raised. First is the fact that to date the hog market has performed very weak from a seasonal standpoint. Typically hog futures, cash hog prices and pork cutout values are surging upward at this time of year. This has simply not been the case this year. Pork remains cheap and offered. Cold storage stocks at the end of April are up 8.6% from last year although they’re even with the five-year average.
Second, technically hog futures should be moving higher at this time of year. Instead, the summer hog chart patterns have displayed nothing but a downtrend. June hogs peaked in late-February followed by a lower high in March and again a lower high in April only to experience yet another lower high in May. A down trending summer hog futures market is not what one would expect during the spring season. Typically, the seasonal peak in hog futures prices should occur from mid-June to mid-July. Given the weakness in the market this year, with virtually no seasonal rally, perhaps the seasonal highs will be in place early if not already in place.
Third, fundamentally, in addition to the record large tonnage that must clear through the domestic channels this year and next, we have grave concerns regarding exports given a strong dollar and an obvious trade dispute with China. Recent talk about slapping tariffs on imported automobiles could cause problems with Japan and South Korea, both of which are huge buyers of U.S. pork. The hog industry has seen a rapid and aggressive expansion in slaughter capacity. Most believed, including myself, this would create a new era of packer competition for butcher supplies. Frankly, this has simply never occurred. One major unforeseen problem is the acute labor shortage in the packing industry. A lack of workers to process a record large supply of beef, pork and poultry could cause severe bottlenecks to develop. If this happens, packers won’t be the losers. They will simply break cash prices severely. Packers won’t lose money in a grossly oversupply situation. It will be producers, the unhedged producer who will experience widespread losses.