Our friend Brett Stuart of Global Agritrends has stated that "China will always be our next great market." His implication, of course, is that China's 1.3 billion consumers and their pork-loving nature would be that pot of gold at the end of the rainbow that just keeps moving as we get closer to it. And I agreed with him every time he said it, so I am not being critical of his somewhat dour outlook.
But guess what? It appears that the dog has finally caught the car and we all may be wondering what to do with it.
November pork shipments to China (156.6 million pounds, carcass weight equivalent) exceeded those to Mexico by 27.8 million pounds. As can be seen in Figure 1, this isn't the first such occurrence, but the magnitude of the difference and the underlying circumstances are far different this time. We may finally be onto something big here. November shipments to China/Hong Kong (with those to Hong Kong being miniscule at this point) were up 66% from last year. Year-to-date China/Hong Kong exports are up 122% from 2018.
The big month for China resulted in far and away the largest month ever for U.S. pork exports, breaking the previous record (set in April 2018) by 14%. And to put 2019 in context: There have been 20 months in history in which the U.S. pork industry has exported 500 million pounds or more. Eight of them were in 2019 and December will likely make that count nine out of 21.
Total U.S. pork exports were 19.6% larger than last year in November. Year-to-date shipments are now up 5.5% and will set another record this year, breaking the record of 2018 which broke the record of 2017.
Just in case you are missing my message: I think exports have been exceptionally good and a major positive story for the U.S. pork industry. Even if they are less than some people's pie-in-the-sky expectations.
So why did Iowa-Minnesota negotiated hogs have an average base price of only $42.96 in November, and national negotiated net prices average only $46.52?
Answer: Packing capacity utilization. Figure 2 shows clearly that we severely challenged 5.4-day-per-week slaughter capacity after Nov. 1. And the true situation is even worse than what Figure 2 portrays for two reasons. First, the Prestage Foods plant in Wright County, Iowa, is in that 2.755 million head capacity at a full 10,000 head per day and it has not reached that level yet. The Prestage plant ran near 8,000 head per day in recent weeks, reducing "actual" capacity from "nameplate" capacity.
Second — and more important — packers' normal response to huge margins and lots of pigs is to add Saturday shifts every week every place they can. While some Saturdays saw big slaughter totals, they were not a "full court press" to handle the extra supply. I think the reason is the short labor supply. Plants may have enough labor, but they certainly don't want to run anyone off by working them several Saturdays in a row. So the normal ability to work above my 5.4 days per week capacity has not been present.
The other utilization factor, of course, is pig supplies and they have been plenty big. The peak was 2.825 million the week of Dec. 18 but last week's total of 2.713 million was still well above our computed hog availability of 2.573 million head. The average weight of producer-sold barrows and gilts has risen both weeks this year and was up more than 2 pounds per head versus both last year and the week of Christmas, suggesting that producers are not yet current in their marketings.
So why this post-mortem on the holiday hog market? Look at the red smooth line in Figure 2 that represents our forecast for weekly slaughter in 2020. The numbers behind that line for now through October are pretty well set. Pigs are on the ground to fill slaughter totals through June. The sows that will produce July through October slaughter are bred. The only thing that will significantly impact those numbers would be, I think, a major health break that would kill substantial amounts of pigs. The University of Minnesota's Bob Morrison Swine Health Monitoring Project has found no evidence of a problem of that magnitude for either porcine reproductive and respiratory syndrome or porcine epidemic diarrhea virus — yet. It could still happen, but the production year is off to a great start from the disease standpoint.
You can see that slaughter this past fall looks like child's play compared to what the numbers are telling us for 2020. A larger breeding herd (that is still growing), farrowings that we believe will be larger than USDA's chronically under-estimated levels, continued growth in litter size, and, at least for now, a good health situation all add up to slaughter totals above the 5.4 days per week capacity for the entire fourth quarter.
There will be little help on the capacity side. Premium Iowa Pork's Luverne, Minn., plant will add 2,250 per day. That was initially expected in April and we have heard no updates. We understand that the former MoonRidge Pork plant in Missouri has been looked at by several entities. It would add another 2,500 head per day if operated full-tilt. There could be some line speed increases if plants adopted the New Swine Inspection System approved by the USDA this past year. But we have heard of no one moving aggressively to adopt the system and doing so takes time — and people, something in short supply about everywhere.
Second shifts at Prestage Foods and Clemens Food Group are not in the works at all, and the planned second shift at WholeStone Foods' Fremont, Neb., plant will not be ready until, we hear, 2022. Outside of a few tweaks to line speeds, there is nothing else to offer.
And finally — if Wednesday's Phase One agreement with China benefits U.S. pork the way many expect it to, shipments to China will almost certainly grow beyond 2019's record. We have total exports up a robust 26% with virtually all of that being due to China. The trouble is, that might not matter much if we can't get the hogs processed in a timely and efficient manner. I believe a higher cutout value will indeed help producers, but the impact will be much smaller if capacity is an issue. Right now it looks as though it will be a big issue given the number of hogs I expect.
A last point for this week. One of the factors that was supposed to help those spot hog prices this past year was the opening of the Prestage plant and their pledge to buy hogs in the spot market. Now, the Prestage family and many of their employees are my friends (and I hope will remain so) but I have to ask, "Why have we not seen data from Prestage transactions in USDA's hog or meat price reports yet?" There are likely several answers to that, some involving Prestage and some involving the USDA. But the fact is that we haven't seen any such data in the public reports. Someone needs to rectify this shortcoming.
I know that opening a plant is like draining the proverbial alligator-infested swamp and getting the data right is fraught with peril for both the company and the USDA. But the law says that covered packers (and Prestage surely is one) are required to report and the USDA is required to publish prices of pigs bought and pork sold. The system to report such should be just as important as the stunner or the carcass-split saw in the equipment/systems list for a new plant. Dogmatic government officials are not appreciated by anyone and some forbearance is understandable. But it's been since April 7. That's a lot of forbearance. We hope to see the Prestage numbers included in USDA reports soon.