You might recall that I focused on demand last month and basically made the case for “It’s not my fault!” from the demand side of the pork markets. My May pleading has not changed, but I have to point out that we don’t have much more data than we did when I wrote that on May 7.
April export data will not be published until Thursday by USDA’s Foreign Agricultural Service (product weight and value data) and Friday by the Economic Research Service (carcass weight data). USDA’s weekly pork export data were 6.7% larger for the four weeks ending April 27, but were down 0.8% for the four weeks ending June 1. Those are obviously sending mixed messages amid all of the hubbub of tariffs, threats of tariffs, retaliation, negotiations, etc., etc., etc.
The trade situation remains a huge risk that, in our opinion, was raised to a new level last week when Mexico announced that it would retaliate for U.S. steel and aluminum tariffs with its own tariffs on a number of items, including pork. The size and timing of those tariffs are still not known but Mexico is our largest pork market and is particularly important for hams, a cut that has struggled mightily this spring (see Figure 1). Part of this ham struggle was attributable to an 8% slide in the value of the peso from late-April to mid-May. That slide is at least partially due to all of the uncertainty about the North American Free Trade Agreement. The peso has stabilized some in the past three weeks but last week’s developments are not encouraging. Still, ham prices rallied big time last week and were higher on Monday. The normal seasonal will take them to the upper-$60s in July provided tariffs are not imposed. The hams will likely still move to Mexico even with tariffs. Mexican processors need raw materials. But tariffs would reduce the price those processors would pay to U.S. suppliers.
Supplies are another issue. Just as I wrote in May, the number of hogs is really not a surprise. Weekly slaughter totals, though they differ some from week-to-week, have run very close to the levels we expected after the March report. Even after the December report. I do not think there have been any surprises on the supply side. Figure 2 bears out my position.
Since the week that ended March 9, FI slaughter has amounted to 30.391 million head, 3.2% higher than one year ago. We had expected that total to be 30.353 million, just 0.13% different from actual. Our weekly calculations amount to an “available” number of hogs in a given week based on USDA Hogs and Pigs inventories and productivity estimates as well as “normal” growth patterns. Whether those “available” hogs get harvested in any given week depends on a number of factors, growth rates and packer margins being the major among them.
Packer margins have certainly impacted some weekly harvest levels thus far in 2018. See Figure 3. Higher margins drove packers to chase hogs on a few occasions while tight margins have pushed weekly harvests lower and left some hogs available for future weeks. But the important issue is that packer margins are low enough to have such impacts on hog buying activities. That has not been the case in recent years when capacity was tight. Added capacity has lessened the packer’s buying position, pushing margins, in general, back to their five-year averages.
One note. The gross margins shown in Figure 3 must pay for everything that a packer buys other than the hog. That list includes labor, utilities, packaging, energy, fuel, transportation, insurance, etc., etc. Every item in that list has gotten more expensive in recent years. And some, like transportation due to electronic logging device rules, have gotten substantially more expensive just recently. If gross margins were the same this year as they were last year, packers’ net profits would still be lower.
So, what is to come this fall? A lot more pigs! Figure 2 indicates that harvest will get to 2.7 million in one week and will exceed 2.6 million in six weeks. The all-time record is 2.575 million from the week of Dec. 14, 2017. Weights have been falling back toward year-ago levels but we still expect them to grow this fall. Costs are moderating, but now depend completely on summer weather: July rainfall and temps for corn, August rainfall and temps for soybeans.
Our price forecasts for the summer remain in the low- to mid-$70s for the national weighted average hog price across all purchase methods. Our fourth-quarter thought is for prices to dip into the $50s, perhaps far enough to average less than $60 for the quarter. Our March forecast was $60-$63.
That is not a very rosy scenario, but it could get much worse if the NAFTA goes by the wayside and tariffs on exports to Mexico become a reality.
Our admonitions from last month stand: Know your costs. Study your balance sheet to determine just how much risk you can stand. Examine your head to do the same. Talk to your banker — and your spouse. You’ve worked hard and had some very good years. Take care of the fruits of your labor.
Hope to see you at World Pork Expo. Joe Kerns and I will be doing outlook sessions at lunchtime each day in the National Pork Board tent just north of the Varied Industry building. Our friend Elwynn Taylor will provide a weather outlook as well. Stop by and say hello.