For several years, I have included a short discussion about risks near the end of any economic outlook presentation. It’s always prudent to think about what could go wrong before it goes wrong so I consider this a key component of decision making.
There are two key components of any discussion of risk: The probability of the event happening and the economic impact of that event. We want to always consider potential risks that have both a high probability and high impact, and we pretty much never worry about low-probability, low-impact events. The tricky part it how much importance to assign to those potential risks that have either a high impact and low probability or a low impact but high probability. Most risks fall into those latter two categories.
Let’s consider my “Risks to the forecast” list as it stands right now.
Major export disruption
This has been and probably always will be the No. 1 risk item on my list due to the huge impact it would have on the U.S. industry. The most likely cause of a large export disruption is, of course, the discovery of a “program” or “trade-blocking” disease in the United States. Foot-and-mouth disease, classical swine fever and African swine fever are the most notable of these. The probability of these diseases coming to the United States is low, but certainly not zero. Any of them would bring an immediate halt so U.S. exports. That means the 23% or so of muscle production and much higher percent of offal/variety meat production that is exported would have to be consumed in the United States.
In the short run, prices could fall by 60-80%. Further, FMD would have broader implications since it affects cattle and sheep. The current situation with African swine fever in Europe bears close attention. It is a potential risk to us but, more likely, might help our markets if parts of Europe cannot export pork.
Trade issues are currently No. 2 on my list and last week’s decision by the Trump administration underscores why they are so important. Tariffs on imported steel and aluminum will almost certainly result in retaliatory tariffs on U.S. goods by some trading partners. The targets and magnitudes of those tariffs are not known and are of critical importance. We simply cannot know what the impact will be until we know the nature of the reactions.
Then there is the ongoing risk of North American Free Trade Agreement re-negotiation and the fact that other countries are moving forward with trade agreements (TPP-11, EU-Japan, etc.) while the United States chases other issues. We see this is a risk with reasonably high probability of doing damage and significant impact as well.
Labor has been on everyone’s radar as a risk issue for some time, but it has jumped higher on my list as new packing plants have opened and as federal transportation policy has created a de facto shortage of truck driver labor. We’ve known this was a problem for some time as the immigration policy debate has raged, but two new large plants and the prospects of a third one by the end of this year have made the challenges much more acute.
The electronic data logging regulations have created more problems that many had foreseen and those problems may get more severe if the temporary waiver for EDL restrictions for some haulers of live animals expire this month without significant change. Some long hauls of live animals may simply require two drivers or staged drivers, adding costs for everyone.
Disease losses are always a risk. Further, they have a probability of one (i.e. 100% chance) when we consider the industry as a whole. There are always disease losses. The question is “How large are the disease losses this year?”
The only objective data we have is from the University of Minnesota, and we have to remember that the weekly data they produce are not meant to measure market impacts. They include no “loss” data but instead tell us how many cases there are in sow farms. For porcine epidemic diarrhea virus, these numbers likely have a high correlation to pig losses but the correlation is less for porcine reproductive and respiratory syndrome which has such large impacts in grow-finish facilities.
Then there is the maddening tendency (at least to us economists) of producers to believe the chatter, scuttlebutt and anecdotal evidence of trade show talk instead of the data generated from huge samples of the U.S. sow herd. We aren’t sure the UM data are definitive but it is objective and, as such, probably deserves more validation that producers are often willing to give it.
There was a time back before subsidized ethanol when this was not on my list because it simply was hardly ever an issue. The demand-supply imbalance created by ethanol and the drought of 2012 have now been rectified by more acres, higher yields and higher production in other parts of the world. The past few weeks have seen a run-up of both corn and soybean meal driven by weather concerns in Argentina. Any difficulties in the United States could result in higher costs than we have seen the past three years but we firmly believe it will take two consecutive crop failures somewhere (i.e.: two in the United States, two in South America, one in the United States and one in South America) to get us back to the bad old days of costs above $80 per hundredweight carcass. Further, we aren’t sure that problems in Argentina alone constitute a “South American” failure if conditions in Brazil are acceptable.
Demand is always a risk simply because it can be so fickle. Example: 2009’s H1N1 break that stole our summer rally. In addition, demand has two distinct parts — domestic and export. We think the probability of domestic demand difficulties this year is low given the improvement of consumer attitudes toward meat protein and animal fat the past few years and the strength of the U.S. economy. Nearly nine years of economic growth have pushed the economy to full employment and is now pushing wages and incomes higher. More money means more meat at home and more restaurant meals. All of this good will can, of course, be torpedoed by one food safety issue, so it is not a certainty but conditions look good.
Conditioned upon the trade issues item, exports look good for this year as well. U.S. product should be reasonably priced and the dollar remains weaker against the dollar index and, more importantly, the euro. U.S. product should be a great value to foreign buyers — as long as we decide we actually want to do business with them.
Pork prices if all of our plants are full in 2019
This one is obviously not a 2018 issue, but it is not too early to begin considering the implication. Sows being bred right now will produce market hogs that will not be harvested until 2019. We will have the capacity to slaughter nearly 2.8 million pigs per week in late-2019. They will produce roughly 600 million pounds of carcass weight pork. That compares to our all-time record high of 550.2 million last fall and just 507.2 million the week ending Feb. 23. Even with growth in exports, 2019 could see per capita domestic supplies of nearly 54 pounds, the highest since 1981 and nearly 8% higher than the 50.1 pounds per person offered U.S. consumers last year. That magnitude of increase would push retail prices 10 to 14% lower and could push farm-level prices down by 16 to 24%.
What is scary is that our list is far from complete. We are still optimistic about producers’ economic prospects for 2018, but we need to be aware of the factors that could change that outlook. There are plenty of them.