Source: University of Illinois College of Agricultural, Consumer & Environmental Sciences
August didn’t look so hot for pork prices. Fear of large pork supplies and Mexican and Chinese tariffs on U.S. pork exports was weighing heavy on the industry. It’s one of the reasons Purdue University agricultural economist Chris Hurt forecast so much loss.

“At that time, my forecast was for losses of $40 or more per head in the fall and winter, the worst since 1998. The outlook is still suggesting losses this fall and winter but much less than in August,” Hurt says.

As of Sept. 1, the U.S. hog inventory has taken a 3% jump from 2017, coming in with 75.5 million, which includes a 6.33 million breeding herd — a record relevant to June 1999. Farrowing intentions for this fall and winter were up 2%, and with increased pigs per litter the number of market hogs in the spring and summer of 2019 are expected to be up about 3%.

According to Hurt, pork production will reach record levels in 2018, near 26.5 billion pounds. That record is expected to be broken in 2019 when production may reach 27.3 billion pounds — another 3% increase.

“Why did lean hog futures collapse in the summer? We know that futures markets anticipate supply and demand conditions into the future, and sometimes the anticipation of bad news is not as severe as originally thought,” Hurt says.

Hurt says this seems to be the situation this year, especially in relation to the late-summer anticipation of negative impacts of Mexican and Chinese tariffs on U.S. pork exports. Pork exports represent 22% of production and have become very important to the price of hogs. In addition, Hurt says the tariff situation was a new event with little historic precedent for the market to draw on.

“The magnitude of the price drop was huge,” he says. “December lean hog futures fell from about $60 in June to $44 by early August. The good news is that prices have recovered most of the decline, rising back to $58 by Sept. 28.”

So what are export prospects and what do we know so far about the influence of the tariffs?

“First, we can relate that USDA analysts expect pork exports to rise by a strong 6.3% this year. Official census trade data through July show exports had been up 6.5% which is encouraging,” Hurt says.  

July was the first month of full Chinese tariffs on U.S. pork. July pork exports to China and Hong Kong were down 17%. However exports to Mexico — United States’ largest export customer — were only down 1%. More importantly, total pork exports were up nearly 9% with notable increases to Japan and South Korea, the U.S.’ second and fourth largest export buyers.

Weekly USDA Export Sales Reports extend through the week ending Sept. 20 and have total commitments (already exported plus unshipped sales for this year) up 5.3%. On this more extensive data, China and Hong Kong commitments for the year are down 32%; Mexico is unchanged; Canada is up 11%; and South Korea is up 37%. 

Mexican purchases seem to not be affected much by the tariffs — purchasing 32% of all pork export volume in 2017. Exports to China and Hong Kong have been negatively impacted, but they are much smaller — representing just 9% of exports in 2017. Hurt says other buyers have more than compensated for the lost volume to China.

The second factor providing more optimism to lean hog futures has been the concern over potential hog death losses in China from African swine fever.

“China’s pork production is 4.5 times that of the U.S. In addition, they raise 97% of their consumption domestically and import only 3%. So, a 1% loss of their production means they will need to increase imports by about one-third,” Hurt says. “If ASF does result in increased Chinese imports, the U.S. may not get that business, but rather Canada and the EU will. The advantage for the U.S. is that we will get added exports to some of the destinations that Canada and the EU were shipping to.”

Live weight prices for 51-52% lean carcasses are expected to average in the low-$40s in the final quarter this year. An improvement to the mid-$40s is expected for the first quarter of 2019, and then low-$50s in the spring and summer quarters. Price forecasts for the fall of 2019 drop back to the low-to-mid-$40s.

Cost of production estimates are $49 to $51 per live hundredweight. Hurt’s outlook is for losses of $10 to $20 per head this fall and winter and then for profits of $5 to $10 a head next spring and summer, before returning to losses late in 2019.

“The pork outlook has improved with considerable uncertainties. Trade issues with Mexico have improved with a bilateral agreement. However it remains unclear if Congress will accept this potential agreement with Mexico without a trilateral agreement with Canada. The trade disagreements with China continue to escalate and it remains unknown if African swine fever will result in China increasing pork imports.

“What does seem assured is that pork supplies will be at record levels. The recent rate of U.S. pork expansion probably cannot be sustained. The industry will simply reach a point where supplies are too large to sell at profitable prices,” Hurt says.