It has been two years since we have all gotten together in Des Moines to celebrate the U.S. pork industry and rekindle relationships with those we may only see at this event. The recent changes in mask requirements come at a great time for our human interaction, although our collective commitment to biosecurity will remain at a heightened level given the gravity of a potential breach. The hot topics of discussion in the halls of the Varied Industry building and the open forum of the Grand Concourse will consist of the regular fare, along with some acute areas of discovery. Here is how I think they will shake out.
Is the hog market too good to be true? The revenue side of our business is always the topic at or near the top of the discussion matrix. This year will be fun as we are looking at nice profits for the better part of the forward curve. I believe there is good reason to believe we are looking at a season of favorable economic returns, with both the domestic and export side of the business showing promise.
Dr. Steve Meyer has done an excellent job of explaining the role of demand (disappearance at a price) as it relates to our domestic consumption. Attribute it to the cause of your choice – COVID behavior, price elasticity to beef, the re-opening of the economy – but the numbers speak for themselves. Real per-capita expenditures for pork, a measure of the status or pork demand, is up 5.7% year-to-date. Pork supply has, so far, been close to 2020. The increase we have experienced has not been attributable to a supply disruption—pork production is up 2.5% year over year—but rather demand that has been fantastic.
The export front is similar. While not quite keeping pace to the record year of 2020, exports and forward sales have been impressively holding their own. We have yet to feel the impact of our increase in pricing causing a compression in orders. There is reason to look over our shoulder as U.S. values are significantly higher than those of our competitors, notably the EU and Brazil, but something else seems to be in play. The U.S. would appear to be the volume player in a market that is characterized by demand across the globe. This one bears monitoring for any signs of wobble, right now we are on solid ground.
China. At the last World Pork Expo in 2018, there was only talk about the potential of China. In 2019, the event was cancelled out of respect for the potential spread of the virus. In 2021, what had been only talk of the great opportunity to export to the most populace country on earth became a reality, resulting in record shipments and higher prices. It seems something of significance is always at play in what may be considered the most intriguing country on the planet; the peculiar storyline is still with us today.
Per official Chinese proclamation, their reproductive herd is nearly rebuilt (back to 97% of previous levels), and they added the equivalent of 20 million sows of production in the past year. An impressive feat if it occurred, I have my doubts. Travels have been limited and so have the normal flows of information to attempt to document this transition. We only have in-country sources and economic data as our guideposts. Our best intelligence would challenge the official assumption as too aggressive; the economic data has been “inconsistent” in regard to cause and effect. Reported prices have fallen dramatically from their highs while new orders continue at an impressive pace. One source of data from China, Cofeed, recently went dark with no explanation. What was a cloudy situation in regards to the free flow of information has just become a bit more opaque. China has also quietly become the no. 1 export market for corn out of the U.S. This, also, will be a topic of conversation………….
The prospects for the crop. We have sharply broken out of our sleepy range in the corn market after spending the past six years around $3.50. A combination of issues are at play in the discernment of how-in-the-world-did-we-get-here discussion, the important part at this time is the remainder of the crop getting in the ground and the handicapping of the growing season weather. Unlike most years, the grain rally is not on account of weather concerns deep in the growing season. This year, the price appreciation happened during a timeframe wheb we could actually do something about it – plant the crop. The USDA has acres roughly consistent with last year while a well-followed group out of Memphis is calling for a whopping 5.7 million acres in over the USDA number. The difference between those two numbers, even with the record yields in the USDA balance sheet, is the difference between squeaking by and having gracious plenty at the end of next year. Corn futures recently swooned over $1 per bushel on the heels of this acreage projection (in combination with favorable U.S. rains and a bridge issue along the Mississippi and the funds adjusting and rain in Brazil and China indicating that prices were too high and………..) as the market will be wrestling with yield prospects and demand expectations for the balance of the growing season. Highs are rarely made in the month of May, and it is my belief that this year will be no different. We have enough tension in the balance sheets to warrant a good scare or two throughout the season.
Expansion. Historically, the pork industry has not tolerated long-term profits, typically expanding in an attempt to garner more for our individual cause. This is not “bad.” In fact, I think it is a healthy characteristic of a market that represents opportunity for the most competitive to thrive. I am painting a picture of some pretty profitable times for the U.S. pork industry and am of a belief that we will not be able to mess it up anytime soon. The construction forecast is focused on California’s Proposition 12 compliance which would actually decrease the supply of available market hogs sans productivity advances. The increase in costs of both sow units and finishing barns is up in the 15% range with no noticeable changes in the return on this investment. In short, we may be in a stall period that is of benefit to the pork producer despite the economic incentive. The physical supply of breeding animals is not of the surplus quantity that would normally allow for expansion, we have enough disease concerns and anecdotal evidence of production difficulty to have some confidence that the rebuild will be later rather than sooner. Herd health is always a topic of conversation, so I will not mention it here as we all have our own opinions, making them more fun to share in person.
What to do? This is the omnipresent question, whether it pertains to genetics, production, marketing or risk management. In reference to the risk management piece, we have a new tool at our availability that was not active the last time we were in Des Moines as a group. The insurance provisions administered by the USDA have been amended and updated. There is an application here for producers of every size. I will go as far as stating this: The insurance products are the best risk management tool for the pork producer, and everyone should be aware of their function. There are seminars available at World Pork Expo as well as in the commercial realm that will assist you in understanding the nuances. These are attractive and effective tools for all to utilize.
I hope you are looking forward to this event and the learning opportunity that it represents. It should be fun to get together again after a two-year hiatus.
Comments in this article are market commentary and are not to be construed as market advice. Trading is risky and not suitable for all individuals. Fore more information, contact Joseph Kerns.
Source: Jospeh Kerns, Partners for Production Agriculture, who are solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.