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Pork Industry Faces Tight Margin Year

January 6, 2016

Pork producers are expected to experience another year of tight margins in 2016, similar to the year just completed. According to Purdue University Extension economist Chris Hurt, pork production is expected to rise by about 1 percent, but beef production will rise by 4 percent and poultry by about 3 percent. There will be plenty of meat and poultry for consumers and retail prices will likely fall, encouraging them to buy more. The global marketplace is also casting shadows on the U.S. pork industry, with weak income growth in some countries that buy U.S. pork and a strong U.S. dollar that encourages more pork imports and stimulates pork production in competitive countries.

Hurt provided the following analysis.

First, a review of last year: The industry recovered from the PED virus that reduced baby pig numbers from October 2013 to August 2014. Baby pig losses created gaps in slaughter hog numbers from April 2014 to February 2015. This slaughter gap helped create a period of record-high hog and pork prices. However, since March 2015, there has been little effect on slaughter numbers due to PED.

The number of pigs per litter also bounced back quickly when the disease was controlled. In 2015, the number of pigs per litter set new records in each quarter. Annual pigs per litter set a new record high in 2015 at 10.38 pigs. This compares to just 9 pigs per litter in 2005, a 15 percent increase in 10 years.

Hog prices were depressed in 2015 due to a 7 percent production increase on a combination of 8 percent higher numbers and 1percent lower weights. Pork trade was also a negative for hog prices in 2015 as the strong U.S. dollar encouraged more pork imports, especially from Canada. Data currently available on trade suggest that higher pork imports increased pork supplies by an additional 2 percent. With 7 percent higher production and 2 percent greater imports, total available supplies in the U.S. were up nearly 9 percent. The large supply surge became a concern in the last two months as prices fell to six-year lows that were well below costs of production.

What about 2016?
The Dec. 1 USDA Hogs and Pigs market hog inventory estimate suggests some let up in the large market supplies in late 2015. The USDA inventory estimate suggests that market supplies were up 5 percent in December, but should begin to taper off in the new year. First-quarter supplies suggested by the USDA inventory would be up about 1 percent, but weights are expected to be down, so total first quarter pork production may be unchanged to up 1 percent if USDA inventory numbers are accurate. Using the USDA inventory numbers, second-quarter pork production would be down 1 percent.

What about summer and fall pork production?
Pork producers indicated to USDA that they would reduce farrowings this winter by 2 percent with farrowings unchanged in the summer. If so, pork production would be down 1 percent in the second quarter, unchanged in the third quarter, and up 1 to 2 percent in the fourth quarter. For 2016, production would be unchanged to 1 percent higher than last year.

How will trade affect hog prices in 2016?
USDA’s current outlook is for pork exports to increase by 4 percent with steady imports. If those projections are correct, trade would help increase prices a bit for 2016. However, the strength of the U.S. dollar will likely be a continued shadow over improved pork trade. Two factors will support a continued strong dollar: weak non-U.S. economic growth and rising U.S. interest rates. A strong dollar would provide headwinds against improved trade, as USDA now forecasts.

Further headwinds for 2016 hog prices will come in the form of growing supplies of competitive meats led by a 4 percent expansion of beef supplies. Poultry production will rise by about 3 percent and with about 1 percent more pork, total meat supplies will be nearly 3 percent higher. The beneficiaries will be consumers who will see lower retail pork and beef prices in 2016.

For the year, live-weight hog prices are expected to average in the higher $40s after averaging near $50 in 2015. Prices are expected to average in the mid-$40s in the first quarter before moving upward to average in the low-to-mid $50s in the second and third quarters. Prices are expected to drop to the mid $40s for the final quarter.

My cost-of-production estimate for farrow-to-finish production in 2015 was $51 per live hundredweight. A modest reduction to $50 is expected for 2016. The slight reduction is due primarily to lower soybean meal prices that will be the lowest since 2007.

Margins are expected to be negative for the year with an average loss of about $4 per head. There will be large differences by quarter with loses near $16 per head in the first and the fourth quarters and profits of about $8 per head in the second and third quarters.

The bottom line is that the pork industry has already expanded enough to drive prices back below costs of production. Any further expansion in the pork industry at this time will likely lead to even larger losses. The beef and poultry sectors are also expanding which means more abundant meat and poultry supplies in 2016. Retail meat and poultry prices will need to move lower to move these larger supplies. In addition, the strong U.S. dollar and weak non-U.S. economic outlook likely mean that trade could be an additional factor that weakens hog and pork prices.

Source: University of Illinois