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Expand at the rate of expected increases in net exports or red ink will flow

Export markets may not be as robust as forecast by USDA due to very slow economic growth and actual recession in many countries. Add to that the massive value increase of the dollar versus its chief competitive currencies as the cost of oil plummeted…

Friday 6 February 2015 (4 years 1 months 17 days ago)

There is an emotion rising in the US pork industry at about the rate that US pork futures prices are falling. It is fear and it is rising fast as the June Lean Hog Futures at CME have dropped 20% in the last two months and current prices continue to plummet well beyond the normal end of the seasonal low price pattern for winter as daily kills exceed last year’s level. Coming off months of phenomenal profits (for those who did not hedge them at lower levels), producers have geared up for both an expansion and a slight but strategic geographical shift of a small part of the US sow base. Along with profit-fueled expansion, part of the motive has been to locate some new sow herds in territory just outside of the areas currently dense with production, where staunching the spread of PEDv even with excellent bio-security has proven nearly impossible. Some producers involved in the expansion may retire more risky locations once the new ones are built but don’t bet money on that prospect.

The motive here is to provide future protection against disease threats coming out of nowhere like PEDv. Producers who had pigs during the outbreak reaped hefty profits, at times exceeding $100/head. The key was “those producers with pigs”. Weaned pigs from these new and more distantly located sow complexes will still flow to feed grain production areas for finishing in order to maintain a low total cost structure. Moving the weaned or feeder pig may help avoid a new catastrophe vs. farrowing in the midst of a disease ravaged are abut it does not eliminate the risk of disease acquisition.However, the piglet may be at a more robust age and weight and should clear the sow herd in good health.

Couple that with the added problem that the industry has discovered, and may be getting addicted to the idea that it can produce and sell record weight animals (280-310 lbs / 127-140 kg live weight is common now) due to cheap feed and loosened finishing space and still make huge profits. All of which of course will be coming to an end rather sharply as soon as producers have essentially recovered the full productivity per sow which was lost during the critical peak death loss period of the PEDv epidemic in the fall/winter of 2013. Now that the devastating phase of PEDv is essentially past, though no one dare say that yet, a wave of pork meat is expected to build and flow into US packing plants in the next year. That will happen until the price hammer returns weights to more manageable levels and some production expansion on the books is reversed before too much earth is moved.

Most people, but maybe especially pork producers, suffer from the problem of immediacy. This means they forecast their future based on the belief that the current and near-past continues unabated into the future. It’s as though the well-established patterns of the last 100 years are irrelevant information when it comes to thinking about what comes next. Admittedly, we live in a time when a lot of “firsts” seem to be occurring, which creates some new patterns, but in point-of-fact there is rarely anything really new under the sun, and history (all of it, not the last 10 minutes) is a great educator for those who pay heed.

Headlines in the United States recently trumpeted the forecast that this year’s US pork production will likely equal or squeak out a narrow edge over total US beef and veal production for the first time since the 1950s. There are those who like to think that this is because pork has somehow come under increasing demand while beef has lost some favor with consumers. The simple truth is that the decimated beef production in the US, still suffering from the 2012 drought and other major weather kills, such as the tragic blizzard in South Dakota, has created a doubling (or more) of retail beef prices in a very short period. Keep in mind that in 2011, before these disastrous weather events, USDA figures reveal that U.S. beef and veal production exceeded total US pork production by 16%. Relative price differences due to availability pretty much explains the consumption differences rather than some fundamental change in demand for pork by US consumers.

Now that pork producers are learning to manage PEDv better and its ferocity seems to have declined, it has not taken long for predicted fortunes to be reversed. For instance, even though beef won’t be much of a competitor for Pork dollars in the US, as its production is expected to continue to decline due to its long cycle recovery issues, export markets may not be as robust as forecast by USDA due to very slow economic growth globally and actual recession in many countries like big pork net-importer, Japan, where “Abenomics” is getting the blame for a near 2% annualized decline in GDP last quarter(as reported December 2014). Add to that the massive value increase of the dollar versus its chief competitive currencies as the cost of oil plummeted and you have what is shaping up as a potentially challenging export year for the US. Unless of course, overproduction gets the price “attractive” in spite of global spending weakness. All of that could make headlines later in 2015 making increases in US pork exports a Pyrrhic victory indeed. The EU is pinning a lot of its hopes on renewed trading with Russia as the Russians have a taste for pork and their consumption has exceeded production by close to 50% in recent years. However, political turmoil darkens the reliability picture there even more than usual as well as seemingly birthing a few opportunities.

So now we face the ultimate reality for mature pork production regions around the globe where domestic demand is saturated and stable, like the US and the EU. It’s a lesson of history that requires a memory longer than a year or so: Expand at the expected long-run growth rate of net pork exports or red ink will flow like a river.

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08-Feb-2015lylavillelylavilleGood news
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