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Summer seasonal is sitting on the launching pad but fuel may be a little low

The bearish indicators still hang heavy over the industry and some have actually increased.

Friday 15 April 2016 (2 years 2 months 4 days ago)
mcrisol

If you have been following the column you know that I have maintained for many months that the normal seasonal rise into summer could be in danger of failing to make its normal increase due to several fundamental factors. Since about mid-March, the June Lean Hog futures contract has fallen about six percent from its peak. Even though the dollar is losing some strength against the Euro and the Brazilian Real, due to the failure of the US Federal Reserve Bank to continue its incremental increase in interest rates, the dollar is holding essentially steady against the Chinese, Canadian and Mexican currencies. The slight decline in the value of the dollar is the only bullish sign regarding US hog prices and it is marginal at best. The bearish indicators still hang heavy over the industry and some have actually increased.

The USDA has just estimated that the US corn acres planted will be much higher than industry expectations at just short of 94 million acres (38 million hectares). It is reported that this year will be one of the largest corn acreages planted since the 1940’s when yields were a fraction of today’s productivity. As corn prices fell like a rock, we pretty much insured that pig feed costs will continue to be extremely low favoring high market weights. And guess what, just like last month’s article headline, new estimates this week suggest feed costs are now projected to be at 2007 levels. This comes from my favorite US (retired) pork market analyst who phones it in from Hawaii now while most producers probably think he is hard at work behind his former mid-western office desk. A well-deserved finish to a very productive career in service to pork producers.

These low feed costs will partially offset the natural forces which make pigs less likely to gain in the summer heat. We have been able to show from previous years that producers know how to mitigate but not completely eliminate the summer weight declines when feed costs are low and profit prospects lay out there.

Other issues include continued sluggishness in net exports partially fueled by the final stake in the heart of MCOOL, leading to increases in imports of both Canadian pork and hogs. Another factor is competitive meats for the dinner table. Beef in US supermarkets is finally coming down in price after several years of dramatically high prices related to the industry’s historically gutted inventory, a function of natural disasters (sequential drought and devastating snow storms). Just as the BBQ season begins we are likely to see some beef steaks and roasts edging out pork steaks, chops and ribs on the grill unless pork prices drop even farther.

Since last time, we have had the announcement of yet another major new packing plant planned for north central Iowa (Mason City) and you now need a scorecard to keep track of all the increased slaughter capacity staging in over the next couple of years in the US. Much of the capacity of these plants is already contracted or filled by the large producer investors. In the case of this latest plant, about half is expected to be offered to independent producers. This means they will pull their current production from other independent slaughter plants once they have their own capacity available. So while some of the switch will be neutral for supply, there will still be a large amount of shackles to fill by those willing to construct new hog units and crank it out. We are seeing some of that happen now and it will tend to arrive ahead of the plant capacity to handle it so oversupply is certainly a temporary reality that lingers on the horizon. If net exports don’t turn around soon, there will a lot of red ink as well as blood on the packing house floors and a cull of capacity will inevitably take place.

Recently I was asked to give my thoughts on the most important risks producers face over the next couple of decades and I will share more of it with you next time, but the current situation in the US packing sector allows me to highlight one element of that set of risks.

Almost any country with a modern, developed pork production industry will fill domestic demand pretty handily and require increasing net exports to offer opportunity for future growth. Since this is the case, producers must come into alignment with packer/processor chains which are highly focused on and successful at developing export sales. While there will always be the domestic demand to fill, the future for growth is for most developed countries, in the export markets.

Export markets which have been dependable in the past evolve as competition, core competency, political turmoil and profit opportunities emerge and change worldwide. Producers aligning with packer/processor chains who know how to move in these changing seas will be one important way that future profit risks can be managed. I do not know the catalyst which will cause this to begin to change but small, fragmented packing sectors most often do not offer the same future opportunities for producers large or small. The principle reason is that information transparency between final buyers and the producers is critical for guiding future investment and it is almost completely blunted in small, and fragmented packer structures. Big is not always better but the free flow of information is the critical requirement for long term, low variance, higher than average profitability. “Hide the ball” played across ownership boundaries between producers and packers limits the future for both sectors. If you think I am talking about your situation, I probably am.

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