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Troubles come treading on each other's heels

Floods, African swine fever, tariffs war, heat waves, and some more issues... How will they affect the once-in-a-lifetime profit-palooza that many pork industry participants hoped for earlier?

Tuesday 9 July 2019 (10 days ago)
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Riskiness and random shocks are nothing new to pork producers worldwide. The difference is, rarely do global disease outbreaks at the existential threat level, floods, scorching heat waves, tariff wars, crop failures, food-as-a-weapon strategies blocking imports from selected countries (think Canada), over-production, and a couple of other calamities (add your own local ones), come all at the same time. And despite that, profits, yes, profits everywhere but beginning to shrink.

Would it really be that unusual to have the current profit levels from pig production in July in the northern hemisphere? It seems likely that pigs in Spain are losing weight now due to the oppressive heat so the normal summer seasonal price increase should put further profits in pork producers pockets without any added help from increases in exports.

There is no doubt that demand from the regions of the spreading ASF contagion in China and Southeast Asia is sitting beneath the profits as a kind of floor, as pork is vacuumed up from all over the world. Grey market, black market, regular markets, and merchant middlemen barely able to sleep as they grab pork with well-practiced strategies to minimize localized supply shocks and skyrocketing prices. They are well practiced at getting all the pork they need with minimum price advance. Add to the factors mentioned above plus the many things previously discussed in this column and you have a murky soup of influences keeping it from being the once-in-a-lifetime profit-palooza that many pork industry participants hoped for earlier. In the US, we continue to see price outlook going into December of this year slipping farther and farther as current market prices, though generating profits, are retreating faster than a typical summer seasonal.

One of the emerging threats to profitability that is just beginning to be assessed is the tremendous spring flooding in the US which has saturated the entire corn belt but has been especially bad on the eastern side (Illinois, Indiana and Ohio). Corn prices are already up over a $1.00/bushel ($40/tonne) in the current cash market adding up to $7.50-$10.00 per head to the full cost of production (sow and market pig) for a 280 lb. (127kg) pig at harvest. The specter we are beginning to see as we look out into the next few months is rising feed costs and eroding market prices for pigs.

USDA tends to wait until the corn and soybean crop is fully emerged before making any substantial adjustments to expected annual production. In any normal year that would have been weeks ago but it is still not complete across the entire corn belt. I remind you of the nearly fool-proof saying, “rain makes grain”, but it is hard to hold onto that with a lot of confidence when flood waters are topping your boots but history says you should believe the saying and discount your wet feet. Ample carryover, a larger number of corn acres than expected planted, and huge corn and soybean crops expected from Argentina and Brazil will likely keep this cost of production problem from escalating into a nightmare.

The latest pig count survey from the USDA (June 27) was nothing short of stunning. More pigs are currently in inventory on farms in the USA than ever before (at least since this survey began in the mid-1960’s). Market hog inventory was up 4% from a year ago and average slaughter weights have been pushed higher and higher and maintained in July at these levels (now 281.5 lbs.; 127 kg) only constrained by the upper weight tail of the trailer load weight distribution being punished substantially with discounts. We are seeing a continuing trend of slowly expanding finishing concentration in Iowa especially and the movement of sow herd to (and the expansion within) the neighboring states like Missouri, Illinois, Nebraska. South Dakota, touching Iowa on Iowa’s upper northwest border is also seeing an expansion of sows while North Carolina slows declines.

Knowing the megatrend changes in the US pork chain will help you forecast these movements before USDA confirms them. We have written here about the motive of large producer groups to invest up-chain in large scale packing and processing (most recently Clemens Coldwater, Triumph and Prestage Eagle Grove plants). They have done this so they can “see” both directions (up and back chain) and thereby optimize investments in the long run. Add to this now the consolidating veterinary consulting firms which have created one-stop full-service planning, new site acquisition and building, genetics consultation and sales/sourcing, production management, marketing services, slaughter plant acquisition, and yes, even veterinary services! The emergence of these groups and their continued competitive consolidation is behind much of what you read happening in the USDA June Hogs and Pigs Report. Record average productivity, geographical production shifting to optimize health and other costs (like feed and transportation) and proximity to their affiliated slaughter plants. How these groups weather the first, really sustained profit challenge will provide further insight to future trends: escalating consolidation or retracement to some risk reducing fragmentation and a return to specialization. History is the story of the rise and fall of bandwagons of every kind.

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