It’s very difficult to be pessimistic in the US hog market these days even though there are a few small signs that the big profits of this summer are getting ready to show some fade. That of course would be expected anyway as summer prices fall in response to the increasing numbers of animals and their increasing rate of growth which inevitably occurs as temperatures cool and new crop corn becomes available. The big news is the continuation of increased export and domestic demand.
Much of the increased domestic demand for pork can be attributed to the move by McDonalds to serve breakfast all day beginning in the fall of 2015 instead of stopping mid-morning. Fast food breakfast is the largest use of US pork in the restaurant sector (typically bacon, sausage and a loin slice commonly referred to as Canadian bacon). All major competitors to McDonalds quickly followed suit.
The primal belly, roughly 16% of the carcass by weight, has been the second highest priced primal, but since 2015 it has become not only the highest priced but is a much greater percent of the total carcass than ribs (4%-5%), the previous high price king. Increased demand for bellies in the winter of 2016 resulted in the inability to fill cold storage (the typical practice when belly demand is very low in winter months) and gave rise to rumors that there would be a bacon shortage in the spring of 2017. Supplies were adequate but prices skyrocketed during the rumored shortage.
In other good news, ample slaughter capacity is expected by the time we get to the real pinch in November and December but falling lean hog futures prices (October through February 2018) and now some trouble in the corn market is promising to potentially trim profits a little more than hoped.
Very recently the USDA reduced by a few bushels, the expected corn yield per acre. This forecast could be adjusted down even farther in late summer/early fall as a creeping drought centered in South Dakota (upper Midwest US) has some tentacles that reach into western Minnesota and west-central and south-central Iowa. Now, in the big corn production areas, only Minnesota has over 80% of the crop judged to be in good to excellent condition but expected yields this year are still not predicted to match last year by a significant shortfall. The rest of the corn belt is ranging in the 50-65% good to excellent rating. Despite all of this, the harvest now is expected to be the third largest on record. We must acknowledge that feed costs, after a long period of stability at relatively low levels, could be inching up but still making manageable moves upward over the coming year.
Exports have been (for both the EU and the US) the brightest part of the economic future. There is a lot of uncertainty about what will happen to the US pork export picture now that President Trump has pulled out of TPP and wants to renegotiate NAFTA. There is not a lot of visible activity on the bilateral deal making front between the US and individual countries, the process which the president favors.
One thing which has begun is a scramble for new deals among other countries and the dropping of several previous tariff and trade barriers to make those deals happen. The recent agreement between the EU and Japan primarily effecting processed pork will give an advantage to EU producers should it be finalized. The people in the trading countries wind up being better off as prices typically fall. So much of trade though is about posturing so until there is finalization, there is still the opportunity for new proposals and amended agreements from those first announced.
US producers believe their trade negotiators must be in there cutting deals and while most feel certain that this is coming, there will be an investment dampening effect if tangible progress on trade doesn’t begin to materialize. While it is a great opportunity for the EU and other major pork exporters to grab some global share, keeping it might be difficult, all things being equal, as low cost/high quality production tends to edge out competitors who can offer high quality but can’t match cost in the long run.
Another source of hand wringing among US producers is the huge focus on cutting budgets in government agencies and even eliminating whole sections of governmental functions by the Trump administration. It would be safe to say that the level of government funding enthusiasm for recent plans within the US Pork industry to protect future profits by establishing vaccine banks and other strategies against export stopping diseases has disappointed some producers. Still, most people know that key investments which require political support are often worked out behind the scenes as the culmination of some give and take (we call it “horse-trading”) so press speculation is the last place to get a good sense of what might be happening. We will know what happened when the deal is struck. Keep in mind, you can see the national Capitol building in D.C. by merely stepping outside the offices of the National Pork Producer’s Council and you wouldn’t even break a sweat on the short walk over there. Some US pork producers have a much better than average golf game too.