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Two Words for Facing the New Year: Buckle Up!

2017 is setting up to be a very surprising and interesting time in the global pork industry. Everywhere around the globe where pork production is at a comparative advantage, expansion is taking place. In the US, President-elect Trump brings a completely new model of leadership…

Monday 9 January 2017 (7 months 14 days ago)

If you haven’t done it already, fasten your seatbelts as 2017 is setting up to be a very surprising and interesting time in the global pork industry. Everywhere you look around the globe where pork production is at a comparative advantage, expansion is taking place and in some places like the US and China, at breakneck speed. The number one fuel on this production fire is low feed costs worldwide and in China, very high sales prices. Very low feed costs around the world is resulting in profitable production at sale prices which would have brought big league losses in the last decade.

I can recall some four years ago when corn prices were $7.00/bu. ($275/MT), a planner for a major agricultural company called me to ask if I thought corn prices in the United States would ever fall below $4.00/bu. ($157/MT) again. While we haven’t recovered to pre-2006 levels (pre-ethanol), corn prices in the US are very close to $3.00/bu. ($118/MT). High protein soybean meal (48%) has followed a similar pattern. This means many US producers can feed a hog to carcass weight 214 lbs. (97 kg) for about $65/head in feed cost. Add another $60 for all non-feed costs and the cost of production at breakeven is $0.58/lb. ($1.28/kg) in the carcass.

The really amazing story is that the cost of feed to produce a hog has not varied more than about $2-$3 per head for the entire year of 2016. Stable and low feed costs are powerful expansion drivers. Even when market prices fell below breakeven in the fourth quarter, most producers had secured price protection in some form and incredibly, in the face of expected record upon record production increases coming into 2017, market prices have risen out of December lows to cut losses per head in half. That may be about to change as nearby futures are signaling a steep downward adjustment in the near term to match supply and the record increases forecast for the first half of 2017 by the USDA December Quarterly Hogs and Pigs Report.

Overlaying this massive production of pork (records too in total red meat production for the US) is the uncertainty the Trump administration is bringing to established global trading platforms and nearly completed negotiation on a couple of big global trade pacts (Trans-Pacific Partnership; TPP and Transatlantic Trade and Investment Partnership; TTIP). President-elect Trump has indicated he will cancel US participation in the TPP on the first day he takes office. The production seen in the EU (especially Spain) as well as the US (and now returning to Brazil), will require lots of export activity to keep these global production areas from economic disaster. This is causing some heartburn among many US pork producers who felt the Obama administration and congress had dragged its feet on finishing negotiations of these treaties, especially TPP.

Most of the politicians and the media in the US still do not have a clue regarding how to read President-elect Trump as he brings a completely new model of leadership, protocol and global relationship building to the fore. Most of his pronouncements are opening bids in a perceived negotiation and are regularly misread as policy statements since the political class and media in the US have never encountered this kind of interaction and communication of position. Perhaps the most astute thing written to date about him is that his followers “take him seriously but not literally” and the media and others “take him literally and not seriously”. So, when he announces the US departure from the TPP framework he really means a new trading relationship will be crafted, not for instance, we will not have a trade agreement with key trading partners. More to come on what all this will look like but here are some clues that will keep 2017 one of the most interesting years in modern memory.

Look for US trade and other strategic relationships to be stripped of their bureaucratic frameworks and overreach into attempts at shaping policy in member nations (which have raised objections regarding loss of sovereignty). The disruption that President Trump will bring to established governmental policies will provide an unprecedented opportunity for nations to rethink “truisms” which are not true anymore. Case in point, Chinese glass manufacturer, Fuyao Group is planning on moving factories from China to the US to increase profitability. In a recent article in Fortune, the company reports that taxes are 35% higher in China than the US and the combination of cheap land, and outstanding, reliable and low cost transportation/infrastructure is offsetting the disadvantage of higher labor costs. Look for President Trump to dramatically facilitate such moves and usher in new US trade opportunities based on cleverness and ingenuity versus red tape and established rules, many going back several centuries. More next time.

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