Live hog prices improved dramatically from late August through early October, moving against seasonal trends due to factors we are all reading about every day and trying to understand. Market factors, which are always complex, became much more complex with the African swine fever (ASF) outbreak in China. In addition to that potential impact on global pork prices, the trade war going on with major export destinations continues to make marketing and business decisions a challenge for the pork industry.
The price moves in the period from late August to early October were astounding. They were driven down hard by trade wars and the speculation of losing significant volume in export markets over the next year. The market rebound following ASF outbreaks and trade optimism improved the western Corn Belt market by $55 per head, the CME index by $47 per head, and the USDA Cutout by $30 per head. The outlook, based on futures markets from mid-July to early August, improved by about $25 per head produced when looking out over the next year. Big market swings for sure, but they likely just brought us back to a 12-month outlook that would net $5 to $10 profit per head.
Let’s explore some of the forces driving the market, from the obvious stated above to others that are getting somewhat lost in the discussion.
African swine fever causes unknowns
ASF and its spread into and around China might make the biggest impact on our hog markets over the next year. I say that not because I have any inside information on how it is spreading within China, as that information has become very well controlled inside the country; however, I am convinced it is infecting many more farms in China than have been reported.
Half of China’s pig production is outside in small farms that have little or no biosecurity. The density of pig production in the affected areas is huge and even the large farms would not have the disease prevention we have in the U.S. If you look at other diseases on farms in China, they have not controlled pseudorabies, PRRS, FMD; we should not expect this to be controlled either.
The difference between ASF and these diseases is mortality. If China lost 17.5% of their production to the disease, that volume would equate to all of the production in the U.S. in 2017 and would surpass the global pork exports from all nations combined. This has the potential to be a global issue.
On the side of concern, North America needs to keep this disease out. We likely got PEDV from the same areas of China where ASF is spreading. A lot of good work is being done by a lot of smart people in the U.S. to improve protocols to help secure our border and safeguard ingredients coming in, but that is a complex and difficult task. In short, we are at risk, as we have been for FMD for years.
Trade issues driving the market
Trade issues, primarily recent tariffs on U.S. pork for both Mexico and China, have been a market driver. While the volume to Mexico is largely unchanged from a year ago (up 4% YTD on pork muscle cut and up 2% YTD when muscle cuts and pork variety meats are combined), the U.S. producer has shouldered most of the tariff in lower prices, particularly for hams exported to the U.S. Recent announcements on an agreement with Mexico on a new trade deal, which yet has to be ratified by both countries, has likely helped the futures market and provided some help in the outlook.
U.S. swine herd expands
Based on the number of new farms built over the past three years, the U.S. is expanding its breeding herd. The latest USDA report pegged the breeding herd at 6,330,000 sows and market inventory at 69,156,000. It was right in line with analyst expectations at the time and seemed reasonable. Over the past three years of growth in the U.S. hog herd, it would equate to 1.9% annual growth in the breeding herd and 3.1% annual growth in market inventory. In addition, it seemed to be in line with what was harvested through August.
For whatever reason, we dropped back to similar numbers to a year ago. The market weights haven’t seemed to climb, suggesting the inventory just wasn’t there. If the breeding herd numbers are accurate, we have clearly had some issues around herd health that impacted pork production beginning in March of this year.
I have been in this industry for several decades and have never experienced a time when it was more difficult to determine the outlook. With so many factors affecting the market you could build a case for tremendous profits in 2019 if China is forced to reach out to the world to acquire pork supplies for its consumers.
You could also build a case for significant losses in the next 12 months with more pork, beef and chicken on the market if trade restrictions and tariffs worsen. In addition, with ASF spreading in Europe and China, keeping the disease out of North America is getting a lot of attention as it would have a potentially devastating impact on our industry.
Making marketing decisions in this environment is tough, but the stakes are high and the opportunity to lay off some of the risk is available.