We live in an age characterized by random shocks, so the future is always filled with contingencies, but if you could (reasonably) tee up the coming year any better, I am not sure how. Let’s look at the foundations for 2018, starting with demand. Within limits, the politics and hand-wringing associated with trade deals will come and go, but U.S. exports will remain strong because global income is expected to continue to rise throughout 2018.
More Income, Not More People, Means More Pork Demand.
U.S. producers are a proven, dependable supplier of large quantities of high quality pork, provisioned to final user demand and supplied at reasonable cost. Almost 25% of the carcass now travels to another country for consumption.
In addition, even though the U.S. is certainly not bulletproof to export-halting diseases, the combination of a dynamic, multidisciplinary veterinary consulting network, the availability of several state-of-the-art diagnostic labs, multipronged USDA support including customs and border protection, and a country focused on preparedness and education, all means the level of resilience to problems has never been higher, though we hope it is not tested.
Domestic demand is quite possibly stronger than it has ever been, largely fueled by the never-ending uses of the primal belly.
The U.S. industry is gradually moving toward a producer-planned and controlled chain. The locus of control is shifting toward highly coordinated and/or integrated production and processing, because the sizeable value capture from the transparency created between that interface is compelling.
This is not to say large-scale, coordinated production is the only way to go. Neither is it easy, by any stretch, to comprehensively manage and extract its inherent value proposition. However, the emergence of big data technologies will facilitate a strong and improved value capture by those innovators who create the systems and culture to make it happen.
The U.S. industry added two large-scale packing plants in 2017 and some additional midsize plants, and the two largest were in this emerging model. The plant (and associated production) expansions were carried out in an orderly fashion, minimizing destructive competitive warfare. Existing plants that were predicted to lose hogs planned early and arranged a new dedicated supply in time to minimize disruption. It seems the marketing of the pork was planned before the building of the plants, which is the way it’s supposed to be.
None of the above scenarios would have been executed without the expectation of long-term profitability.
Here, several sea-change events underpin big, positive expectations. First, we are in a very stable period of record or near-record global coarse grain/feed ingredient production, which will keep feed costs low and reasonable for many months ahead.
As an example, USDA forecasts for 2017/18 U.S. corn output keep growing on the back of record-high yields. In addition, the feed industry worldwide is consolidating and recently exceeded an unprecedented production of 1 billion metric tons on 7% fewer mills, according to the 2017 Alltech Global Feed survey.
While this is feed of all types, the trend is toward creating better quality feed at a lower cost from larger, more technologically driven mills. This simply stacks on the advantages of large, global feed ingredient production capacity.
Droughts happen and will no doubt happen again, but right now, low feed costs will drive high carcass weights and exceptional profitability into 2018 for U.S. producers.
New Tax Code
The long-awaited restructuring of the U.S. tax code and reduction of corporate tax rates promises to drive U.S. gross domestic product (a measure of national income) up over 3% for the extended future. In addition, it is predicted to create almost one million new jobs and raise wages 2.9% says the Tax Foundation.
Rising incomes are associated with more dining at restaurants, too, where pork dominates the breakfast menu as well as the ever-innovative use of bacon.
The current U.S. government focus on the reduction of regulations and red tape is part of a stunning reversal of a long-term trend toward more and more government management of everyday activities as well as business activities. The scope of this reduction includes not only the outright elimination of some key business-dampening regulations, but the removal of bureaucratic authority to create new regulations and adjudicate enforcement of those regulations completely outside of the legislative process.
Apparently, that puddle on your farm is no longer going to be viewed as part of the navigable waters of the U.S. except maybe by one of your kids with a plastic boat.
No Shortage of Fuel
Lastly, the discovery of very large U.S. energy supplies in the form of fossil fuels (shale deposits as well as crude oil on- and offshore) coupled with the cost-effective means to extract them has essentially led to the long-sought goal of U.S. energy independence and dramatic reductions in gasoline prices. To cap things off, the U.S. continues to experience a very low long-term cost of capital (borrowing is cheap) and inflation is inexplicably nowhere to be found yet.
Throughout the coming year we will keep you abreast of how this coinciding set of positive events plays out. No doubt there are some unanticipated speed bumps ahead but maybe too, some additional upbeat surprises.