As we approach the beginning of the barbeque season (at least in terms of demand for ribs), we are not among those crying out that the sky is falling. There is no doubt a certain amount of transient uncertainty has weighed upon the market recently; however, every major strength we previously mentioned as characteristic for the coming year is still largely in place.
Cost of feed is up marginally due to small increases in corn and soybean meal prices. These increases are part of the normal fluctuations that happen during a year as weather patterns shift (Argentine drought), global demand increases or decreases, and government policy activity becomes activist. The Argentine drought substantially reduced their offerings to the global market, which provided new optimism for corn producers that the U.S. would step in to fill that gap with increased exports. USDA expects to add 5¢ or less to the bushel price of corn, which is below cost of production levels now.
Expected Production Increase
Record U.S. pork production continues to inch higher as the last Hogs and Pigs Report indicated. Pigs per litter and total productive capacity are up as expected with total production for the year expected to be in the 3% to 4% range. However, these increases are part of a well-planned advance in total capacity for U.S. production, not the unbridled enthusiasm of thousands of individuals deciding to increase production based on unrealistically high future profit forecasts. The normal seasonal pattern would continue to pressure U.S. pork prices through mid-April and then the summer seasonal rise should begin.
China in Perspective
We have a firm belief the China tariffs and the NAFTA posturing will be shown in retrospect to be “tempests in a teapot” for U.S. producers. The outlook is based on the fundamentals of the global market and here, the U.S. is in a commanding position. We know that after several years of massive investments in pork production by China, their markets are now signaling the major production companies to slow down. This slow-down takes up to two years of punishment to reach a kind of equilibrium as “work-in-progress” continues to grow and reach the marketplace for many months after reduced breeding decisions are made.
Added to that, not all companies decide to stop growing at the same time as each has a different cost structure and set of risks that either allow it to continue when others must stop or be among the early slow-down group. Eventually, everybody gets the message. Placing a tariff on U.S. pork when you don’t need it is designed for the political impact, not financial impact. We are not taking the bait.
Finding the Best Price Points
China has been a careful shopper on the world market both for production inputs and for needed pork imports. The Chinese know how to range out and divide purchases, for instance, among global suppliers to help create the best purchase price points. This is nothing new. There are also many indirect pathways for merchandising pork that can move it legally through and among nations. Keep thinking global low cost, high quality, high safety, dependable supplier and you will see clearly when the news headlines get others’ blood pressure rising.
We’re Still Optimistic
We still believe rising global income in 2018 will produce record demand for pork, and U.S. offerings will have no difficulty finding a home among that demand.
Remember, the new Korean export agreement, recently revised after similar hand-wringing and hubbub, means U.S. pork now moves into that country essentially duty free, and the results for February (the latest available) show an increase in volume of about 33% and an increased value of over 40%, as reported by the U.S. Meat Export Federation (USMEF). It was reported to be the first negotiated trade agreement revised in U.S. history. By the way, the USMEF also reported record-breaking consumption of pork by South Koreans as the Bank of Korea raised the national income growth forecast to 3% just a couple of weeks into 2018.
Adding to that is the increasing demand for U.S. pork from Central and South America. Mexico, the biggest volume purchaser, and Japan, the biggest value purchaser, both increased total value of purchases in February over the previous year per USMEF, while recent trade agreements are substantially boosting export growth in several countries in the southern hemisphere. Colombia, Honduras, El Salvador and Peru are among that group.
Higher Domestic Consumption
Lower prices in the U.S. marketplace early in the year coupled with increased disposable income due to tax cuts will boost domestic consumption and start the summer cooking season off a little earlier given favorable weather. The most recent forecast for spring and summer by the Weather Network predicts normal rainfall for the Midwest with above-normal precipitation for the northwest Corn and Wheat Belts. That’s good news as they have been in drought conditions for a couple years. Midwest temperatures are expected to be above normal this summer, which should slow down pig growth and boost prices, bringing a normal seasonal price pattern. The other consequence of normal to above-normal precipitation and hot temperatures is a bigger corn crop than anticipated.
Don’t panic at headlines screaming how fast weaned pig prices are falling. They are following the typical seasonal decline that happens every year at this time. While the trajectory down recently became a little steeper than normal, it is in line with the trade uncertainty that seems likely to leave the marketplace in the next several weeks.