Explosive Volatility: Pork Industry’s Norm

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By Kent Bang, Compeer Financial

The pork sector has been increasingly volatile in 2019. Many producers are looking at the fluctuations in cash hogs, the pork cutout or the futures market and wondering if this level of volatility will continue in the future. My belief is that it will likely be with us for some period of time, and it may be for years. I have thought for some time that the volatility will continue to increase as our industry becomes more dependent on exports. I still think that is the case today. Let’s face it, based on the fundamentals, we are more dependent on exports.

High Supply, High Demand
Fundamentals of supply and demand are very challenging today. To start with, U.S. pork production set record high levels in the first two quarters of 2019 – up 3.7% through the first half of the year from a year ago. Beef production was up slightly for the first half of 2019 and poultry production was up 1% as well.  There are plentiful supplies of red meat and poultry.

Exports of red meat year-to-date have been softer. Pork and pork variety meat exports are off by 4% in addition to beef and beef variety meat exports being down by 3%. Pork imports are down, but more than offset by beef imports. However, it’s not significant to supply with net imports up less than 0.1% of supply.

The point is that we have significantly higher levels of red meat available to the U.S. consumer. At the same time, we have managed to improve prices paid for pigs from $55 per carcass cwt. at the beginning of the year to over $80 in the months of May, June and July despite very choppy markets and red ink for pork slaughter operations over that period of time.  

Pork Shortage is Coming, But When?
The market improved on the expectation that pork supplies are going to be short in the future due to African swine fever (ASF) outbreaks in China and southeast Asia. I say expectation, not because I think the shortage is questionable, but because the timing of the shortage is unknown. 

The marketing of pigs from farms that have been impacted has and will actually increase the pork supply in that area while the disease spreads. When the area stabilizes, I expect they will experience a shortage of market-ready pigs, and I believe we have seen that to some degree in the past two months with sharply higher domestic Chinese pork prices and an increase in pork imports to that country.

This was pushed back farther than people expected, and the spread of the disease is still occurring. This means two things are happening. First, producers are marketing as many pigs as they can during the outbreak in China and selling pigs below normal market weights to receive some income for the pigs before they contract the disease. Second, the longer the spread of the disease goes on, the larger the reduction in supply will be in the future. 

ASF doesn’t discriminate between growing pigs and breeding stock. In addition, there are few farms that are not farrow-finish, so the breeding herd has likely had similar reductions. I believe China’s losses have been large enough to reduce production going forward to exceed the total export volumes on an annual basis from all sources. The global pork exports from all sources in 2018 was 8.5 million metric tons.

An Explosive Outlook
Pork imports to China and southeast Asia from all sources will increase dramatically sometime between now and early 2020. The difficulty knowing how long the disease will continue to reduce the swine herd in Asia and how much pork has been put in freezers there will make timing in the marketplace impossible. This challenge will continue to make the market volatile (like it has been over the past several months), but the outcome appears to be very bullish U.S. pork. Add the ongoing trade war with China to the mix and you get explosive volatility.

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