High Hog Prices and Trailing Pork Prices Compress Processor Margins

( National Pork Board and the Pork Checkoff )

Pork exports are expected to increase more than 7% next year as Mexican demand for U.S. pork was reestablished following the lifting of tariffs in May, according to the latest USDA Livestock, Dairy, and Poultry Outlook says.

Estimated gross processing margins have been consistently year-over-year lower since early April, says Mildred Haley, USDA agricultural economist. Although second-quarter prices of both hogs and wholesale pork cuts have been year-over-year higher, hog prices have increased relatively faster, squeezing processor margins as a result. 

Undoubtedly, the rescission of Mexican tariffs on U.S. pork largely prompted upward revisions in U.S. pork export forecasts for both 2019 and 2020, Haley says.

In April and May of this year, the price of 51-52% lean hogs averaged $58.65, more than 35% above prices in the same period of 2018. This jump was partly due to an increase in the demand for hogs and partly due to the African swine fever (ASF) situation in China and its implications for U.S. pork exports to China. 

“It is notable that along with the larger April-May slaughter numbers, the U.S. processing sector produced more pork products, and that those products cleared the wholesale market at higher wholesale prices,” Haley says. “A larger volume of pork selling at higher prices points to increased pork demand.”

In particular, given that April pork exports were more than 4% lower than a year earlier, higher market-clearing wholesale pork prices suggest a strong increase in domestic demand. Weekly federally inspected pork production for April and May was 4% higher than a year ago, and the wholesale carcass cutout price averaged almost 20% above April-May of 2018.

“Wholesale price increases were not sufficient to offset larger hog price changes, however, and processor margins declined as a consequence,” Haley says.

Hog Price Forecast Still Above a Year Ago 
For the second quarter, hog prices are expected to average $58 per cwt, more than 21% higher than the same period a year ago. Forecasts for third- and fourth-quarter hog prices were lowered slightly to $60 and $56 per cwt, respectively. 

These prices reflect slightly weaker expected packer demand for hogs, Haley says, although continued robust demand—both domestic and foreign—for U.S. pork products will underpin prices at above year-ago levels through the balance of 2019. 

Meat Export Forecast
Beef exports are forecast to increase 2.7%, primarily because of the lower anticipated competition in Asian markets, as beef supplies in Oceania will reflect weather-related herd reduction this year. Broiler export growth is forecast at 2.3% based on expectations of increased demand in low- and middle-income countries, particularly as the global meat and poultry market is pressured by shifting Chinese demand, Haley adds. 

A 3% growth is anticipated for turkey exports next year, supported by strength in shipments to Mexico with continued low turkey prices expected to draw additional international purchasers. Lamb and mutton exports are likely to fall as U.S. production trends lower. Export volumes for eggs and egg products are forecast to decrease by 3%, based on expectations of continued softness in foreign demand. Dairy exports are expected to grow 3.3% next year as global demand grows.

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