Is The “Hog Cycle” A Thing Of The Past?

Impacts on supply and demand are more likely factors. ( Farm Journal )

Pork production profitability has been relatively good with no major cycle low since the period from August 2012 through May 2013. Yes, we have had a quarter or two since then that have given the production sector red ink, but the historical hog cycle, which was generally an extended period of red ink where there was no light at the end of the tunnel, seems to be gone. In the past, the hog cycle was something you could count on every four years or so, correcting the breeding herd growth and subsequent pork supply growth before returning to profitability.  

I would say it will be “shocks” to supply and demand rather than typical patterns of growth in supply that will drive the pork cycle in the future.

One obvious reason for the change is the dramatically higher capital investment in fixed assets. As the investment in pork production assets continues to increase, it is more difficult to idle facilities. And with short-term losses, taking assets out of production is not a consideration. Rather, maximizing throughput is always the goal.  

Another reason for the change is how pigs are marketed. As the industry has become more integrated and also more contracted, reducing numbers is a long-term consideration when there is a 12-month, 24-month, or even longer obligation to deliver pigs.

I believe we have a strong industry today and great opportunity to continue. Our demand outlook for pork is good, but there are always risks.  

Pork Demand

The U.S. Meat Export Federation’s December export data showed pork exports in calendar year 2017 were up 6.6% and pork variety meat exports were up 4% over 2016. This was a good year for pork exports, led by growth in exports to Mexico (again), where 34.5% of U.S. pork exports ended up. Very good export growth to Korea was achieved, with 29% growth; and the South American countries of Columbia, Chile and Peru exceeded 2016 pork exports by 57%.  

Although pork shipments to China were off 24% in 2017, they were still our No. 3 market in terms of volume behind Mexico and Japan. In addition, pork variety meat exports totaled $1.17 billion, exceeding $1 billion for the first time. Variety meat exports equate to more than $8.00 for every pig produced in the U.S. on a product not widely consumed in the U.S.

Domestic demand signals are strong as well. In spite of large quantities of pork in the U.S., retail prices remain strong (higher than the previous year in fact). According to USDA retail price data, the retail value for pork was 1% higher for calendar year 2017, 4.4% higher in the fourth quarter of 2017, and 5% higher in January 2018 versus January of 2017. All of these are signals pork demand is good.

Cycle Risks

As I pointed out earlier, the risks to the industry will likely be an event impacting demand. We know supply will continue to grow unless we have some production issues.

Demand risks are many, including international trade issues and how they impact our ability to maintain strong exports. The North American Free Trade Agreement, the Korea-U.S. Agreement and the Trans-Pacific Partnership (TPP) are three key agreements that are under negotiation—with or without the U.S. at this point, in the case of TPP. Additional risk is clearly from growing competitive meat supplies: the beef herd is growing and there is expansion in the broiler industry, with a number of new projects being developed or planned for the near future.