Written by Kent Bang
August provided a good indicator of the volatility in the pork sector. After pushing the market lower for four to five weeks with the cash market and futures falling nearly every day, news in the middle of the month began to surface that would start to turn the market around and bring speculators back into the sector. After meeting with a number of clients this summer and looking at some year-end projections and 2019 forecasts, it has been quite dismal.
The outlook, based on futures prices, indicated we would see significant losses (greater than $30) through the end of the year. Those projections showed losses continuing through most of next year.
But in mid-August, the futures markets were sharply higher, gaining $10 per cwt in the nearby months and $6-plus in the deferred months. We added more than $15 per head to the average of the next 12 months on the news of African swine fever (ASF) in China (see page 21).
Pork supply growth is having a big impact on the market. The week ending Aug. 18 was the largest slaughter week of the year so far with an estimated harvest of 2,459,000 head in the U.S.
That is a lot of pigs for this time of year and likely the largest slaughter week outside of the fourth quarter in history.
Packers have responded by driving prices down relative to the cutout as the number of head offered is large and processors are running at or near capacity. The spread from Western Corn Belt to Cutout has increased by $32 per head in the past 30 days. Packer margins have improved dramatically in that period—not by $32 per head, but significantly. Average carcass weights of pigs as of publication had increased by 2 lb. per head, so pork supplies are heavy in the marketplace.
Trade a Factor
Obviously, trade is a key driver of the downturn in the market outlook. U.S. exporters are still moving nearly equal amounts of product to Mexico as a year ago and have maintained much of our export market elsewhere with the exception of China.
Pork muscle cut exports to China have been reduced to nearly nothing. Offal is still moving, although at reduced volumes. This impact is weighing on U.S. markets, given the record level of pork production year to date.
African Swine Fever in China
The big news has been the ASF outbreaks in China. China’s dense pig production, including large numbers of small and backyard farms that have no biosecurity, and the lack of control of pig movement would suggest health officials will have difficulty controlling the spread of this disease.
The second positive test in mid-August sent our futures markets up the limit for two days. The third positive test for ASF in China came just a few days later. The potential for significant loss of pigs in the most dense production area on the globe is a possibility, and the market is reacting.
It is too early to tell what the long-term effects will be for U.S. producers.
It bears watching closely as you look at marketing opportunities presented by a volatile time in the futures market. There are obviously speculators who see this as an opportunity, which might give you a chance to lay off some risk in September and improve the outlook for your business.
At the end of the day, we still have a lot of pork (and other meat) to move through the marketing channels in the next year and beyond.
For the past 20 years, Kent Bang has been involved in the financing of commercial swine operations and pork processors. Currently, he serves as vice president swine lending for Compeer. He has been a long-time member of the NPPC Pork Alliance. Kent currently serves on the NPPC board of directors and as a director for the NPPC Political Action Committee. He and his wife, Julie, live in Omaha, Neb., and have two adult sons.