Plant Capacity, Exports and Economics: What's Next for Pig Farmers?

Hog Barn ( Lindsey Pound )

The pork industry is dealing with a whole lot of balls in the air that people aren’t used to juggling, says Steve Meyer, ag economist with Kerns and Associates. 

Since COVID-19 struck, the pork industry has faced new challenges and opportunities each week. This week, plants are back online and exports are solid, but it’s still a fairly fragile environment both for the processors and producers supplying those plants, says Christine McCracken, Rabobank senior analyst – animal protein.

“Nothing is as bad as what producers have faced – a lack of markets and frustration of not being able to deliver pigs,” McCracken says. 

Getting Plants Back to Normal
The first rule to getting out of a hole is to stop digging, Meyer says. Getting pork processing plants up and running at normal capacity is critical for the pork industry as the backlog of hogs waiting to be harvested continues to grow.

But is it possible to get back to normal or at least above 90% processing capacity in the near future?

“Not in the near future,” Meyer says. “We're going to pick some low hanging fruit here early and then it's going to be slower as we go into the summer months. I don't look for us to be back near those levels until maybe August. It's going to take a while and there's going to be some steps forward and some steps back.” 

Processing plants are up against major hurdles, most notably assuring their workforce that it’s safe to go back to work. But not far behind that are all the physical changes the plant has to make in order to assure worker safety and abide by CDC and OSHA guidelines. 

Much debate remains about whether the packing industry will ever be able to resume normal run rates, McCracken says. 

“When I talk to the plants, I get very mixed answers. Some say they will see no net change –they can engineer around it even with social distancing at the plant,” McCracken says. 

She thinks this may be more possible with the newer plants than some of the older plants. As a whole, McCracken doesn’t expect the industry to get back to 100%, but she believes getting to over 90% capacity is possible during the summer months as the industry works through the overhang in inventory.

“I think it becomes a bigger issue during the second half of the year when we were expecting these big supplies of hogs to come to market,” she says. “Producers have done a lot to curb production. But I’m getting mixed answers on how much liquidation the industry is really seeing. It depends on who you ask.”

Will Exports Remain Competitive?
As good as exports have been this year, they probably won’t stay at those levels, McCracken explains.

“What has been a fairly stable export market in exports will likely get weaker over the next several weeks, especially to China, as the increase in pork prices will make our exports less competitive,” McCracken says.

Logistically, with the economic slowdown in the European Union (EU) and the U.S., Chinese exporters have not seen the orders for manufactured goods, McCracken says. Because of this, they’ve canceled 15% of boat sailings from China to U.S. and this results in dramatically higher rates for exported products – not just from the U.S., but also the EU and Brazil.

From a big-picture perspective, McCracken says the initial drop in pork prices due to weaker foodservice demand made the U.S. more competitive as its prices dropped with the slowdown in its demand. But now, more recently, U.S. pork has priced itself out of that export market. 

““It’s all about relative pricing and how our pork stacks up to the competition,” McCracken says. “In the EU, many countries continue to enforce stay-at-home orders, so you are not seeing markets recover as quickly.”

She says the EU also had a couple of plants shut down last week, as they continue to battle COVID-19, and are just now seeing disruption at the plant level. 

Mexico is also struggling to contain COVID-19, but they haven’t had as many cases in their plants. The biggest challenges they are facing are a weaker economy and the disruption of their tourist trade which is a big part of meat demand in Mexico, she says.

“From their standpoint, will the demand be there for U.S. pork? Exports to Mexico were relatively strong through the first quarter, but will have a difficult time maintaining this momentum with the price increases we have seen recently. The 20% decline in the value of the Peso since February also makes our pork more expensive. It’s that combination of things – it is not just what we are seeing today but what we will see from economic demand going forward in markets like Mexico and even Central America,” McCracken says.

In addition, Brazil is also seeing COVID-19 related disruption at its plants now, she says. “They’ve limited the movement of products and hogs between provinces and issued quarantine measures, but their industry will face the same limitations on availability and shipping we see in the U.S. and Europe over the short term.”

As the U.S. pork industry normalizes, as plants come back online at normal capacity, she believes the U.S. should continue to be very competitive with its export trade competitors.

Economic Fallout
McCracken says the economic fallout of COVID-19 will be the bigger issue longer term for meat demand.

“It’s going to be hard for people to spend a lot on protein, especially when many have lost their jobs. They will probably cut back or trade down to lower cost proteins as they’ve done in the past, and that doesn’t always work in favor of pork,” she says. “Pork has a lot to offer, however.”

One of the big positives is that as people spend more time cooking at home and fire up their grills, there should be more interest in pork as an alternative to beef. It’s also cheaper to eat at home than eating out, she adds. That may help pork over the summer months as consumers look for ways to cut back.

“Overall as you’ve seen through every downturn in the economy, pork consumption is likely to struggle for the next few years as we work to get back to normal,” she says.

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