By Dennis DiPietre and Lance Mulberry
Massive production in the fourth quarter of 2019 has overwhelmed any chance of positive price trends emerging from demand in the export markets. The December forecast as embodied in the futures market has essentially returned to the August outlook for December after several false moves upward from demand that did not materialize.
There’s no use blaming China. A substantial amount of the weekly production of pork in the U.S. and other exporting countries is already committed to existing demand and both short- and medium-term contracts. Although there is “extra pork“ that could go to places like China or supply unusual and unexpected demands, it is less than people think.
When live hogs coming to market overwhelm domestic demands, packers are normally in the driver’s seat to cherry pick extra-U.S. opportunities. Live hog prices reflect the superabundance of pigs flowing into U.S. packing plants (all out records falling and falling again).
Cold storage has dramatically increased in a counter-cyclical fashion. This allows pork from pigs bought relatively cheap to position itself for the future export market and be somewhat disconnected from current pig prices. And though it’s hard for many to realize, there is a limited global supply of pork – limited in its capacity to supply the overwhelming potential demand from China.
In Spain, a big seller of pork to China, the opportunity for packers and processors to sell abroad is incenting them to bid up prices for live hogs dramatically and shrinking packer/processor margins. Cultural factors, environmental and animal welfare opposition and income stagnation has kept a lid on domestic demand expansion leaving the export market (including intra-EU trade) as key to future growth and profits.
The opposite is the case with packer margins in the U.S. The difference? Spanish production is disciplined, largely integrated and not going up 3% to 4% per year with nowhere to sell. Keeping pig production just short of total domestic and export demand keeps high returns flowing to the production sector.
A wise producer recently commented on whether integrated systems were going to be essential to compete in the future. When sophisticated production systems own the packing and processing functions, the potential for communication and information sharing across the slaughter barrier dramatically improves (but does not guarantee) future net income resilience and the prospect for clear signals regarding expansion and attribute investment, rather than just rolling the dice.
Expansion of meat substitutes
Due to the emerging meat substitute market, expansion in future domestic demand for pork and beef is likely to soften just as production is going through the roof. How much is anybody’s guess. Take a lesson from the milk industry who has seen “milk” from almonds, oats and cashews begin to substantially push out demand for cow’s milk. Despite the fact that “almonds do not lactate,” (the U.S. regulatory condition for something to be called “milk”) plant milk is sticking with the name so far.
Think of it … no 30,000-cow dairies, no “gas” to affect the global temperature, no “up at 4 a.m. and to bed at 9 p.m. with no vacation” when “milking” almonds for a living. It is vegan, high in protein, has less calories, no lactose intolerance, better taste (at least than skim milk) and a smaller footprint than cow milk production. No wonder one of the leading yogurt makers in the world recently invested $10 billion in soymilk production.
We can’t blame China for everything. Some of our challenges are within our control.
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