Q&A Series: Economists Weigh in on Pork Outlook

( Farm Journal's PORK )

No one could have predicted the way COVID-19 would change our world in 2020. As the industry adapts and moves forward, Farm Journal’s PORK asked five economists to share their perspectives on what’s ahead in the pork industry. 



Scott Brown
Agricultural Economist, University of Missouri
Columbia, MO

Q. How has current liquidation changed the outlook for pork production later this year?
A.
Disruptions to hog processing have overshadowed the effect of producer decisions. Even as some producers respond to less demand for pork in the short term and a more difficult price outlook moving forward by trimming herd sizes, more hogs are backing up in the system due to processing challenges. We have seen a slowdown in pork production for the 2nd quarter of 2020, with 2nd quarter pork production expected to trail year ago levels by more than 5%y after posting a gain of over 8% in the 1st quarter. However, this will cause more hog slaughter to be pushed into the 3rd and 4th quarters of this year, leading to production growth in the 2nd half of 2020 to exceed the 2019 level by around 5%. Heavier weights will also contribute to the growth in pork production as hogs await processing space. 2021 pork production could slow relative to 2020 as the market-ready hog inventory backlog subsides and current decisions regarding future hog supplies. 

Q. When does profitability in the swine industry come back? How long will it last?
A.
The two positives as we get further into 2021 rest with pork production growth slowing as the supply side works through the current situation and what appears to be continued strong demand internationally for US pork. The unknown at this point is the longer run damage done to domestic pork demand as the US economy begins to recover from the shutdown that resulted from COVID19. If the domestic economy can find some solid footing in 2021 then some modest profitability could occur by mid to late 2021. If the domestic economy struggles to recover, then profitability will be challenged next year as well. Once profitability does return, it might last longer than usual as the supply side is slow to expand in the face of added risk and needed recovery to balance sheets. 



Dermot Hayes
Professor of Economics and Finance, Iowa State University 
Ames, IA

Q. How has current liquidation changed the outlook for pork production later this year? 
A.
We had been expecting packing plant capacity problems this fall. If liquidation is at modest levels (less than two million), this will reduce the extent of the problem but not fully address it. If liquidation is in the five million range and concentrated on young animals, then we may avoid the capacity problem.

Q. When does profitability in the swine industry come back? How long will it last? 
A.
Profitability should be positive starting April 2021, and stay positive until September 2021. Given the demand out of China , then on average, 2021 and 2022 should be profitable. 

Christine McCracken
Executive Director, Senior Protein Analyst, Rabobank 
New York, N.Y.

Q. How has current liquidation changed the outlook for pork production later this year?
A.
To date, industry efforts to reduce supply have largely focused on near-term imbalance, with not enough done to affect long-term supply. Based on what we have seen thus far, the industry has likely shaved less than 5% off our expected fourth quarter slaughter estimate, but some of this will likely be offset by higher weights. Given prospects for continued market pressure, slower exports and a gradual economic recovery, we would expect to see additional liquidation in the coming weeks.

Q. When does profitability in the swine industry come back? How long will it last?
A.
Based on our current supply/demand outlook and relatively low costs of production, there will be some that can return to profitability before year-end, but profits are likely to be short-lived. Industry supplies remain ahead of current demand, particularly given the weaker economic outlook and softer export markets. Based on what we know today, we remain relatively pessimistic on the profit potential for the swine industry through 2021. But things can change if good decisions are made.


John Nalivka
President / Owner, Sterling Marketing, Inc.
Vale, OR

Q. How has current liquidation changed the outlook for pork production later this year?
A.
COVID-19 has obviously significantly slowed the pace of expansion in U.S. hog and pork production, which following the March 1 Hogs and Pigs report, was set to continue at a 4% clip. I was projecting pork production at a 5% increase for 2020, setting a new record and again, for the second year surpassing U.S. beef production. I indicated to clients at the time that without sharply higher exports largely driven by China demand as the result of ASF, pork prices would be pressured by these large supplies. U.S. pork expansion which began four years ago and was initially driven by new and growing processor capacity was now motivated by the export demand. However, large supplies were already pressuring prices and profits as COVID-19 entered the picture. While I have reduced the pace of expansion, I have not cut production as much as USDA in their May WASDE. We will see a sharp 7% drop during second quarter from the prior year and then increased production during third quarter followed by a 3% drop in the fourth quarter leaving slaughter down 1% for the year and production up nearly 1% from a year earlier. I think it is still early to know how things will shake out going into first half 2021 with packer capacity already coming back on line and approaching 75%. The initiation of the new USMCA in July, coupled with continued exports to China, will be supportive. However, I do acknowledge that there is still significant uncertainty with regard to COVID-19, opening the country and getting the economy back to some semblance of normal. It is not a simple “flip the switch” situation and will take some time to get legs – probably near the end of the year and to further complicate things, it is an election year.

Q. When does profitability in the swine industry come back? How long will it last?
A.
Losses will narrow for producers as the summer progresses with profitability perhaps returning. But, solid profitability is not likely to be realized until first half 2021. Markets have to return to some order and not be defined by short supply driven by plant closures, reduced production and consumer panic buying. Once that happens, volatility will be reduced and producers can plan.


Arlan Suderman
Chief Commodities Economist, INTL FCStone
Kansas City, MO
 
Q.  How has current liquidation changed the outlook for pork production later this year?
A.
The pork industry finally got the export demand it had been waiting for, and then coronavirus hit. Positive tests among processing plant employees led to plant shutdowns, which dropped processing capacity roughly 40% below levels needed to meet the demand. Product prices exploded higher as China bid supplies away from the U.S. consumer. High prices suppressed domestic demand, while the producer struggled with cheap cash prices lacking markets to haul hogs to due to the shutdowns. Many producers were left with little alternative but to euthanize hogs. Sow slaughter increased as well, now at 11-year highs, resulting in contraction in the industry. We need to bring weekly slaughter closer to 2.4 million head to bring things back into balance. Until then, we continue to back up hogs, suppressing cash prices, while keeping product prices elevated hampering consumer demand. Ham supplies are building due to a lack of restaurant demand, so getting the economy opened up with people eating out again would help. Slaughter capacity also needs to get back to levels that allows us to work through the backlog of hogs. Capacity at many plants is below optimum levels due to new social distancing requirement. 
 
Q. When does profitability come back? How long will it last?
A.
At that point, we should see buyers start to compete for hogs again, bringing profitability back to the industry. A rule of thumb is that we need to see hogs around $62 for break even. The forward curve for lean hog futures is slightly below that until next April, telling us when the market thinks we will return to profitable levels again. 
 

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