Exports add value to pork producers’ bottom line. But why isn’t that value showing up in better prices?
The huge increase in exports to China is being offset by weakness in secondary markets, explains Christine McCracken, Rabobank executive director – animal protein. Unlike China and parts of Southeast Asia where they’ve had a lot of African swine fever (ASF) and are short on pork, many countries are having a tough time importing due to COVID-19 and weak food service industries.
“It's really a backup in demand from some of these other export markets,” she says. “If we didn't have China, it would obviously be a problem.”
McCracken is concerned that the U.S. has become so reliant on China as an export partner.
“If that market were to go away due to ASF, some kind of political issue or foreign animal disease, it would be a huge risk to our industry,” she says.
She believes there are a couple reasons why producers aren’t seeing the upside of exports right now.
1. Overall carcass value is under pressure.
China has taken a lot of product that many of our other export partners haven’t been able to absorb. They are also taking a lot of variety meats that may or may not have a home here in the U.S. and McCracken says that’s helping boost the value of the carcass.
“It's really more about some of these other cuts still under pressure here domestically, and that's largely a labor issue,” she says.
The challenge isn’t just in the plant because they are not able to fully bone those products and extract all the value of the carcass, but it's also because of food service, she says.
With more people working from home and less business travel, the demand for breakfast meats just isn’t as strong as it had been. She says that while retail pork demand is still pretty good and only slightly below year-ago levels, we still aren’t getting all the value of those high value cuts. This translates into lower overall pork prices and some pressure on the cutout.
2. The U.S. has too many pigs.
“The U.S. pork industry is too good at producing pigs. Not only have litter sizes continued to get larger, but we grew this sow base when we added capacity and the industry just got a little ahead of itself,” McCracken says. “All these pigs ultimately need to line up with a shackle and when they don’t, there is no incentive for the packer to pay more. It really boils down to supply and demand.”
Over the past several years we have seen the industry break down into those with packer contracts and those without, she explains.
“If you don’t have a strong relationship with your packer, you may not have a home for that pig, and even then, there are no guarantees. With so few negotiated hogs as a result, the spread between the formula and cash markets has widened and forced producers to manage that exposure,” she says. “You can no longer afford to run things without a plan, there is just too much risk.”
The combination of weaker export markets outside China, the inability of the packer to fully optimize carcass values due to labor constraints and the short-term oversupply of pigs is keeping the U.S. producer from realizing the full benefit of stronger Chinese exports, McCracken says.
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