For the fifth consecutive year, record U.S. pork production is expected. And again this year, it’s not just more pork that’s expected on the marketplace, it’s more total red meat and poultry supplies, too.
Beef producers have expanded aggressively and are expected to surpass the beef production record set in 2002, said Lee Schulz, Iowa State University agricultural economist, at the Kansas State Swine Profitability Conference on Tuesday. And total poultry production has been rising for the past six years, with the same outcome expected this year, too.
“Prices going forward will either depress, or promote, further growth within each respective industry,” Schulz said. “These record supplies underscore how important demand will be in determining 2019 livestock and poultry prices. So far, for pork, demand appears to be keeping pace with rising production.”
Demand must continue to grow
Evidence of robust U.S. pork demand expectations—from both domestic and foreign consumers—is implicit in the 2019 CME lean hog futures contract prices, he added. Prices on average look to be a replay of 2018, even though pork production is expected to be 2% to 3% higher in 2019.
“Of course, the wild card remains what will happen politically on the tariff and trade front,” Schulz said. "Further resolution could trigger a price rally.”
USDA’s 10-year forecast suggests production for red meat and poultry will increase 7.5% over the next 10 years, with pork leading at 9.4%.
On the demand side, per capita pork consumption in 2028 is forecasted to rise to 54.3 lb., up 1 lb. or 2.3% from 2019. Schulz noted that the limited 10-year forecasted rise in per capita consumption is telling.
“It suggests that growing per capita pork consumption much beyond current levels will be very difficult without a dramatic reduction of price,” Schulz said. “No price collapse is forecasted. However, price levels that would substantially boost per capita consumption would likely not be financially sustainable. What the forecasts imply, and a realistic goal, is holding pork’s share of the domestic protein market relatively steady, while looking for opportunities to grow demand.”
Demand strength reflects consumer valuation of pork which underlies total dollars available for the industry and drives prices and profitability for all sectors in the industry, he said.
Active export market development has permitted pork producers to boost production at a faster rate than domestic consumption. Schulz expects this trend will continue.
“Even if the industry now has adequate slaughter capacity, it still has to find a market for the big pork supply. U.S. pork export tonnage is forecast up 8% in 2019. That number could be significantly higher or lower depending largely on sales to China and Mexico,” he added.
Further trade liberalization of key customary and emerging markets would benefit the U.S. pork industry, but Schulz pointed out that it also benefits export competitors.
“Expect export markets to be strongly contested in 2019 and beyond,” he said. “Competition will be intense in both quality and price. The U.S. remains a leader in both of these elements. Shocks such as disease outbreaks and trade disputes will add volatility to the export component of demand.”
No matter what trends impact the international or domestic markets for U.S. pork, the goal with any marketing plan should be to minimize risk by reducing losses and increasing the probability of profit, Schulz said.
“Focused management of things one can control in-house, such as critical production cost and price risk management, will position any decisionmaker to make the most out of any situation,” he said.
Spreading fixed (building, equipment) and quasi-fixed (labor) costs over more units of output boosts economic efficiency. Sow farms, for example, can reduce average fixed and sunk costs per head by stocking and farrowing more sows. In fact, recent numbers suggest they are, Schulz said.
He encouraged producers to take a longer-term perspective on the outlook. Long-term forecasts are important considerations in the timing of decisions on facility improvements, new facility construction or general expansion of the hog operation. For example, producers might strive to plan investment in new facilities or in facility expansion so that the initial new output flow coincides as closely as possible with the price upturn phase of a hog cycle, Schulz said.
Decisions for 2019
Volatility in the hog market is not likely to decrease and the short-term outlook is somewhat bearish. However, given good marketing and price risk management, profitability is achievable, Schulz said.
Lessons learned from 2018 could help producers maximize profit potential in 2019.
“There are favorable opportunities to hedge or put a floor on hog prices,” Schulz noted. “Don’t wait to execute a price risk management strategy. Recall what happened to the summer 2018 hog market. October lean hog futures prices, as an example, fell from about $63 in June to under $50 by early August as the market was anticipating the negative impacts of Mexican and Chinese tariffs on U.S. pork exports.”
The potential for profits at times this year should encourage producers to take advantage of forward pricing opportunities when they arise, he added.
“Early in the year futures market prices could be higher than cash prices when hogs are ready for delivery,” he said.
2019 Pork Outlook: Trade Optimism and Runaway Supply