It’s been an interesting start to 2021. COVID-19 cases are still surging and the political and market landscape has changed dramatically.
“For now, the pandemic is still very much impacting the U.S. economy and rural industries,” CoBank said in its January 2021 report. “But the dissemination of vaccines and dramatic improvement in commodity prices is enabling markets to look over the horizon to better days ahead. The shakeup in political power in Washington has boosted confidence that more fiscal spending is on its way, steepening the yield curve and raising GDP forecasts.”
The U.S. pork sector worked through the backlog of hogs over the summer and started Q4 2020 relatively current in most parts of the country, explained Will Sawyer, CoBank’s lead economist, animal protein. Combined with a boost in trade expectations after Germany had an outbreak of African swine fever (ASF) last September, this delivered the best spot producer margins for the year in October.
However, fears of capacity issues and higher feed costs resulted in eroding producer and packer margins, he said.
After Thanksgiving, slaughter levels accelerated and peaked at 2.8 million head just before Christmas week, Sawyer said, in comparison to 2.7 million in October and most of November.
“While slaughter levels are still below prior year levels, the boost signals that the industry is managing its way through a difficult labor and demand environment,” Sawyer said in CoBank’s quarterly report.
Although feed costs in Q4 were mostly in line with prior-year levels, Sawyer said that will change as feed cost inflation returns.
“Hog producers face 28% higher feed costs in 2021, peaking in the summer at nearly 40%. This is the highest level of feed cost inflation in over a decade,” Sawyer said in the report. “Producer profitability largely hinges on rational hog supplies and exports. The current futures curve for feed and hogs indicate producer margins slightly above break-even.”
With a significant level of sow slaughter this year resulting from difficult margins tied to plant shutdowns and slowdowns in the spring, CoBank expects far less pork supply growth in 2021. In fact, USDA expects 0.6% growth in pork supply in 2021 – the lowest level of growth since the PED virus outbreak of 2013 and 2014.
In general, optimism about the U.S. economy is rising, especially in the second half of the year, CoBank reports. Unfortunately, it’s going to require everyone to “muddle through for a few months more.”
Read the full report here.
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