U.S. Pork Outlook: Will 2021 Be Different?

(Lori Hays, Farm Journal)

Many people would like to push fast forward to 2021 and forget 2020 ever happened. Will 2021 be a better year for the U.S. pork industry? Most economists think so, but they’ll be the first to admit that’s what they thought last year.

The industry appears to be set for another year of large hog supplies that will stretch processing capacity and pork demand, says University of Missouri economist Scott Brown. Demand growth will need to continue in 2021 and any slowdown could make 2021 a tough year, he cautions.

“Keeping all the pieces in balance and working together is the key,” says John Nalivka, president of Sterling Marketing. “Capacity is more than just how much space you have to bring hogs into the plant and slaughter them, it also has to do with capacity beyond that – on further processing and fabrication."

When everything is working really well, the highly efficient U.S. pork production system is great, he says. But as the industry saw in 2020, all it takes is one kink in that system to create upheaval.

Although no one holds a crystal ball to shed light on exactly what a new year will bring, Christine McCracken, Rabobank executive director – animal protein, says, “The disruption of the past year gave everyone a preview of just how bad things can get when plants are closed, customers are lost, labor is compromised, or export markets are lost. For the most part, the industry came through the experience with a few bruises and limited lasting damage.”

Five respected economists in the pork industry share their insight on what’s ahead in 2021 and ways producers can make the most of new opportunities ahead. 

2021 Outlook Economists

What is your 2021 pork outlook? 

Basse: AgResource’s outlook for the U.S. pork industry is for production to be up 2.4% in 2021 while input prices like corn/soymeal rise, thereby hurting margins. China is rapidly expanding its hog herd which will curtail red meat imports and raise their soybean/corn imports in the years ahead. Both will combine to squeeze U.S. pork producer margins. China’s hog carcass price should relax with time to equal other world exporters sometime late in 2021. How much China curtails its meat imports depends on its political adherence to Phase 1. U.S. corn/soybean prices only relax with record large South American crops. We forecast U.S. 2020/21 soybean/soymeal supplies to be exceptionally tight. Pork producers need to be locking down feed costs into late winter on strong CBOT corrections. U.S. domestic pork demand is surprising record large. Post-COVID-19 demand has been the bull driver of product prices since May. The demand does not appear to be slowing down. Americans are consuming more meat at home than with foodservice. 

Brown: What is known with relative certainty is supplies of pork will be large in 2021. While the most recent Hogs and Pigs Report showed a 1.5% decline in the breeding herd as of Sept. 1, productivity is likely to grow by a similar amount, canceling out the reduction in fewer sows. Even if steeper cuts to the breeding herd are made before the end of 2020 and pork production declines in 2021 relative to this year, production will still be higher than any year prior to 2020. The demand outlook is mixed, with longer-term consumer response to this year’s COVID-induced recession yet to be determined. While meat and pork demand at grocery outlets has been brisk, many restaurants remain limited by COVID restrictions. The rate at which full restaurant re-opening takes place is one of many unknowns, along with how stressed consumer finances will be next year, depending upon further federal government stimulus. 

Although it will still be some time before China is not importing large amounts of pork, the recent growth in exports will be difficult to match in 2021. All the unknowns on the demand side will lead to volatility in hog markets. While the markets will likely afford some opportunities to lock in profits for 2021, the year could be a tough one financially. While it is impossible to perfectly pick the highs, knowing opportunities of relatively higher hog prices are likely to present themselves during the year and being poised to lock in those prices for at least a portion of your production can make a big difference in surviving an overall difficult financial environment.

Hayes: It should be a profitable summer and a modestly profitable year, but that is what we thought this time last year as well.

McCracken: It is likely to be another year of volatility in the U.S. pork industry – but it would be difficult to top 2020. The industry is ending the year on a high note. Strong export demand following the discovery of African swine fever (ASF) in Germany and the subsequent ban on German exports into key markets creates an unexpected opportunity for U.S. processors. Exports into Japan, South Korea and China are expected to remain supportive to prices to start the year, but remain unpredictable – especially given the current political climate and the questions around whether Germany can win less restrictive trade terms. Recent market strength has allowed U.S. producers to limit losses in 2021, but they need to remain vigilant in controlling costs and looking for opportunities to manage risk.

Nalivka: I am optimistic, but preface that by saying where we are today is a result of the strong export market which is largely driven by our exports and sales to China. I anticipate continued relatively tighter supply and hog numbers into the first quarter. As we go into the second quarter, that supply of hogs is going to grow because I think the industry has adjusted, with producer margins well into the black now and making money. I’ve got hog numbers up 9% in the second quarter, as we begin to see some growth this fall with increased farrowings, that’s still against a 6% drop in the second quarter of 2020. Assuming everything continues to run smoothly with regard to the market, then we'll get producers back on that growth rate they were at prior to COVID-19, generally 3% to 4% growth year over year in each of the quarterly inventories. My price forecast generally runs ahead of 2020. During the first half, that's not very difficult, obviously. When we get into the fourth quarter, I see prices start to weaken some so that basically leaves me with hog prices relatively close to where we were in 2019. 

What is your advice for producers in 2021?

Basse: U.S. pork producers need to be thinking forward about margins amid the uncertainty of China import demand. Lock down profit margins when offered in coming years.

Brown: Do not pass up opportunities to eliminate at least a portion of the price risk you face in both feed and hog prices. 2021 could be another year where feed costs stay low and hog prices remain profitable, but there remains risk in both sides that should be at least partially minimized. In addition, start thinking now about 2022 and beyond. How can your operation survive in a world without large increases in the demand for U.S. pork exports? The U.S. is likely to ship about 2 billion more pounds of pork in 2020 relative to the average levels of 2015-2017. This amounts to about 7% of total U.S. pork production. If full ASF recovery is achieved in the next 12 or 18 months in China and other markets, can the U.S. industry remain at its current size and still be profitable? What changes to your operation will allow for financial stability and not just survival if demand suffers a downturn in the next two years? 

Hayes: Sell more hogs on the carcass price and fewer on the negotiated market. Use the futures or one of the subsidized insurance products to lock in or protect positive margins when possible.

McCracken: Make a plan. 2020 has been a very trying time for many – one that I hope we don’t have to repeat any time soon. But oftentimes when an industry is seriously challenged, it learns its vulnerabilities. I would proactively address those weaknesses whether that is by managing risk, strengthening your balance sheet or finding new markets for your pigs - you can limit the financial impact of another disruption. Having a plan before you need it and when you still have a choice, is a significantly better option than being forced to make tough decisions in the middle of a crisis.

Nalivka: Do not assume anything. We came into this year and who would have thought that by the latter part of April, things would turn into such a wreck? Be aware things can change rapidly and have your financial house in order. When these things happen, you have to manage risk. Managing risk includes the market, production risk and anticipated shortfalls. You have to ask yourself, “Am I prepared to work through that and manage the risk that I will face as a result of that?”

What is the most important question the pork industry needs to ask itself now?

Basse: How long will China import demand persist with their hog herd in dramatic expansion? 

Brown: How does the U.S. pork industry adjust to a potential slowdown in the growth of exports? There are many signals pointing to a tougher period to continue to grow exports and the recent expansion seen depends critically on China. The soybean industry experienced the effects of depending on one market too heavily and the pork industry should be planning a strategy if the same issue occurs. China’s recent self-sufficiency goals in pork may not be attainable quickly but they should not be ignored.Hayes: What do we do when Chinese pork production recovers in 2023 or 2024? We need alternative export markets. 

McCracken: What will the industry look like in 10 years and will my operation be competitive? The pace of change in the industry is accelerating, as technologies improve and markets become more global. Will producers adapt to this new environment and meet customer expectations around traceability, sustainability and quality? What is already clear is that the hurdles keep getting higher. Packers are also facing a more challenging operating environment, with greater regulatory scrutiny, new global competition, an aging workforce and continuously evolving needs of the consumer. Ultimately, the industry needs to consider whether it will continue to compete on cost or if new tools and technologies might offer new opportunities for growth.

Nalivka: How long will China be in the market to the extent they are, representing 31% of our U.S. pork exports? China won’t always depend upon the U.S. to the extent they are now. Are there other markets that we can continue to grow as China gets its herd back in production and doesn't need to buy as much pork from us as they are now? To me, that's the $64 question on the export side and not getting ahead of ourselves because of current profitability. 
 

More from Farm Journal's PORK:

Don’t Assume Anything in 2021, Economists Advise Pork Producers

2021 U.S. Pork Outlook: Volatility and A Little Optimism

Hard Questions the Pork Industry Needs to Tackle in 2021

 

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