2019 Pork Outlook: Trade Optimism and Runaway Supply
If a bucket of water spills on one side of the room, what could it do to you on the other side of the room? Craig Morris, vice president of international marketing at the National Pork Board, says these are exceptional times in the history of the pork industry – we no longer live in a world where what we do affects only ourselves. A huge paradigm shift is taking place, and U.S. pork producers’ returns are more dependent on international markets than ever before.
“We were very optimistic going into 2018 that this would be a record year for pork exports,” Morris says. “To think the trade issues we’ve had with Mexico and China could have popped up like they did, well, it was just unthinkable. The market has changed so much this year because of factors that really have nothing to do with the pork industry.”
So, what can pork producers expect in 2019? Some experts say that despite uncertainties surrounding trade and the size of the U.S. pork supply, producers have reason to be optimistic.
“I’m optimistic that we will get these trade differences settled,” says Chris Hurt, Purdue University agricultural economist. “The signing of the U.S.-Mexico-Canada (USMCA) trade agreement calms trade conflicts with Mexico and Canada, although it still needs approval in each country. In addition, it leaves in place the U.S. tariffs on steel and aluminum. It was these tariffs that caused Mexico and Canada to place restrictions on U.S. pork. Those tariffs still need to come off.”
Hope for a cooling of the trade conflicts with China are potentially supportive to hog prices, Hurt adds.
“China needs food, so if we come up with a big trade package with China that says they’ll buy $70 or 80 billion in total goods from the U.S., some of that will be ag and some will be pork,” he says. “I think that feels pretty positive right now.”
But will that happen?
“There’s an adage in the market that you buy the rumor,” Hurt says. “The rumor is when the prices go up on the talk that we may get a negotiated package with China. The fact is that it may not be as big a package as we hoped for, so you sell the fact. Buy the rumor and sell the fact. That is providing optimism at this point on the trade front.”
Rein-in the pork supply
After a boom period for grain prices from 2008-2013, pork producers finally saw feed prices drop in 2014. Since then, the pork industry has steadily increased production to the point that we are now producing as much pork as we can at levels to just about breakeven, Hurt says.
“We’ve been on a terror of increasing production in the range of 3% a year – that is more than we would generally expect the demand to grow each year,” Hurt says. “Demand typically grows about 1% a year – sticking close to population growth.”
Can the pork industry continue to grow supply 3% each year? The answer comes back to demand, Hurt says.
“We produce high-quality pork at an efficient price. The world has come to our doorstep to help us move that product,” he says. “But we’re at a point that we have to ask ourselves if we can continue to produce pork at this rate of growth.”
Producers control the supply, not any one individual, Hurt says. The high supply means producers can’t expect much profitability and that leaves them vulnerable to losses if the industry doesn’t have a strong demand base.
Hurt believes the industry needs to get back to a 1% to 2% growth rate each year.
“Looking at 2018, we ended up with losses of about $12 per head and assigned that blame to trade conflicts,” Hurt says. “Periods of profitability encourage expansion. Periods of loss encourage slowing of expansion, or in some cases, contraction. Producers are not the only ones who see the signals to slow down growth – so do agricultural lenders. I expect they will be cautioning their producers about that next expansion.”
Hurt projects that supply will remain 3% higher at least for the first three quarters of 2019 but may weaken in the fourth quarter to a 1% or 2% increase in supply.
Exporters search for the next Mexico
Since 1980, the pork industry has seen movement to reduce trade barriers and open markets, allowing the lowest cost and most efficient producers in any country of the world to benefit from reduction of trade barriers. These efforts have resulted in nearly a 20% increase in the pork market due to exports, Hurt says.
“We did not lose as many export opportunities as we feared in Mexico this year, and other countries came in and bought more,” Hurt says. “We’ll end up with about 6% increase in pork exports in 2018. The good news for next year is that USDA analysts estimate an 8% increase in pork exports.”
What the industry has seen in South Korea, Columbia, Australia, the Philippines, the Dominican Republic and a whole host of other markets, has been nothing short of spectacular this year, Morris explains. Unfortunately, with Mexico and China trade pulling the industry down, it was hard to keep the percent of production and dollar per head from exports in the same ballpark as 2017.
In addition to Mexico and China, pork exporters have invested a lot of time and energy into building a solid trade partnership with number one value market, Japan. In 2017, Japan imported more than $1.626 billion worth of U.S. pork, making it the No. 1 export market in terms of value. That dollar amount represents approximately 868 million pounds of U.S. pork.
“Japan has been a market we've definitely held our ground in,” Morris says. “We’re 2% higher on quantity this year and 3% on value, but our market share has drifted. We’ve lost a little of our competitive edge against Canada. And obviously with the EPA agreement with Europe and Japan, and the TPP11 moving forward for Canada and others, our opportunity in that market in years out diminishes.”
Many of the questions surrounding the future for U.S. pork in the Japanese market fall on the administration and free trade agreements with Japan, Morris says.
“We have a new marketing campaign - Mitsuboshi-Three Star American Pork – going on in Japan that could be wildly successful if we can compete on an equal footing,” Morris says.
With USDA estimating 5.3% more domestic production in 2019, Morris says it’s more important than ever for the U.S. to find large volume growth markets like Mexico has been for the last decade.
“If we’ve learned anything, we’ve learned it’s very expensive to dislodge a relationship,” Morris says. “It’s much easier to be there at the onset. Mexico is a case in point – we were there at the beginning of their pork demand explosion and have developed really strong partnerships.”
Morris says that 26.6% of the U.S. pork supply (when you include variety meats) was exported in 2017, making the export market supremely important to the industry. The U.S. export market grew so fast with such few markets that it’s critical to leverage resources in our growth markets of the future in South and Central American, ASEAN and elsewhere, and really build those markets of tomorrow, he says.
The National Pork Board, the U.S. Meat Export Federation (USMEF) and the U.S. Department of Agriculture (USDA) announced in November that they will engage in a foresight-based marketing study called Pork 2040. The study will investigate changing consumer attitudes and trends in developed and emerging U.S. pork export markets in 17 defined countries.
“Funding the Pork 2040 study is so important for us,” Morris says. “We need an objective handle on what could happen to protein demand 20 years from now.”
African swine fever swings market either direction
African swine fever (ASF) remains a double-edged sword to the U.S. pork industry. If we get trade issues behind us, Morris says significant production constraints in China due to ASF could result in China looking outside their borders for pork.
But if they have widescale death loss, what will happen to domestic demand?
“Both beef and broiler prices have increased in China,” Morris says. “But, nationally we are not seeing that for pork. That gives me a measure of concern. If they are liquidating hogs, in theory they’d have less pork available and you’d expect prices would go up across the board.”
Morris says prices are going up in some regions, like the southwest region that has more processing capacity and makes products that are popular for the Chinese New Year celebrations. With the increased demand they have for pork products, they simply can’t get enough product in because of movement restrictions.
“It's too early to tell,” Morris says. “But if images of dead hogs in the streets affect pork demand, that will not only affect demand for domestically raised pork, but for internationally raised pork as well. We've got to monitor the ASF situation to really understand what the true opportunity is in China. Is it a bullish opportunity or is it bearish?”
Hurt agrees that ASF is a significant factor, but we still can’t determine the magnitude. China is such a large market and primarily produces its own pork – 97% of the pork consumed in China is produced there, Hurt says. If China loses 1% of its hogs to ASF, it will need to increase imports by about 33% to cover that tonnage.
“That gets the world pork market excited and that will drive prices higher,” Hurt says. “Will it come from the U.S.? That doesn’t make a difference. If it comes from other countries, then we will get a benefit even if they don’t buy from us.”
Strong economy means more consumer demand for pork
Hurt says the tone of the U.S. economy remains positive for 2019. Consumers are expected to have more money in their pocket with wage rates rising and unemployment at multi-decade-level lows. He believes this will help meat consumption and domestic market opportunities.
“Although Wall Street is talking about the economy slowing down – it’s important to understand that does not mean the economy is going backwards, but rather the rate of growth is slowing down,” Hurt says. “For consumers, that’s still more money in their pockets. The difference is that in 2018, they had 3% more income and in 2019, they are predicting it may be closer to 2%. That’s still growth.”
Even though it’s mostly “talk” at this point, concerns still remain about rising interest rates, military conflicts, Brexit, the president, debt problems, recession and more. However, Hurt says consumers remain optimistic and this is ultimately good for livestock producers.
All major segments of the livestock industry are expanding. USDA is projecting beef to be up 3% in terms of production and the chicken industry up 2% in 2019, resulting in a record supply of competitive meats in 2019.
Another factor affecting the economy now is political uncertainty, Hurt says. It’s a little bit of a wild card in the pork outlook but does fit in with the potential for surprise.
“These things that give us optimism now about the pork outlook are based upon political positions of countries and to know whether those are going to work out or not, we don’t know. Disappointment can come pretty quickly as well,” Hurt says.
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