As we launch into a new year of pork production, a cluster of indicators show this year could be much better than current expectations, although the ever-creeping-closer African swine fever (ASF) would instantly negate everything we are about to say. Let’s allow ASF to warm the bench with the boogeyman for a moment while we look at the very bullish indicators for the coming year.
Profitability Ahead
First, we are in a time of dramatically increasing inflation, which is selectively causing the cost of goods to rise at very different rates. Food inflation has been one of the more severe areas impacted, but the bottom line is that it points to higher prices for pork and for pigs, all things being equal. A recent study indicated consumer demand for pork can be both elastic and inelastic depending on several factors including cut, where people live, ethnic makeup of the community, etc. The bottom line is rising pork prices will not likely be met by a corresponding fall off in consumer demand across the entire carcass, thereby negating the impact of increased revenue on profitability.
It is naïve to believe since inflation affects costs and prices (revenue) that there is an exact offset to profits. Yes, corn and soybean meal are at recent historical highs, but the supplies on hand and the 2022 outlook are indicative of a downward trend. Awakening Chinese pig production could keep U.S. grain in high demand, but their ASF problem is at least a 10- to 15-year roller coaster. We are not looking for sustained and increasing Chinese feed grain demand that would derail any U.S. hog profitability in 2022.
Both exports and imports of U.S. pork are ranging toward the higher end of expectations (by recent historical standards). While imports will mildly dampen some regional prices, the export story is much more indicative of well-supported U.S. pork producer profits. It is true the pace of pork exports is much more positive when you measure it in value, versus tonnage, which is a bit of an illusion reflecting the inflated prices rather than increases in volume demand. Still, more revenue and potentially lower costs for feed in the coming year will mean more profit, even if things to spend it on will take a little of the shine off the apple.
Lower Production Numbers
Production is off the unrealistic growth trend and will keep plants bidding for pigs. It seems inevitable that genetic growth will have to slow from the torrid pace of the past decade or more due to the capacity of sows needed to sustain the same percentage of full-value pigs per litter as litter sizes keep amping up. Also, the advanced skill level required to consistently produce 30 full-value pigs per year, regardless of genetic capability of the breeding stock, is not equally distributed across the industry and is impaired by staff shortages and constantly retraining new staff.
One significant reason we are not seeing these lower production numbers more dramatically affecting producer prices is that staffing at packing plants, as well as on the farm, has been volatile and hard to sustain at ideal levels. For example, Tyson Foods proposed a three-day (nine-hour) work week at some plants, with full benefits, and is willing to pay for four, rather than three, nine-hour days.
Hog weights remain high. We are tracking increasing volatility in live pig price spreads and sort loss, which has developed this fall and reflects the volatility in the production sector due to a combination of disease outbreaks, new crop corn and personnel shortages to market animals at their most profitable times.
Cold Storage Still Below Normal Levels
U.S. cold storage decreased significantly during the closure of plants due to COVID-19 in summer 2020 and it has not been replenished. Refilling cold storage is slow when packers are making a lot of money. This temporary demand will reverse when it is drawn down again later.
Prices for other substitute proteins, such as beef, poultry and lamb, have also increased by the same forces working on the pork sector. This makes the quick switch to alternatives less advantageous in a time of generalized high prices draining the household budget.
Forecasting prices for pork is a bit of a fool’s errand since there are so many random variables that impact the best forecasts. However, we are feeling pretty good about 2022 if we can keep ASF as somebody else’s problem.
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