2023 Pork Outlook: A Recipe for Fireworks? 

(Farm Journal)

Of all the challenges coming at the U.S. pork industry in the year ahead, economists agree it likely won’t be the price of pigs. 

“The last several USDA Hogs & Pigs Reports have provided a static sow herd with no jolts in productivity,” says Joe Kerns, president of Partners for Production Agriculture. “We are likely not going to produce ourselves out of profit.”

But the challenges producers will face aren’t small. Many believe the threat of a border-closing disease such as African swine fever (ASF) continues to top the list. Not losing sight on biosecurity is key to protecting the U.S. pig herd. 

“Absent that, my biggest concern is on the input side – specifically, corn,” Kerns explains. “We are running tight on a balance sheet in the U.S. with everything we know. Insert a problem with production either here or in South America combined or separate from potential demand increase (maybe China?) and we could put a serious hurt on the corn market. Throw in some tilt in acreage demand on account of renewable diesel demand and you have a recipe for fireworks.”

The demand front for pork has been impressive, but the current forecast of a slowdown in the general economy could also become an issue for pork prices in 2023, adds Scott Brown, an economist at the University of Missouri.

The coming year is likely to look a lot like 2022, points out Christine McCracken, executive director animal protein at Rabobank, with historically high costs of feed, fuel and financing costs pressuring margins.

“With nominal growth in production and steady pork exports, hog markets are expected to trend only slightly below 2022 averages. Packer demand for hogs should remain steady yet could slow if retail pork sales disappoint or exports fall short of expectations,” she says. “Any improvement in the health status of the herd or a return to trendline productivity would also limit the near-term upside in the cash market.”  

Costs were a headwind to producer returns in 2022 and they will be again in 2023, agrees Lee Schulz, an economist at Iowa State University. According to the Iowa State University model for farrow to finish production, costs increased 27% or $17/carcass cwt in 2021 compared to 2020. Costs increased 18% or $15/carcass cwt in 2022 compared to 2021. 

“This translates into an increase of over $60 per head in just two years. Costs are forecasted to remain at, or maybe slightly below, these record levels in 2023. Feed costs have been a big part of this increase, but pork producers use numerous inputs and services which have all been higher in 2022,” Schulz says. 

The USDA National Agricultural Statistics Service prices paid indices can provide some context, he explains. The September 2022 prices paid index for commodities, services, interest, taxes and wage rates, labeled PPITW, was up 12% from September 2021 and up 24% from two years ago. Higher hog prices have only partially offset the rise in costs in 2022. On an annual basis, hog prices were only 7% higher in 2022 than in 2021. Moderation in revenues seem imminent for 2023. Hog prices are forecasted to decrease 5% from 2022 levels.

Here’s a deeper look at these economists’ pork outlook and advice for pig farmers heading into 2023.

What is your 2023 outlook for the pork industry? 

Brown: In defining 2023 pork markets, I often use “sideways” to describe my outlook. Given current information on sow inventory, it appears 2023 pork production will increase by less than 300 million pounds. My current outlook for hog prices is a decline of about $5 per cwt for 2023 relative to 2022 as a weaker outlook for real Gross Domestic Product (GDP) and higher interest rates slows domestic demand growth. 

Kerns: I am cautiously optimistic about 2023. Perhaps that is the most ringing endorsement we can have in a practical fashion. As an industry, we often pay more attention to the fear factors and focus on “what could go wrong.” That is human nature, and you have to be respectful of that approach, even if does not make sense from the outside looking in. It is against that backdrop where we currently have summer hogs making new life of contract highs and representing over $35 per head profits for most producers. We do not have to count on hope for our future, we can secure respectable profits right now with a combination of futures, options and insurance to take the economic risk out of the equation. That is not a normal scenario and I like the prospects of our industry to generate profits into 2023. 

McCracken: We are generally optimistic on the U.S. pork market outlook as global protein supplies remain constrained, but it will be tough for producers to repeat the level of returns we have seen in the past few years. U.S. pork markets are likely to be under some pressure as consumers contend with the economic fallout of slowing growth and reduced purchasing power. Pork also faces more competition in the retail meat case from increased chicken supplies early in the year, which is likely to attract stronger promotional activity. We are more optimistic on the second half of 2023 as U.S. beef supplies will contract, leaving more room in the case for pork. 

Schulz: Current levels of risk, uncertainty and input costs have producers pulling back, in spite of relatively strong hog prices. We are seeing a change in supply―a retrenching of the industry so to speak. The latest USDA Hogs and Pigs report showed as of Sept. 1, the breeding herd was 6.152 million head, down 0.6% compared to a year and the smallest September breeding herd since 2017. Hog producers said they intend to farrow 2.973 million sows during the September through November quarter, which would be down 2.5% from the same quarter in 2021. Similarly, December 2022 through February 2023 sows farrowing intentions are expected to be below year prior levels. If producers do follow through on these intentions, this would be the fewest number of sows farrowing since 2015 and will keep pork supplies rather tight through at least the first half of 2023.

According to the Livestock Marketing Information Center, pork production is forecasted to decline to 27.1 billion lb. in 2023. This would be a slight drop from the 2022 level. The lower production is based on a projected 0.7% decrease in commercial hog slaughter which would more than offset an expected 0.4% increase in carcass weights. USDA is a bit more optimistic with 2023 pork production forecasted to be slightly above 2022 production. Even with the smaller breeding herd it may be possible to see a modest growth in production in 2023 if there is productivity growth, which could come from more pigs saved per litter or heavier hog weights.

As is always the case, demand will be a key focus for market participants in 2023. Even if domestic per capita consumption is lower or flat next year, U.S. consumers paying higher real (i.e., inflation adjusted) prices would help hold the strong demand of the last several years. Pork export volume in 2023 is forecasted to be down 2% from 2022. The strong U.S. dollar is a notable headwind to U.S. pork exports.

What are the drivers of change for pork producers in 2023?

Brown: Weather remains one of the potentially important drivers. Dry weather in key corn-growing regions of the U.S. will push corn prices even higher, while good weather could lead to record corn yields and reduce corn prices from the recent high levels the industry has experienced.  

Kerns: We are currently in the eye of the hurricane where everything is seemingly calm, but the storm is on the horizon. The competition for acreage brought on by sustainable aviation fuel battling for acres with renewable diesel production will cause the biggest changes, maybe ever, in how we feed animals. The full impact will not be realized in 2023, but we will start the transition and it will not be a passing fad. Large-scale production increases are not on the horizon for a myriad of reasons, we would normally be concerned about expansion as the $64,000 question. Not this year. The impact of Washington DC policies as they relate to addressing carbon concerns and the unintended consequences therein will drive the discussion in 2023 and beyond.

McCracken: The expected Supreme Court decision on California’s Proposition 12 in early 2023 will add clarity around statewide regulation of sow housing. Regardless of the final court ruling, however, customers appear to be independently moving toward open-pen gestation housing and producers appear to be accelerating efforts to transition. This is a tough investment for some given recurring herd health challenges and a higher rate environment yet follows several months of strong returns which helps cushion the blow. Nevertheless, the higher investment hurdle and managerial burden of new systems when combined with the advancing age of U.S. hog producers, could prompt further consolidation in 2023. Packers strained by unpredictable hog supplies in 2022/23 are likely to redouble their efforts to ensure sufficient production in order to optimize plant efficiencies. 

Schulz: I would be remiss if I didn’t mention all the possible usual suspects including domestic and export demand, any changes in the global epidemiological conditions of ASF, the economy, state and national policy debates, productivity/disease impacts, and weather/grain markets to name a few. More uncertainty likely alters the risk–reward relationship as producers consider expansion. The more risk and uncertainty producers see, for a given level of expected profit, the more likely they will go slow on expansion once it starts.

More from Farm Journal's PORK:

9 Questions Pork Industry Leaders Challenge You to Think About

The Real Outcomes of the Swine Health Information Center in 2022

FDA Publishes 2021 Report on Antimicrobial Use in Livestock

 

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