Challenges Build on Both Sides of the Profit Equation
After a period of profitability following the two years of COVID-19 challenges, we are starting to see some dark clouds on the horizon. Challenges are building on both sides of the profit equation: costs of production and sales revenue. Layers of uncertainty are in the air, and even if some of them were resolved today, their impacts will continue for months.
The coming risks are on both sides of a decision-making teeter-totter that could drop on either side of the fulcrum. Other unprecedented things are happening like high inflation and the highest value of the dollar against key foreign currencies in years. Exports depend on U.S. pork being competitively priced.
If you want to go to bed sure about the coming year, I refer you to the words of Justice Oliver Wendell Holmes, who is supposed to have said, “The longing for certainty ... is in every human mind. But certainty is generally illusion.”
First, the more certain thing is the high cost of production, which will be with us until the U.S. producer of feed grains delivers up a record-breaking crop. That seems unlikely since the cost of production for the feed grain producer, especially to produce nitrogen-hungry corn, is turning away from corn on the margin to soybeans or other alternates. Even if corn is produced, where hog manure is not available, the yields will likely be less than record level since the economically smart thing to do is to reduce nitrogen use through one of several substitutes which don’t deliver the same punch such as using chicken litter (which is potentially a source of the spread of bird flu) and various tillage practices like strip tilling to increase efficiency of applied fertilizer.
The war in Ukraine has severely messed up significant sources of nitrogen exported from the region. Retaliatory actions by the Russians, such as cutting off natural gas supplies to some Eastern Europe countries, means the raw materials for nitrogen fertilizer production (natural gas) that may have been available will now be diverted to alleviate some of this and/or hoarded against the prospect of a coming winter without heat for millions. Even if the war was over tomorrow, it would be months or years before anything “normal” returns. Layer on top of this, the continuing port disruptions and the emerging fifth wave of COVID-19 and there is no balm in Gilead. This will mean producers of all meat animals will be reducing production at least by weight.
On the revenue side, the closure of Chinese ports, roads and entire cities to mitigate the spread of COVID-19 means imports and exports of all kinds of products, including food, are delayed, losing condition, cancelled or dramatically repriced (upward of course). It also is causing a substantial decline in demand by the millions of Chinese who cannot shop or order for delivery to their homes. The pork production machine that is China is ramped up again so imports have been less than hoped for, but they will be ranging out looking for corn as domestic demand recovers.
All of this means the EU and Brazil (both big exporters to China) are scrambling for a pathway into importers that have been dominated by U.S. pork. Pork at retail has reached the highest price ever, driven by the belly price, but high-cost beef (beef producers are reducing herds due to drought in the South and frigid storms in the North) and unexpectedly rising poultry prices (due to avian influenza) means consumers jumping to substitutes for the center of the plate are finding it harder to justify on a cost basis alone.
Will hog prices remain high?
A mid-April USDA-ERS report estimated in 2022 U.S. pork production will be down 2% from last year and pork exports would be down a whopping 6.2% on “weak demand from key importing regions.” Here is the teeter-totter.
We will be producing less, but there is less export demand (now almost 30% of every hog). Which one will be the heavier influence in the balancing board? The teeter-totter for feed grains is less production due to high costs, but some offset through ingenuity of the U.S. crop producer in beating back high nitrogen costs with manure and litter and gaining some output per acre through advances in seed, micronutrient, fringe fertilizer substitutes and equipment technologies, and less demand by China (temporarily) until their domestic demand is allowed to rise again.
Our latest forecast has profits disappearing by September for the average U.S. hog producer who cannot utilize or sell manure. The one who can profitably renegotiate manure’s value can enjoy another two months of profitability and stave off losses until November. It’s worth remembering all this uncertainty — high costs and disappearing availability of cereals such as wheat and corn — will be primarily borne on the backs of the world’s poor.
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