Economists Urge Pig Farmers to Watch Out for These Threats to Pork Outlook
Dynamic markets. Volatility. Russia-Ukraine war. High feed costs. Consumer demand strength. The issues affecting the pork outlook go on and on. Farm Journal’s PORK asked five economists to share their perspectives on what’s ahead for the second half of yet another interesting year.
Top (l to r): Altin Kalo, head economist with Steiner Consulting Group, and Scott Brown, agricultural economist at the University of Missouri
Bottom (l to r): Nathan Losey, grain and livestock market analyst with AgResource Company, Christine McCracken, executive director and senior animal protein analyst at Rabobank, and John Nalivka, president and owner of Sterling Marketing Inc.
Q. What’s been the biggest surprise in the market so far this year?
SB: Given that pork production so far this year is 4% below the year-ago level, it is surprising that hog prices have not been better. Although weaker pork exports are part of the lack of hog price strength, other factors are at play that has pushed cash hog prices below year-ago levels.
AK: I am not sure if it qualifies as a surprise, but this year was another reminder that markets are dynamic. Just because the market reacted one way last year, does not mean it will continue to act the same way this year. People react to market conditions; they adjust and eventually that is reflected in the market. Memories of the price spikes in 2021 were fresh at the start of the year. Whether it was retailers, foodservice operators or processors, everyone decided to prepare for an inflationary price environment. The higher raw material prices were passed on down the supply chain, amplified in the process by higher costs for labor, freight, logistics, packaging, etc. This spring, customers saw double-digit price increases on restaurant menus and in the grocery meat case. At the same time, real per capita disposable incomes have declined almost every month since last August. So, maybe it should not be a surprise that demand has been far softer than previously thought. But it sure has surprised the hog futures market, which has lost 22% in the last five weeks (reference is June hog futures price today versus March 30).
NL: The biggest surprise has been the increase in feed costs. Short crops in Canada, South America and Europe have been the key drivers. But soaring U.S. and global energy prices have compounded the issues, as has the Russia-Ukraine war.
CM: While the obvious answer would be the Russia-Ukraine conflict and its impact on feed costs, for me the close No. 2 is the strength of consumer demand. Although we are clearly beginning to see a few cracks in the demand for higher value items as the reality of inflationary pressures takes hold, I have been pleasantly surprised with overall takeaway even as prices on the shelf moved higher. The real test will come over the grilling season – as the full impact of higher meat costs reach consumers just as the economy begins to slow.
JN: I think the volatility in the pork market has been somewhat surprising. We have a pretty good roadmap with regard to supply. At the same time, global markets have become more volatile and largely driven by “what is China going to do,” which is definitely a moving target with limited or not very good information. We became accustomed to growing pork export markets and, perhaps, too presumptive in forecasting pork product prices going forward. Lesson learned, particularly with China leading the way!
Q. How will the Ukrainian war impact the second half of 2022?
SB: It will remain challenging to get Ukrainian feed grain and oilseed supplies into global markets as the damage to ports will take many months to get any significant recovery. It will be tough to find other ways to move Ukrainian agricultural products. The lack of Ukrainian feed grains and oilseeds in global markets will keep feed costs high for pork producers.
AK: The war does not have a direct impact on meat prices, but it sure affects the price producers pay for the feed that goes into their animals. In recent years, Ukraine has emerged as a major corn supplier in the world market. Much of the corn Ukraine produces goes to export, and USDA estimates that during the 2021-22 marketing year (crop harvested last fall), Ukraine accounted for 12% of the global corn trade. A good portion of that supply has been locked in the country, some of it stolen by Russia, and we don’t know how much they will be able to plant this year and sell to the world. If they must make a choice between planting corn and planting wheat to feed their people, we think they will lean toward the second. USDA thinks Ukraine will produce 54% less corn in 2022 and export 61% less. Countries that used to buy Ukrainian corn, which includes China, will look to get it elsewhere, with the U.S. a consistently good shipper. The war in Ukraine has also disrupted the oil market, with diesel prices well over $5.50 and heading to $6 a gallon. That part of the world also produces a good portion of the fertilizers that Brazilian farmers grow. Bottom line: The war in Ukraine is the most significant world event since the collapse of the Soviet Union, and it will significantly increase input costs for U.S. hog producers.
NL: The lack of Ukrainian and Russian grain exports from the Black Sea will continue to underpin world grain markets in the year ahead. Soaring energy prices in Europe will be just as important as global transportation costs continue to increase. Global fertilizer production will continue to decline, and world prices will further increase.
CM: The big unknown is how much grain and/or oilseeds the Black Sea region will be able to produce, and ultimately export, during this crop year. While the U.S. does not rely on imports from the region, the global nature of the market will amplify the impact of any export shortfall. Given this uncertainty and the disappointing second crop in Brazil, the stakes are even higher for the U.S. to have an even better crop. There will be a long tail on the impacts of this war, with the full impact of higher cost fertilizer, seed and chemicals stretching into 2023.
JN: The Ukrainian war has become a critical factor in global grain and fertilizer markets, not to mention U.S. aid. I wouldn’t expect the war to continue at the same pace into the second half, but then as with everything else this year, the best advice is “never say never.” I don’t see much relief on grain prices and costs of production. Producers will have to continue to keep feed costs at the top of the priority list for risk management.
Q. What is the profitability outlook for U.S. pork producers this year?
SB: It looks like 2022 will be a breakeven year for many producers. Many 2022 lean hog futures contracts gained about $25 per hundredweight (cwt) over the first three months of 2022, and the outlook looked bright. However, most contract months have moved back to levels found at the beginning of the year. Feed and other costs have moved 15% to 20% higher since the start of 2022, and there remains concern costs will continue to move higher.
AK: Profitability is different depending on the producer. Those who were prudent enough to put on hedges earlier in the year will be in great shape. Those who didn’t will likely see some red ink. Iowa State University does a good job providing a baseline for producer profitability making some assumptions. Their numbers show strong profits in the last three months, and we agree. But the recent collapse in futures points to negative returns in the second half of the year.
NL: Hog producers in 2021 realized good margins for much of the year. Red meat prices led U.S. inflation, starting in mid-2020. But inflation has now spread to everything: energy, consumer staples, all other food products, vehicles, etc. There are some growing concerns consumers could begin downgrading their at-home menus. All of this occurs as we see the export program to China come unwound. There are a lot of crosscurrents at the moment. Inflation and its impact on both consumers and producers is the largest unknown.
CM: Margins have been strong all year, although rising costs and a more volatile hog market will make it difficult to repeat in the second half of the year. There have been opportunities for the producer to limit the downside risk over the balance of the year, but not everyone took advantage of the early market strength.
JN: I think producer profits will remain relatively strong, but at the same time, packer margins are weak in the face of a weaker-than-expected cutout, and this suggests the situation can change if packers cut back on kills to manage margins. Weights are already high, and this obviously affects pork production. I think one possibility in support of the pork prices is consumers who are increasingly pinched by record-high gasoline prices will become more cost conscious at the supermarket meat case and move more toward pork instead of buying higher priced beef. We are already seeing some of this, but it remains to be seen at this point how far it may go. At any rate, this can be positive support for pork prices.
Q. If you have five minutes with a pork producer right now, what would you advise them?
SB: Risk management is critical in today’s volatile markets. Choose a risk management strategy that helps minimize margin volatility. The risk management plan must use a coordinated approach between input costs and hog prices. Historical results have proven leaving one or the other unprotected can lead to reduced profitability.
AK: Always work on a risk management plan. Markets are volatile and a consistent risk management program will pay off in the long run. Industry consolidation continues and packers now control a bigger share of the hogs out there. This gives them more marketing power. Like it or not, the old ways of pricing hogs off the cash market seem to no longer work, with just 1% of the hogs negotiated. Evaluate various ways on how to price your hogs and always try to find ways that allow you to lay off some of that risk.
NL: For much of 2018-2021, the worst thing a producer could do is lock in margin. This was due to strong Chinese demand that kept a bid under hog prices and kept the market at elevated levels. But the Chinese export story is over. I think producers need to remain classic with their margin hedges. For wean-to-finish producers that means hedging margins at placement, and for farrow-to finish producers that means hedging margins sometime between when sows are bred and when they are farrowed.
CM: Stay the course – continue your focus on margins, management and mental health. Volatile input markets will require a laser-like focus on managing your commodity risk and maintaining a strong balance sheet. Now would also be a good time to reinvest in your on-farm labor and training programs. Reviewing your biosecurity protocols is crucial, especially given ongoing herd health challenges and ongoing risks. Finally, take care of yourself and your team – greater uncertainty in the markets can be stressful and there are resources to help manage the added pressure.
JN: Be vigilant in every perspective in this time of volatile prices and high inflation. Risk management is absolutely crucial and will lead to sound decision to protect margins.
We will be uniting together June 6-12 for PORK Week across all of our Farm Journal platforms to elevate the important role the pork industry plays in feeding the world. Share your stories and post photos on social media using #PORKWeek22 to help us honor the pork industry. From “AgDay TV” to “AgriTalk” to “U.S. Farm Report” to PorkBusiness.com and everything in between, tune in and join us as we acknowledge the most noble profession there is: feeding people.
