By Dennis DiPietre and Lance Mulberry
When industry analysts assess the news for the coming year, they often receive it as disjointed pieces of the entire puzzle. Feed prices have risen dramatically, exports are at record levels, cold storage is as empty as it gets (and maybe a little emptier) and hog prices are rising both in the cash market and the futures. But how do you put all of these pieces together to predict the “whole package” of profitability? Some factors that affect profits are up, some are down and some are relatively stable, while others have a high variance going into 2021.
Feed costs are perhaps the most worrisome, but we would also include production-versus-packer capacity whenever I grab my worry beads. Production is expected to creep higher once again, and we’re still experiencing occasional processing closures or jams related to COVID-19, such as the Olymel plant at Red Deer, Alberta, Canada in February. We’ve also found that the CO2 supply chain was seriously disrupted during the COVID-19 scramble and its uses in processing are many, including euthanizing pigs for harvest. When the kill runs close to and bumps into capacity, small disruptions can have an exaggerated impact.
Damage to Iowa crops from derecho winds in August 2020 and an unexpected draw down of old crop corn left the industry with a little less (3% to 4%) in the cupboard than expected. This comes after a five- or six-year run of low feed costs, so everyone has gotten a little complacent. The current La Niña is pushing a drier than normal weather pattern around the world. Argentina and Brazil were the most recently affected countries. It looks like they escaped a disaster but the situation there has pushed global grain prices higher.
Up to two-thirds of the Argentine planted corn acres were parched and in desperate need of rain preharvest. Recent rains seem to have saved the crop from disaster, but it is an illustration of how things can suddenly inject a random shock into a seemingly bright profit outlook. Corn demand is expected to be high this year punctuated by still positive increases in U.S. meat production and the surging demand coming out of China as megafarms ramp up after the African swine fever (ASF) devastation, which began in 2018.
We know that ASF is still a factor there because of both news stories out of China and their still-soaring pig prices. People forget that less than 50% of the total production in China is still in small producer hands. They are much less likely to be able to afford strong biosecurity measures.
The big pork demand season is ending there as the Lunar New Year celebration ends, so we will see whether the very high Chinese pork prices hold, indicating supply has not been adequately reestablished from the massive depopulations due to the disease.
Turning to soybeans, the Brazilian crop was expected to be a bin buster, but drought has delayed the harvest and likely damaged expected production somewhat. This has led to an extended period of exports from U.S. stocks as China and other countries buy up supplies against a potential shortage, but have also blocked their own exports to keep their cupboard full during the pandemic.
The U.S. is potentially the next stop on the La Niña travelogue. Will higher feed costs wipe out most of the potential profit for U.S. pork producers in 2021 regardless of high pork prices? Time will tell, but we will need a severe drought this spring to erase what the futures are predicting for pork prices. Stay tuned for more of the other factors next time.
More from Farm Journal’s PORK:
How Big of a Gap Did 2020 Create in the Pork Industry?
Focus on Optimal Capital Structure or Face the Moment of Truth
5 Unwritten Rules to Help You Hang On Until Profitability Returns
