Economists Call Out Game Changers in the Pork Outlook
Pork demand. Inflation. African swine fever recovery in China. Consumer spending. Pandemic effects. The issues affecting the pork outlook go on and on. Farm Journal’s PORK asked five economists to share their perspectives on what’s coming in the second half of another interesting year in the pork industry.
Scott Brown, Livestock Economist, University of Missouri
John Nalivka, President, Sterling Marketing, Inc.
Lee Schulz, Associate Professor and Extension Livestock Economist, Iowa State University
Altin Kalo, Head Economist, Steiner Consulting Group
Brett Stuart, President, Global AgriTrends
Q. What are the game changers in the pork outlook for the second half of the year?
SB: It is difficult to underscore just how important pork demand, both domestic and international, has been to recent market prices. The fact that pork export levels have remained near the levels of 2020 (and in fact shipments for March were larger than a year ago) has been an amazing accomplishment, given the export growth that was posted in 2019 and 2020. Setbacks in the recovery from African swine fever in China, disease issues in other global markets, and economic recovery from the pandemic have all been positives for global pork demand thus far in 2021, and the extent to which these factors continue for the remainder of the year is crucial for U.S. pork markets. The biggest wildcard on the domestic demand front remains consumer spending and habits as pandemic effects continue to ease. Consumers have shown a desire to resume normal activities and to spend at least a portion of that which was saved during 2020. As long as these habits continue through the remainder of the year, hog prices should remain historically strong.
AK: Demand is a major game changer. Right now, we are seeing some of the highest wholesale pork prices since 2014. For some items, we are seeing all-time record prices, and yet production remains quite large for this time of year. Some of this is because of a demand shift due to broader inflation pressures, higher incomes and consumer preferences. Some of this is due to a bull whip effect as the economy emerges from COVID-19 restrictions. It is hard to assess how much of the current shift in demand is due to consumers willing to pay more for pork (true demand shift) and how much is due to the bull whip effect. In the next six months, we should get a better sense about demand and prices needed to clear the market. We also do not know the full effect from the current court decision to slow down line speeds and the upcoming implementation of Proposition 12 in California, both of which could push up wholesale pork prices while punishing some producers.
JN: While U.S. pork exports have been a significant factor supporting the market, I think there is still a great deal of uncertainty in that regard as well. From the standpoint of producers this year, I simply think the watchword is “caution,” and this is quite a shift from chasing to new processing capacity.
LS: Demand-pull and cost-push factors have coalesced to cause notably higher hog prices. Cost-push inflation occurs when production costs rise or supplies fall. "Too many dollars chasing too few goods" drives demand-pull inflation. Demand-pull inflation tends to benefit producers, whereas cost-push inflation tends to hurt them. Cost-push inflation in commodities is usually temporary. How “temporary” the increase in feed costs and also items such as supplies and repairs, building materials, vehicles, machinery and custom services will be a big factor in the outlook for the second half of 2021 and beyond. Surging first-half 2020 exports to China pushed 2020 U.S. pork export volume record high, shattering the 2019 record. Pork export value also ran record high. China was not the only success story in 2020. Maintaining record exports to diverse world pork markets would make 2021 a big win.
BS: As we move to seasonal supply growth, exports will become more critical to supporting prices. Chinese hog prices have dropped by 50% since January. The lack of transparency from China’s swine sector leaves everyone guessing. No one on earth knows how many hogs there are or were in China. We know that the battle against ASF continues around China. But with this big shift lower in Chinese hog prices, and a big upward move in U.S. hog prices, we expect Chinese demand for U.S. pork to moderate over the summer. Look for a bottom in Chinese hog prices soon, potentially followed by an upward move higher. If so, imports typically surge four to six months after Chinese prices surge.
Q. What is the profitability outlook for pork producers?
SB: For all the good news on the hog price side, sharply higher input costs are taking their toll on profitability. Farrow-to-finish production costs are up at least 30% for many producers relative to last summer, and while hog prices have more than made up for this recently, prices tend to decline more quickly than costs when market corrections occur. 2021 as a whole is looking to be moderately profitable for most producers, but some of the uncertainties mentioned above could begin to crimp profitability as soon as this fall and certainly into 2022. The size of this year’s corn crop is one large profitability factor, as well as ASF recovery in China. As the world’s largest hog herd resumes growing there, China imports less pork (a negative for hog prices) and imports more feed (a positive for feed prices and another negative for hog profitability).
AK: Current futures present a profitable outlook for producers. High feed costs will tend to keep profitability in check, but we still think current prices suggest producers will be in the black for the next 12 months.
JN: I think the producer margin outlook will remain relatively positive, but with the caveat that feed costs continue to pose risk. While I remain positive with regard to demand, that can also change.
LS: The last time pork producers had to deal with this high of costs was in 2014. Farrow-to-finish production costs are forecast to increase 25% or $16 per carcass cwt in 2021 compared to 2020. This translates into an increase of nearly $35 per head in 2021 compared to 2020. In 2014, hog prices were $9 per cwt higher than what is expected in 2021. These higher prices helped offset the higher costs. Some operations might not fully realize the full magnitude of the increase in feed prices as they might have implemented some price risk management such as hedging corn and soybean meal. Managing risk in this setting might involve trying to protect some combination of lean hogs, corn and soybean meal. Using realized prices through the first five months of the year and current futures market prices as a guide, farrow-to-finish profits could be $30 per pig higher in 2021 than the red-ink experienced on average last year. Still, given current conditions, the annual profit this year could be half of what it was in 2014.
BS: Over the past year we have seen strong U.S. consumer demand. That demand has spurred higher prices. Now, we are headed into a summer of COVID-19 recovery and reopening. This all bodes well for profitability moving forward. Expansion appears to remain subdued. Exports could provide key support into the back half of the year.
Q. What’s one piece of advice you have for pork producers right now?
SB: Take advantage of opportunities to lock in future profits. Pork demand has overachieved the expectations of many, and it could prove difficult to hold this strength. Protecting yourself now against downside risk and volatility could provide an element of stability moving forward when cash markets for both hogs and feed look to remain volatile.
AK: I would go back to the often-repeated Warren Buffett piece of advice: “Be fearful when others are greedy and greedy when others are fearful.” Last year, things could not have looked worse for producers as COVID-19 created a significant backlog of hogs on farms and resulted in major losses for some producers. It was a truly fearful time. And yet, those that managed to work through that fear now are reaping the benefits the highest prices in a decade. There is a lot of euphoria in the market right now and it might be time to start becoming a bit fearful. Managing risk is always key for producers, this year is no different.
JN: My advice is that while there is certainly reason to be positive, remain attentive to how quickly the situation could change and shrink margins significantly.
LS: Many producers might believe lowering costs automatically improves profit. Lowering costs and maintaining, or improving, revenue will boost profit. However, some cost-cutting moves can erode production and quality, resulting in lower revenue and less profit. Cost is only part of profit. Instead of focusing on becoming a low-cost producer, I challenge you to think about being the best manager of costs and a better marketer of hogs. This might require a shift in where you spend money, or even increasing an expense.
BS: Focus on the factors under your control (production, productivity, health), and seek to remain best-informed as possible as you make decisions regarding those factors you cannot (weather, exports, politics).
We will be uniting together June 7-13 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 #PORKWeek21 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.
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