One Surprise After Another: Economists Offer Perspective on Pork Industry
Proposition 12. Sideways breeding inventory. Astronomical input costs. Declining consumer demand. 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. They include: Scott Brown, economist at University of Missouri; Brian Earnest, lead protein industry analyst at CoBank; Christine McCracken, executive director, protein analyst at Rabobank; Altin Kalo, head economist at Steiner Consulting Group; and Lee Schulz, economist at Iowa State University.
Q. What’s been the biggest surprise in the market so far in 2023?
SB: Consumer demand for pork products has quickly declined from the levels achieved in much of 2021 and 2022. The fact that demand has retreated from these historically high levels is not necessarily a surprise, but the rate at which it has returned to more historical levels has caught many off-guard. The pork cutout value for every quarter of 2021 and 2022 was at least 19% higher than the comparable quarterly average from 2015 to 2019, with five of the eight quarters more than 30% higher than the pre-pandemic five-year average. Pork output for each of these quarters was above the 2015 to 2019 average, indicating that the price increases were more a result of stronger demand than reduced supply.
Though pork production has begun this year at levels broadly similar to 2021 and 2022, pork cutout values were just 9% above the 2015 to 2019 average in the first quarter of 2023, with an even smaller increase looking likely for quarter two. Pork belly values, which were a large contributing factor to the higher pork cutout in 2021 and 2022, are down nearly 49% thus far in 2023 relative to the same period of 2022.
BE: Supply was larger than anticipated to start 2023, which significantly eroded support from hogs and pork. Weaker pork markets should encourage deflation for this key item at grilling, but price points in front of consumers remain stubbornly high. Also, from a global standpoint, most expected opportunity in China would continue to soften, However, U.S. pork exporters have been pleasantly surprised by Mexico’s insatiable appetite for pork this year.
AK: The biggest surprise for me has been the extreme weakness in demand for bacon. It has been the primary reason for the year-over-year decline in pork wholesale prices to this point. Time and again futures markets have had to downgrade forward expectations based on how disappointing the trade in pork bellies has been during this period. No one seems to know when things will turn around. Retail business should get better in the summer and futures are still somewhat optimistic that bellies will get off the mat. But what’s hard to assess is the impact from the slowdown in foodservice sales. Because bacon is often an add-on product, it depends on robust sales of chicken sandwiches and burgers. This makes it more difficult to jump-start sales than by simply lowering the price.
CM: The magnitude of the weakness in domestic pork demand versus other proteins year-to-date has been the most surprising development. Part of the challenge has been persistently high retail prices despite weakness in wholesale pork markets, which is limiting consumer interest. Retailers appear to be subsidizing other items (like beef) with higher retail pork prices in an effort to optimize meat case sales. While this strategy has been effective in the short run, it is not sustainable. Pork remains an exceptional value and should regain retailer support over the summer grilling season.
LS: What hasn’t been a surprise so far in 2023? It’s come from both sides of the supply and demand balance sheet. Federally inspected hog slaughter through mid-May 2023 was 1.5% higher than a year ago and larger than anticipated by USDA Hogs and Pigs reports. First quarter 2023 U.S. retail pork demand was notably lower than a year ago due to lower domestic per capita consumption and lower inflation-adjusted retail prices. First quarter 2023 pork exports increased 127.5 million pounds or 8.3% over the same period last year. This happened despite a relatively strong U.S. dollar. As recently as January 2023, the World Agricultural Supply and Demand Estimates, prepared and released by the World Agricultural Outlook Board, had 2023 pork exports at par with 2022 levels. Now forecasts are for a 2.6% increase in pork exports in 2023 compared to 2022. In late-December 2022, the June 2023 lean hog futures contract on the CME traded as high as $109.175/cwt. However, since that late-December peak, lean hog futures prices have dropped substantially. By the third week in May, the June 2023 contract had traded down to $83.150/cwt.
Q. Where are we at in the pork cycle?
SB: The breeding inventory has been in a sideways pattern for much of the last year following the late 2020 and 2021 declines. The relatively high hog prices of 2022 did not lead to an expansion of the breeding herd, as expensive feed and other input costs took a large bite out of producer bottom lines. Now that pork demand has backed away even as feed costs stay elevated, there appears to be little appetite for expansion. Pork production increases in the next couple of years will likely be determined by productivity growth more than changes in the breeding herd. It will likely take a significant drop in feed prices or stronger U.S. pork demand from domestic and/or international consumers to move us out of this sideways supply pattern. The days of a traditional pork cycle are less likely as the pork industry structure is much different today than was experienced in the past. It is much harder to drive pork production lower today than historically, as the cost of investment requires producers to utilize their facilities fully.
BE: The industry remains in transition. There was a massive shift in 2020 as processor capacity was shaken by COVID, then disruptions in demand as China’s needs for pork declined. Overall, exogenous market forces have played as big a role in pressuring market values as any, which is tempering the breeder supply. I expect we’ll see lackluster values to dampen opportunity for meaningful growth through 2023 and into 2024.
AK: We are still in a contraction phase, but the trough may not be far. Much will depend on corn prices later this year. After the sharp runup in prices in 2021-22, the market may have swung too far in the other direction. It will take a bit of time for retail and wholesale markets to settle down. Last year, retail prices jumped as much as 25% for some pork items. Now we are in a period of retrenchment and in the meantime, producers need to adjust supply in order to bring a margin back in the business. Lower corn prices in 2024 would go a long way towards helping find a trough.
CM: The industry is in the contraction phase of the cycle and it will be forced to shrink the herd until it finds market equilibrium. Based on current conditions, the market remains oversupplied with excess production and disappointing prices. Historically, high cost or inefficient producers are forced to reduce production or exit the industry entirely over this part of the cycle. This time is no exception. This is the time in the cycle that will punish those producers without sufficient financial resources or solid cost discipline.
LS: Profitable returns to hog production in 2021 and 2022, albeit modest in 2022, brought about higher production levels that have been realized so far in 2023. Current levels of risk, uncertainty and input costs have producers pulling back. But for the near term, biology sets the pork production timeline. Supply cannot simply be turned off. The World Agricultural Outlook Board is still forecasting larger U.S. production in 2023 compared to 2022 and for 2024 production to only marginally decline compared to 2023 levels.
Q. In your opinion, what are the game changers for the second half of the year?
SB: I believe feed costs are at the top of the list, given the uncertainty that accompanies every growing season. If weather allows for strong corn yields, hog producers could see an improvement in their bottom line just from some feed cost relief. But below-trend yields could keep the expense side of the ledger similar to recent months or worse. There is also some optimism that pork demand may recover as beef supplies become increasingly tight later this year, but seeing significant demand improvement for the remainder of 2023 seems a bit of a stretch given current trends and economic uncertainty.
BE: There were what seemed to be fairly credible reports that African swine fever (ASF) returned as a problem for hogs in China, which has encouraged additional pork production in China in recent months. Hog values there plummeted as a result. The back half of 2023 and leading into 2024 likely comes with an increased need for pork. However, unlike the last time this was an issue, the ability of EU producers to step in is weakened from lower hog availability.
AK: Prop 12 has thrown a monkey wrench in a business that was already in some turmoil. Buyers are sitting on their hands, thinking that maybe there will be extra product in the second half of the year. Over 12% of the U.S. population will now be required to buy pork that’s different than what’s offered to the rest. Will that pork be there? How much more will it cost and what impact will this have on sales and consumption? No one knows, everyone guesses. These are unchartered waters and suppliers will be cautious. There is always the possibility of miscalculation, both up or down and therefore potential for a lot of volatility.
CM: Market conditions will hinge on the implementation of Proposition 12, the pace of liquidation, a successful U.S. harvest, continued access to export markets and the economic health of the consumer.
LS: Demand, demand and more demand. The first quarter 2023 pork demand index was down 6.7% from a year ago. The first quarter demand index reached its highest value in 2022 so from a historical perspective demand remains relatively strong. That’s the good news. The not-so-good news is pork demand has waned the last three quarters. I’m reminded of one of the important rules of Dr. Wayne Purcell, a noted agricultural economist and pioneer of meat demand monitoring efforts, that says, “A prolonged period of decreasing demand will eventually exceed even the most efficient producer’s ability to cut costs.” Pork demand is key and less certain in 2023.
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