As we look forward, there is good news and challenging news. The biggest threat to profit is changes in pork demand. This is a new situation for most as we have enjoyed two decades of strong demand domestically and growing net exports internationally. In the past, when profits were challenged, the result was excessive growth and too much supply to sell at profitable prices. We are not used to structural demand problems, especially the larger U.S. and global market blunting of demand.
Keep Expansion Down
The key thing producers can do is keep expansion down while working to achieve new levels of cost-effective efficiency and increases in sow productivity. There is evidence a recession driven by larger-than-normal reductions in the work force is coming, but how exactly and extensively it will affect consumer demand is not yet known.
What Will They Eat?
You might have heard the old saying that ag is immune from recessions because everyone must eat. It is true that everyone must eat, but what will they eat? You can be assured pork will feel a very measurable reduction in total domestic demand if significant unemployment sets in. The majority of U.S. pork is consumed in the U.S. by middle- and low-income families. Most of it is consumed at home, primarily in the Midwest and South.
There are many creative ways home cooks and chefs can blend the available and reasonably priced sets of ingredients into great meals if one ingredient gets out of line in terms of price. They simply reduce and extend with cheaper ingredients.
The latest USDA report says we consume just over 51 lb. of pork per capita (annually) in the U.S. We have about 84 million families with just over three people on average per family. This means each family on average would consume 153 lb. of pork per year (3 people x 51 lb.). What if a family buys a half pound less pork per week when the recession digs in? That reduces family consumption from 153 lb. per year to (153 lb. – 52 weeks x 0.5 lb. = 26 fewer pounds) 127 lb. total.
The Hard Reality for Pork
The truth is, as fresh pork builds up during the recession, some of it will be frozen but much will be sold at discounted prices to domestic or international distribution networks. At these discounted prices, the U.S. could maintain its 51-lb. consumption per person, but will acquire it with less money pumped into the pork chain.
Other factors determine how much this revenue reduction will be, such as the cost and availability of substitutes (beef, chicken, beans, etc., and some by remixing the retail cut demand), which means more ground pork and shoulder cuts versus bacon, loins and spare ribs. The mix of total individual demand could still reach 51 lb. (or more), but the cut mix will likely include cheaper cuts and less revenue until rising demand affects price.
Food has been slowing down in terms of inflationary pricing increases. In August 2022, food inflation was at an annual rate of 12%, dropping to 9.5% in February 2023. The latest reports indicate it’s closer to 8.5%. The overall good news is exports continue to support pork prices. This reduces the losses, which would now be faced with even relatively small, sustained reductions. Interest rate levels and banker skepticism are limiting realization of expansion for the most part. If that continues, the industry is doing all it can to weather the coming storm of recession.
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