Are You Prepared to Survive a Trade War?
The U.S. pork industry has been fortunate. Producers have enjoyed strong demand for pork over the past several years and especially in the past 18 months. Demand for U.S. pork on an international basis in 2017 reached a new record of 1,905,186 MT with a total value of $5.3 billion. Pork variety meat was also at a record volume with 543,973 MT sold to foreign markets in 2017. Variety meat exports were more than $1 billion for the first time in history, with $1.173 billion in sales. The total combined export value was $53.47 per head produced in the U.S. in 2017.
Fast-Forward to Now
As we read the news about trade tariffs being placed on U.S. pork and pork products, it is important to understand where our product goes.
The five destinations for U.S. pork in the amounted to 82.3% of all pork exported.
When looking at pork variety meat, our exports were more concentrated, to China/Hong Kong with 59.0% and Mexico, 26.5%. Exports to these two destinations amounted to 85.5% of total variety products.
The impact has been very clear. Futures contracts continue lower at a time we would expect stronger seasonal markets.
Contract months from December 2018 and beyond have reached contract lifetime lows and continue weaker. The trade’s expectation of export losses are dealing a financial blow in the short term for pork markets, and generally for all commodities exported in volume (beans, corn, dairy, poultry and beef are also impacted at various levels).
Business-Savvy Producers are Ready
Fortunately, many of our swine clients have built working capital and equity over the past five years and are in a good position to withstand some adversity. However, when you look at the broader industry and how it has expanded in the past few years, some producers will likely be in a tough position if we don’t see some resolve to export issues soon.
Losses for the six months between October 2018 and March 2019 would be $15 to $20 per head based on today’s futures and normal basis, amounting to $250 per sow. This would pressure some covenants for producers who operate with significant borrowing base debt. For those who have a lot of coverage on hogs, well done. Overall, there is not as much coverage as in the past few years.
Prepare to Respond
For producers with current ratios of less than 1.5:1 and less than 40% equity in the business; it might be necessary to make some changes quickly. What cash-generating or cash-saving opportunities exist for you? Communicate with your lender and develop a strategy to manage through the down cycle.
We all hope trade normalizes before the anticipated impacts affect cash, but we need to prepare accordingly if it drags out for some time.
For the past 20 years, Kent Bang has been involved in the financing of commercial swine operations and pork processors. Currently, he serves as vice president swine lending for Compeer. He has been a long-time member of the NPPC Pork Alliance. Kent currently serves on the NPPC board of directors and as a director for the NPPC Political Action Committee. He and his wife, Julie, live in Omaha, Neb., and have two adult sons.
