We are about ready to enter the next phase of the pandemic whipsaw with respect to prices. Pork producers are facing very high feed costs and market hog prices, which are beginning the inevitable re-entry back to Earth. General economic forces will likely spill over into the pork industry soon.
There are huge distortions in some commodity markets as speculators drive demand for housing and other goods in anticipation of the return of consumer demand. For instance, lumber prices in many places have tripled over the past year or so, reflecting several combined demand pressures. If pork profits are tempting any expansion, the cost of buildings ought to temper that urge.
Large cities are becoming less livable as crime skyrockets. Authorities undertook overly draconian measures to combat the spread of the virus and forced human isolation and small business to close. These same businesses are finding dramatic rises in wages are now necessary to wean people from unemployment payments. That’s driving people to seek a saner life in smaller towns and cities, requiring new housing stock. This means more confrontation with ag as the smells of the big city are traded for the smells of livestock production.
Commodity price inflation is usually an early warning for wider systemwide inflation. Typical feed grain prices have snapped from a decade or more of lows to double what they were a year ago. Significant systemwide inflation is practically unavoidable now due to the injection of trillions of dollars of stimulus and extensive unemployment benefits and money giveaways, which are fueling steadily rising demand but without the full return of productive capability. That is the classic definition of the cause of inflation – too much money chasing too few goods.
As one would expect, inflation first strikes the wider commodity markets. Oil prices are almost double, gas and diesel prices have risen $1 to $2 a gallon (depending on your location). Then, since commodities are the building blocks of food and other consumer goods, expect sharply rising food prices and real increases in food insecurity. As this happens, the value of the dollar weakens, which reprices goods in international trade, since the dollar is still the benchmark currency for global pricing and trading.
Next we’ll see monetary policy initiatives, which are wide open right now, tighten. The impact of these measures will be markedly higher interest rates for an extended period. Coupled with the cost of building materials, this should forestall any expansion in the hog sector for a couple of years and open the possibility for a period of extended profitability, if “just shy” production shortfalls to packer capacity compensate for rising feed grain prices.
We believe China will struggle to achieve the level of pig production they were on the path to achieve prior to ASF in August 2018. They will continue to buy in the open market but with increasingly sophisticated strategies, which will put an end to the endless high prices experienced by Spain, for instance, the largest EU supplier of pork to China for the past few years.
This means ups and downs for exporters such as the U.S., Brazil and the EU. We expect the global transition to plant protein to gain big steam in China and Asia first to fill in for high priced pork. Demand for plant protein will then work its way to the EU and North America in significant ways over the next decade due to consumer shaming related to global warming and because it will be cheaper and cheaper as scale gets developed.
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