Even though spring brought a period of high profitability, the supports holding up the profit performance of the pork industry are subject to some weakness. You can make a good argument the fundamentals of the industry are strong now and I would add will remain that way for a while if we do not begin overproduction again. There are too many risky variables out there, that in the presence of jammed packing plants, can tip the boat.
China continues to be the big wild card. Their struggle with ASF is not over and there is probably no end in sight unless an effective vaccine is discovered and widely disseminated. So far, efforts at developing vaccines within China have not helped and in some cases, have been reported to spread the virus or an altered version of it. The prices for pigs in China are fluctuating wildly – a function of both some success at rebuilding the herd and the flood of pigs going to market that are in danger of being condemned in areas with new ASF outbreaks. If this is true, expect hog prices in China to abruptly turn upward once the mini liquidations are finished and hot summer temperatures slow growth.
The current decline in prices in China are thought to be mostly due to a combination of falling demand after the New Year celebration and extra supply due to liquidation in “hot” areas. This means China will remain in the world market, but it does not mean they will continue their current buying pattern since their vulnerability is widely known. They will try to find ways to acquire pork at the best possible prices and shake things up a bit to avoid seller complacency.
As production on some Chinese mega producers’ sites ramp up, demand for feed ingredients are also ramping up. The buying of pig meat helps U.S. producer prices, but the purchases of feed grains push U.S. cost of production higher and higher, especially now as they come out of old crop supplies. Look for volatility on both ends of the profit spectrum, revenue and cost.
The global drought that has been moving around this hemisphere has largely been confined to the western U.S., from west Texas through to Arizona and California. Add North Dakota in for the current drought picture. If it moves toward the Midwest, a shortage of old crop feed ingredients combined with a lower-than-expected new crop harvest could really take the fun out of hog production.
China is seeking to be self-sufficient in the production, or at least long-term acquisition, of key agricultural products and supporting inputs. They do not seem likely to achieve this, not because of lack of know-how or available technology, but largely because they leap-frogged a few steps of development in going from outdoor, small-scale production to massive mega-farms. No doubt, they have the information systems and ability to use algorithms such as artificial intelligence to forecast and solve problems, but the real issue is the lack of supporting systems that were not developed prior to the plunge into mega-production.
The inability to contain disease is perhaps the greatest single weakness, especially regionally, and one that will remain a key weakness for years to come. Some of the current production facilities are huge and some have gone to heavily fortified, single-site production to gain control over farm-level biosecurity. Our experience in North America would suggest this is a pathway littered with risk and is likely unsustainable. Let us watch though, as we may learn something from their massive and heroic ramp-up strategies.
The sleeper threat may be the new agricultural policy initiatives aimed at climate change. We know fossil fuels are targeted for elimination on a rather unrealistic time frame, so the gradual increase in fuel and fertilizer costs will work its way through to meat prices eventually. Illinois reports costs of corn production are up $1.00/bushel due to rises in these fuel-based inputs. That fits a key climate initiative, to decrease meat production and consumption. Why else would there be such a massive investment in productive capability for plant protein products by large- and small-scale meat processors? A little shaming here and a big price rise there, plus a hearty wave goodbye to baby boomers and their love for meat, could move things along faster than most expect.
More from DiPietre & Mulberry:
