When you carefully review the dynamics of the U.S. industry you will find most indicators are returning to their normal “shape.” However, it is far too early to believe the global pork complex, and especially the U.S. sector, is returning to business as usual.
For instance, we are returning to a normal seasonal pattern in prices after having several counter-seasonal patterns in the past year or so. You may remember in 2020, the annual low price occurred in July due to packing plant closures as COVID-19 swept through employees. The highest price of 2020 occurred in mid-fall, a time of rapidly diminishing prices most years.
While all of this seems to indicate the ebb and flow of the industry has finally returned to standard patterns, there are still some factors at play making it a challenge to read the tea leaves.
Low Cold Storage Supply
Pork in cold storage is still well below the long-term average. Stored pork provides a buffer for suppliers and further processors and a place to go with cuts in low demand at the time so they can be available to supplement spot supplies when that same demand reaches its peak. A good example is hams, which undergo high demand during holidays such as Christmas and Easter.
Having a low cold storage supply means processors and others must source more of their needs directly from the spot market, which tends to result in higher prices and contributes to food inflation pressures. This supports the packer cut-out, and when supplies of live hogs are not jamming plants to capacity or more, it tends to increase producer prices, too.
Reduced Exports
China has sharply reduced export buying. One need only look at the difference between the U.S. and the Spanish industries to see the hazards of one large transitory buyer in the marketplace. Early in the Chinese African swine fever crisis, the U.S. industry was in full-growth mode achieving year-over-year gains of 3% to 4%. The thought of supplying the sinkhole that developed in the Chinese supply, as they liquidated diseased herds, fanned the flames of further investment here.
During this time, China turned primarily to Spain for it biggest buys and the Spanish industry accommodated with dramatic growth both in packing capacity and in supporting production. The outcome for the U.S. was a massive oversupply that was further complicated by days and weeks of plant closures due to the pandemic.
Global pork prices for processors and exporters were plenty high, but U.S. producers failed to capitalize on them because the demand for pigs determined the price they received, and plants had more than they could handle. That has changed now, and the outlook is very positive if growth does not return.
The Spain Situation
Now we turn to Spanish producers and processors, the European Union’s new pork powerhouse. Spain has been gearing up for several years to supply more of the future intra-EU trade needs and then were further motivated to capitalize on the dramatic new demand out of China beginning after the initial Chinese liquidation glut was easing. Former northern EU pork powerhouses such as Germany, Denmark and the Netherlands are on a path of decline due to environmental regulations and older, less efficient facilities not economical to remodel.
Year after year, the processing capacity of Spain increased and the pigs to feed the plants matched the growth. Now, the Chinese buying spree is over, and it is reported pigs are expected to overrun the plants this fall as temperatures cool and growth picks up. Spain received the early profits due to demand outstripping supply.
Now U.S. producers have shifted into this position as their production is well under total plant capacity. Spain will be able to compete; however, their pork meat prices will be bargain basement. If corn prices were not essentially double the past several years, this would be an extended period of remarkable U.S. pork production profits.
When the PRRS season reemerges this fall, supply could take another hit so U.S. producers could very well enjoy good profitability all the way into next fall.
Watch Out for Potholes
What could trip us up? Here is a starter list: U.S. pig production returning to growth mode, new strains of COVID-19 disease sending plants into quarantine mode again, the emergence of an export-stopping disease in the U.S. herd, the western drought moving east over the Corn Belt resulting in a dramatic additional increase in feed ingredient prices and, finally, additional traction, especially in the processed food markets, for plant proteins displacing pork of various cuts and grinds.
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