The hog market is trapped in a bearish fundamental situation that indicates lower prices down the road unless something big happens. The “something big” fundamental development would likely be a surge in pork exports with China becoming a major player.

The U.S. hog market is locked into a bearish fundamental situation. Simply put, pork production has been too high versus the demand for U.S. pork and prices continue to grind lower. Even though pig prices have been consistently below the cost of production (except for a few weeks in the summer) the industry has not embarked on an aggressive cull of breeding stock. The last two Quarterly Hogs and Pigs reports showed kept for breeding down only 1% from the previous year.

However, due to a surge in breeding efficiency, sharply higher pigs per litter have kept the pig crop large enough to force the USDA to increase production projections for 2024. So, in the end, the industry has been totally unresponsive to huge losses and lost equity sustained during 2023.

Looking closer at the December Hogs and Pigs report, most of the large pork producing states showed lower breeding stock with a few holding sow numbers unchanged. Illinois, Iowa, Nebraska, North Carolina, Ohio and Utah all reported fewer sows than last year. Indiana, Michigan and Missouri reported the same number of sows. Two pork producing states stood out with substantially larger sow herds, Pennsylvania reported 19% more sows and South Dakota reported 15% more sows than last year.

Barring a significant increase in the demand for pork, a substantial acceleration in the cull is necessary to restore profitability to the industry. Smithfield Foods, the largest pork producer in the U.S., appeared to lead the charge with announcements last summer that they were closing farms in Missouri and then later in Utah. However, other major pork producers don’t seem to be following suit. It’s almost as if the largest producers are holding out, perhaps waiting for smaller independent producers to close down.

On the demand side of the ledger, U.S. pork export demand has been rising consistently in 2023. Total exports for 2023 are projected to increase by more than 6% compared to last year. Mexico remains our largest export customer by far. However, substantial increases have been noted in many Western Hemisphere countries this year. These include Canada, Colombia, the Dominican Republic, Honduras and Guatemala. U.S. pork exports have been down to Japan and China.

The U.S. pork industry has been stealing market share of world exports from the EU. EU pork prices have been at a record high or near record high all year due to a severe cutback in production. The trend of increasing market share is expected to continue in 2024. However, due to an outlook for continued soft demand from Asia, total U.S. pork exports for 2024 are projected to increase less than 2% in 2024 versus 2023. That’s not going to be enough to clean up the excessive supply and turn the market from a sustained down trend into an up-trending market.

Domestic pork demand is always difficult to monitor, understand and predict. Certainly Prop 12 hurt overall pork demand. Pork prices in California are substantially higher due to high cost of raising pigs under Prop 12 requirements. That’s what California wanted and that’s what they got.

In addition to the “dent” in demand caused by Prop 12, it also appears that domestic demand has been hurt for various reasons. Some say retail margins remained wide during most of 2023, hurting demand. Some say pork has lost its consumer appeal due to poor taste, mostly through a lack of marbling in the loin. Still others suggest with unemployment historically low consumers are more inclined to purchase more expensive beef. Most likely the lower domestic demand for pork is a combination of the above factors.

It’s difficult to imagine and impossible to predict if domestic demand will improve in 2024. In my opinion, the most likely scenario would involve retailers showing a willingness to narrow margins through aggressive promotions to clear pork from the counter. For example, currently outlets in the Chicago area feature pork short ribs in a buy one get two free promotions.

However, it's not difficult to envision a dramatic growth in U.S. pork export demand. Growth in the Western Hemisphere is expected to continue during 2024. If China enters the market for U.S. pork, things change rapidly. China is the superpower in both pork production and consumption.

However, consumption has taken a hit due the severe downturn in the Chinese economy post-Covid. This contributed to gross overproduction resulting in huge losses over the last 12 to 16 months. However data released just last week seems to confirm what we’ve always believed.

Chinese authorities have confirmed that the industry has sustained extreme losses, that input costs remain high and that African swine fever remains a terrible problem. The numbers released by the Ministry of Agriculture are hair raising. They pegged the number of sows in China at the end of November at 41.6 million, down 1.2% from October and down 5.2% from last year. By their own math, 2.1 million fewer sows going into 2024 than one year ago. At 20 pigs per sow per year, that's’ 42 million less butcher hogs slated for 2024 and the liquidation is not finished. The U.S. slaughtered just over 127 million pigs in 2023. So, 42 million represents more than 30% of our total kill last year. November slaughter figures issued by Chinese authorities indicates the liquidation may be accelerating. They reported that 32.8 million pigs were slaughtered in November, up 44.6% from last year. This is a scary figure that hints at not only massive liquidation but of panic marketing of hogs due to ASF.

This data makes it easy to speculate that China, at some point in the near future, will be forced to import a significant amount of pork. Their first choice is Brazil. Their second choice has normally been the EU, but U.S. pork prices are much lower that EU prices.

So, while China would prefer to not buy pork from the U.S., in 2024 they may have little choice. The question open for debate is when? Opinions vary from very soon (first quarter) to not until the second half of 2024. This would be a game changer for the U.S. hog market, and I sure hope it happens before many independent producers are forced to exit the business.

A perfect storm would be created if a deep herd cull occurred in the U.S. during the first quarter and sometime in the second quarter large Chinese business showed up. This is a scary moment in the U.S. hog industry.

Smith publishes his evening livestock wire daily. For a free 30-day trial to this information contact him via email.