The United States is producing more pork but less is available for U.S. consumers, according to a Purdue University Extension marketing specialist.
“What does more pork production but less available for U.S. consumers mean?” asks Chris Hurt. “Pork exports grew by 68% in the first half of the year and imports fell by 15%, meaning that 1.1 billion pounds less pork was available for domestic consumers.
“By the second quarter, U.S. pork production was 9% higher, but U.S. consumers had 6% less pork available to consume.”
It’s all part of what Hurt terms a “remarkable year” for the U.S. pork industry. Unusually high feed and energy prices and 20% more pork produced in the first half of 2008 made profits seem a distant dream.
“But salvation has come in the form of international trade as cheap U.S. pork, subsidized with producer losses and the weak dollar have made pork trade more important than exports are for the corn market,” he says.
As with the role of corn exports in setting corn prices, pork exports have become the single most important factor in determining pork prices. Comparisons of export percentages for corn and pork are startling, Hurt says.
“For the 2007-08 marketing year, corn exports represented 19% of total corn use,” he says. “For 2008-09, current USDA forecasts are for exports to represent only 16%.
“Pork exports, in contrast, are forecast by the USDA to represent 23% of U.S. production in 2008 and 22% in 2009.”
Positive projections for the U.S. pork trade and the potential for declining pork production into 2009 may produce a positive trend for pork and hog prices.
Per capita pork supplies available for U.S. consumers are anticipated to be down 8% in the current quarter and off 10% in the fourth quarter.
For all of 2008, per capita supplies for U.S. consumers will drop about 5%. In 2009, supplies are expected to decline another 2-3%. All this means pork for U.S. consumers will be relatively tight during the next 18 months.
“While trade has been the salvation of the pork industry in 2008, it also presents vulnerabilities as the U.S. industry has become dependent on these trade impacts to continue,” Hurt says.
China and Hong Kong’s import surge from the United States represented 50% of increased pork sales in the first half of 2008.
But Hurt suggests there are at least three concerns when it comes to China:
First, China’s domestic pork production has dropped due to “blue-ear disease” and this year’s earthquake. Estimates are that production has declined 8-9%.
“Pork price inflation was rapid in the winter and spring and gave the Chinese government strong incentives to buy cheap U.S. pork,” he explains.
“The second uncertainty might be called the ‘Olympics effect.’ China had strong incentives to import a large amount of pork in the months prior to the Olympics, not only to keep consumer food price protests to a minimum, but also to have sufficient availability for their Olympic guests. If so, their pork purchases might be reduced in the post-Olympic period.”
The final concern is that this period of rapid pork purchases won’t last because China is trying to restore its own production.
“China has primarily had a policy of self-sufficiency in food production in the last decade with the exception of soybeans and soy products,” says Hurt. “The question of whether China is making a fundamental shift away from self-sufficiency and toward some dependency on imported pork could have profound implications for the U.S. pork industry,” relates Hurt.
Russia provides another area of concern. Russia accounted for 13% of the increased pork exports in the first half of the year – but they tend to be a “value shopper.” Looking for the lowest-priced source of animal protein could reduce their purchases as the price of U.S. pork rises.
Without historical precedent for the current impact of pork prices from international trade, Hurt relies on the futures market instead of a computer model to forecast prices for 51-52% lean carcasses.
“Prices drop from their current low $60s into the very high $50s into September,” he says. “The final quarter of the year will average in the mid $50s with recovery into the higher $50s for the first quarter of 2009. The highest prices will be in the spring and summer of 2009, with averages in the mid-$60s,” he says.
Hurt says producers can compete for high-priced corn if these hog price forecasts hold. “Hog producers will be able to pay about $6.25/bu. for corn in 2009 and still break even compared with only $4 in calendar years 2007 and 2008.”
But to achieve that strong competitive position, he believes three conditions must be met: pork producers must continue to reduce farrowings; foreign customers must continue to buy U.S. pork; and crude oil prices must stay under $140/barrel to compete with ethanol plants for corn.