As I extend belated Happy New Year wishes, I can see already that 2009 is shaping up to be another interesting one. Consider the following developments that will impact your business this year.
Major cutbacks in the chicken industry 2008 was highlighted by the financial troubles and eventual bankruptcy of Pilgrims’ Pride, the largest U.S. chicken company. That process is ongoing and will likely result in a smaller, leaner company that has closed some farms and plants and sold others to competitors – assuming competitors have the financial wherewithal to purchase them.
The stress that pushed Pilgrims’ Pride into bankruptcy most likely contributed to last week’s change at the top of Tyson Foods, as well. CEO Dick Bond announced his resignation, effective immediately, and Tyson announced that former CEO Leland Tollett would return to run the company. That looks like a move away from the “meat” business represented by former IBP executives and back to Tyson’s historic “chicken” base. The move has received positive reviews by stock analysts.
Most critical for pork producers, though, is the massive reductions in output that are now occurring. And, when I say “massive,” I mean that in absolute terms, not just in terms relative to the history of the chicken industry. Consider:
U.S. broiler slaughter for the 52 weeks ended on Dec. 27 was 0.7% lower than broiler slaughter in the 52 weeks that proceeded that period. Yes, that says “lower,” and it’s only the third time since 1980 that a decline has occurred and the first time that the decline has been more than 0.2%.
Fourth-quarter broiler slaughter was 5.8% lower than one year ago, indicating that current reductions are growing.
Broiler egg sets were 7.6% lower in the fourth quarter of 2008 (see Figure 1), showing little evidence that the trend will change and suggesting that the reductions will reach well into the second quarter of 2009.
The broiler-type hatchery flock as of Dec. 1 numbered only 52.4 million hens, the lowest level since September 1997. In addition, recent declines in hatchery flock numbers appear to be much more severe than the normal seasonal pattern (see Figure 2) and have continued beyond the normal seasonal low month of November.
All of this should be positive for pork demand, pork prices and hog prices in 2009. Just how positive that will be will depend primarily on the duration of the ongoing reductions. I don’t see how their severity can get much greater.
What will happen to pork exports? I’ll climb out on a limb and at least say this – exports will not grow at the same pace as in 2008; we will not see 60% growth two years in a row. How’s that for a bold prediction? The real question is whether we will see growth at all.
The announcement that Russia would double the pork import quota in 2009 is very positive. The announcement by Mexico that it intends to disallow shipments in combo containers and force importers to bring in only boxed product is a huge negative. Combos are cardboard containers that are roughly 4 x 4 x 4 ft. mounted on pallets.
The combo situation with Mexico is indeed serious. Some contacts estimate that 70% or more of our products going south are shipped in combos. Mexico’s concern is that they cannot effectively inspect product at the bottom of these large boxes and that importers may be hiding substandard product in the bottom or center of the boxes. Such has indeed happened but, like most problems, those incidents are the exception and not the rule. Forcing shipments in boxes would sharply increase the cost of the product we are sending to a market that is very price sensitive.
A meeting scheduled for Monday has been cancelled, apparently due to schedule conflicts with Mexican officials. The restriction is scheduled to go into effect at the end of the month and U.S. exporters and producer organizations are asking at least for an extension to allow time to find middle ground on the issue.
Finally, the value of the U.S. dollar has worked against us so far and will continue to be a factor in export markets, although its magnitude will ebb and flow.
How will domestic pork demand hold up in the economic downturn? Historically, pork demand has not been severely impacted by recessions. That statement applies to a lesser degree to beef and chicken as those species tend to be impacted more due to their exposure in restaurants and the fact that restaurant sales usually feel the impact of lower consumer spending. The American Restaurant Association reported last week that its index of restaurant traffic reached an all-time low in November.
While pork is not impacted as harshly as beef and chicken by a slowdown in restaurant trade, domestic pork demand appears to be suffering right along with the other species at present. The University of Missouri’s demand indexes (Figure 3) got progressively worse for all three species during 2008 and stood at -5%, -5.6% and -2% for beef, pork and chicken, respectively, as of November. Should those figures remain negative when December calculations are made, 2008 will mark the second time in three years in which the indexes for all three species have fallen.
This doesn’t mean that the Pork Checkoff, packers and processors are not doing a good job of selling pork. It really means that those efforts are being swamped by a sea of negative economic impacts, negative news and fear. Had these marketing groups not been present, the impact could well have been worse. A turn-around in 2009 will be difficult, but any positive impacts will make life better for pork producers and other market participants.
