Is there anything about this hog industry that is positive? That’s a question I keep hearing and, from an economic standpoint, it is a difficult one to answer. But the truth is that the U.S. and Canadian pork industries certainly will not disappear. They are not destined for total destruction and there will be vibrant pork industries in both countries in the future. I write that with 100% confidence and there are not very many things that I consider a certainty.
Here is why the pork industry survival is assured:
• The United States and Canada are still among the three lowest-cost places in the world to raise pigs. Figure 1 shows the results of a PIC survey from 2006. As you can see, the United States, Canada and Brazil were among the lowest-cost countries along with China and Argentina. China is always a bit of a question mark due to shaky data and the fact that an estimated one-third to one-half of China’s pigs are raised in back yards and fed primarily garbage – pretty low cost. Argentina has, by its export policy decisions, basically abdicated its position as a low-cost player in world markets. That leaves the big three – and the United States is the biggest of those.
• The United States and Canada have a huge advantage over other countries in terms of a) animal health status and b) geographic location that conveys some hope of maintaining that advantage. I read one time that the Soviets could not imagine why the United States ever felt threatened during the Cold War since we had vast oceans on both the east and west and friendly neighbors on the north and south. That isolation from international borders is an advantage when it comes to microbes and viruses as well!
• Our product fits modern lifestyles better than in the past. Pork is leaner (perhaps too lean in some instances) and we offer more convenience products than ever before.
• We have technical capabilities at least as good as producers in other parts of the world. Our producers know how to raise pigs. Our veterinarians are among the world’s best in managing herd health. Our packers are superior to all others in terms of efficiency. Our transportation system is better than our nearest rival, Brazil.
• U.S. and Canadian farmers will remain among the world’s best at producing large amounts of grain and plant proteins at competitive costs. As long as the United States remains an exporter of corn, high feed costs here will mean high feed costs worldwide. Our technical capabilities and the fact that we are located nearest to the world’s major grain surplus area will keep our feed costs competitive – higher than they once were, but still competitive with the world. Yes, they will share our high-cost misery. Note, though, that I did not say that there will be vibrant U.S. and Canadian pork industries of the same size as before. While our industries will remain among the best in the world, remaining competitive suppliers of pork and pork by-products to consumers worldwide, they will be smaller.
U.S. citizens made a collective decision, through the actions of their government, about five years ago, to have smaller animal protein sectors for meat, poultry, milk and eggs. That aspect of our biofuels decisions and policies was hardly acknowledged and was not widely discussed until the 2007 decision to raise the levels of the Renewable Fuels Standard. Just because a decision was not acknowledged or discussed does not mean it was not made. The decision to choose course A is an implicit decision to accept consequence B. The current bloodbath in the animal protein business is consequence B – no matter how you cut it.
Higher costs must eventually be covered by the price of the product. In a commodity business that can happen just two ways: Demand must increase or supply must decrease.
In a world where a 2% increase in demand is huge, I think it is unrealistic to think that demand will increase anywhere near fast enough to cover a 20-30% increase in costs. If I am right, the only way to drive prices upward is to reduce supply and that means taking productive assets out of production – empty barns, fewer businesses.
The poultry business has already downsized substantially and continues to do so. Dairy producers have lost huge amounts of money and are struggling to get production in line with a profitable level of consumption. Ditto for pork producers – it just takes longer. Ditto again for beef producers -- it just takes longer yet. And last year’s export surges, especially for dairy and pork, merely delayed the inevitable. We hoped they would last, but was that ever a reasonable possibility?
U.S. and Canadian pork producers still need to reduce output. That means that some will not be in the hog business next year. I am so sorry that is the case, but it is. Still, many of you will be part of a smaller, vibrant and profitable business. It still will not be easy. Never has been.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.