LIVESTOCK MARKETS: U.S. supply glut dampens global pork outlook

LIVESTOCK MARKETS: U.S. supply glut dampens global pork outlook

Rabobank says Five-Nation Hog Price Index to decline further in fourth quarter.

Abundant supply and looming slaughter capacity constraints in the U.S. are pressuring global pork prices, a situation exacerbated by slowing imports from China, according to the Rabobank "Global Pork Quarterly Q4 2016" report.

“This will result in a further decline of the Rabobank Five-Nation Hog Price Index" in the fourth quarter (Figure 1), "which turned unexpectedly in Q3,” Rabobank animal protein analyst Albert Vernooij said. “Prospects for 2017 are weak, with global trade expected to stabilize and all main producers in expansion mode, making supply discipline key to the outlook."

China: Prices to rebound until Chinese New Year

According to the report, low production and seasonal demand moving towards the Chinese New Year will support prices after the third-quarter dip. This will support China's ongoing strong import volumes, but growth will be slower than previous months. Competition will intensify as more countries and companies obtain export permits.

China's pork production is expected to drop 5-6% in 2016. While strong pork prices have encouraged some expansion, other farmers have been closed down due to the implementation of a new environmental policy. Some smaller farmers have also exited due to price volatility.

Rabobank expects China's production to remain low during the first half of 2017, with recovery expected in the second half. The report suggests that the recovery will be modest given the new policy implementation. “We forecast 2017 pork production to increase by 2-3% year over year, which is still below the 2015 level," Vernooij said.

Rabobank said China's pork consumption is expected to recover in 2017 as the economy appears to be stabilizing.

EU: Supply discipline key for positive prospects

Continuing pressured supply and good export demand will result in, at the least, prices stabilizing at elevated levels in the European Union during the fourth quarter. However, 2017 prospects are soft, with rising competition in Asia and the declining British pound pressuring returns from this important local market. Herd expansion needs to stop or decline to support prices, Rabobank said.

The EU is expected to remain the main pork supplier to China in 2017 thanks to its 100% ractopamine-free production and high number of permitted plants. However, Rabobank said the volumes will be lower due to elevated prices and rising competition from the Americas.

U.S.: Supply glut to apply strong price pressure

A higher-than-expected supply, combined with stalling exports and rising domestic competition from beef and poultry, is pushing down hog prices and industry profitability in the U.S. For hog producers, this situation will worsen in the fourth quarter, with slaughter capacity constraints putting processors in the driver's seat until new capacity arrives in 2017.

Rabobank estimated that an unhedged U.S. producer will lose $35 per head in the fourth quarter.

“Through the first eight months of the year, hog production increased just 1%, with a 1.5% increase in hog numbers being modestly offset by lower weights," Rabobank said. "In September, that story changed, with weekly slaughter running 7-8% above year-ago levels, striking fear into a market and harking back to 1998, when the U.S. ran out of shackle space.”

The supply glut is expected to continue, but sharply lower prices could serve as a catalyst for export growth.

Given the volatility in hog supplies, Rabobank said it is difficult to provide a forecast for 2017. However, two new packing plants coming on line next should mean some growth.

Brazil: Market recovery around the corner

A balanced supply, coupled with rising exports, will result in pork prices rebounding in Brazil during the fourth quarter. Combined with the expected decline in feed costs, this will support production and exports in 2017.

According to the report, Brazilian pork exports during the first eight months of 2016 increase 41% year over year. Russia remains the main destination, but other countries have become more relevant, especially China. After importing only about 5,000 metric tons of pork from Brazil in 2015, China already has imported more than 63,000 mt in the first eight months of 2016.

Market recap

The October fed cattle future market was mixed but mostly higher this week. Nearby contracts closed higher Monday and Thursday at $103.125/cwt. and $104.125/cwt., respectively.

October feeder cattle futures were mixed this week. Nearby contracts closed higher Monday at $122.375/cwt. but closed lower at $121.925/cwt. on Thursday.

For the beef cutouts this week, Choice was lower at $181.54/cwt., and Select was higher at $168.81/cwt.

December lean hog futures were mostly higher this week. Nearby contracts closed higher Monday and Thursday at $43.20/cwt. and $45.375/cwt., respectively.

Pork cutout values were mostly higher this week. The wholesale pork cutout was lower at $73.37/cwt. Loins were higher at $71.92/cwt., while hams were higher at $58.38/cwt. Bellies were lower at $109.74/cwt.

Hogs delivered to the western Corn Belt were lower this week, closing at $45.36/cwt. on Thursday.

In the poultry markets, the Georgia dock was unchanged Wednesday at $1.10/lb. Breast meat was higher at $1.55/lb., while leg quarters were unchanged at 31 cents/lb. Wings were lower at $1.53/lb.

According to the U.S. Department of Agriculture, egg prices have been steady, with a firm to higher undertone. Offerings have been light to moderate, and supplies have been light to occasionally heavy, but mostly moderate. Demand has been moderate to fairly good.

Large eggs delivered to the Northeast were higher at 56-60 cents/doz. Prices in the Southeast and Midwest were also higher at 56-59 cents/doz. and 49-52 cents/doz. Large eggs delivered to California were increased to $1.16/doz.

For turkeys, USDA said the market was steady, with mixed undertones. Offerings and demand both have been light. Prices for hens and toms were unchanged at $1.16-1.28/lb. and $1.09-1.28/lb., respectively.

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