Further expansion at this time will likely lead to even larger losses.

Krissa Welshans 1, Feedstuffs Editor

January 7, 2016

6 Min Read
LIVESTOCK MARKET REPORT: Economist says pork industry faces tight margin year

Pork producers in 2016 are expected to experience another year of tight margins, similar to the year just completed, according to Purdue University agricultural economist Chris Hurt.

Pork production is expected to rise by about 1%, but beef production will rise by 4% and poultry by about 3%.

“There will be plenty of meat and poultry for consumers, and retail prices will likely fall to encourage them to buy more,” Hurt said. “The global marketplace is also casting shadows on the U.S. pork industry, with weak income growth in some countries that buy our pork and a strong U.S. dollar that encourages more pork imports and stimulates pork production in competitive countries.”


In 2015, the industry recovered from the porcine epidemic diarrhea virus (PEDV) outbreak that reduced baby pig numbers from October 2013 to August 2014, Hurt explained, adding that the impacts of those baby pig losses created gaps in slaughter hog numbers from April 2014 to February 2015.

“This slaughter gap helped create a period of record-high hog and pork prices. However, since March of 2015, there has been little impact on slaughter numbers due to (PEDV),” Hurt said.

Pigs per litter also bounced back quickly once the disease was controlled, according to Hurt. In 2015, pigs per litter set new quarterly records, and annual pigs per litter for 2015 set a new record high at 10.38 pigs (Figure). This compared to just 9.0 pigs per litter in 2005 — a 15% increase in 10 years, he said.

Hurt said hog prices were depressed in 2015 due to a 7% production increase on a combination of 8% higher numbers and 1% lower weights. Pork trade was also a negative for hog prices in 2015 as the strong U.S. dollar encouraged more pork imports, especially from Canada, he said.

“Data currently available on trade suggest that higher pork imports increased pork supplies by an additional 2%,” Hurt noted. “With 7% higher production and 2% greater imports, total available supplies in the U.S. were up nearly 9%. The large supply surge became a concern in the last two months as prices fell to six-year lows that were well below costs of production.”

What about 2016?

According to Hurt, the recent U.S. Department of Agriculture “Quarterly Hogs & Pigs” report suggested some letup in the large market supplies in late 2015. The USDA inventory showed that the market supplies for December 2015 increased 5% but should begin to taper off with the new year, he said.

“First-quarter supplies suggested by the USDA inventory would be up about 1%, but weights are expected to be down, so total first-quarter pork production may be unchanged to up 1% if USDA inventory numbers are accurate,” Hurt said. “Using the USDA inventory numbers, second-quarter pork production would be down 1%.”

As for summer and fall 2016 pork production, Hurt said pork producers indicated to USDA that they will reduce farrowings this winter by 2%, with farrowings unchanged in the summer. If this transpires, pork production will be down 1% in the second quarter, be unchanged in the third quarter and up 1-2% in the fourth quarter, according to Hurt. Thus, for 2016, production would be unchanged to 1% higher than last year, he added.

Trade impact

USDA's current outlook is for pork exports to increase 4% and for imports to be steady.

If that is correct, Hurt said trade would help increase prices a bit for 2016. However, the strength of the U.S. dollar will likely be a continued shadow over improved pork trade, he added.

“Two factors will support a continued strong dollar: non-U.S. economic growth looks weak, and rising U.S. interest rates. A strong dollar would provide headwinds against improved trade, as USDA now forecasts,” Hurt said.

Further headwinds for 2016 hog prices will come in the form of growing supplies of competitive meats, led by a 4% expansion in beef supplies, according to Hurt.

“Poultry production will rise by about 3%, and with about 1% more pork, total meat supplies will be nearly 3% higher. The beneficiaries will be consumers, who will see lower retail pork and beef prices in 2016,” he said.

Price projections

For the year, liveweight hog prices are expected to average in the higher $40s after averaging near $50 in 2015, Hurt said.

“First-quarter prices are expected to average in the mid-$40 before moving upward to average in the low to mid-$50s in the second and third quarters," he said. "Prices then are expected to drop to the mid-$40s for the final quarter.”

Hurt estimated 2015 costs of production for farrow-to-finish production at $51/cwt. He expects a modest reduction to $50/cwt. for 2016. The slight reduction is due primarily to lower soybean meal prices, which will be at their lowest since 2007, he said.

According to Hurt, margins are expected to be negative for the year, with an average loss of about $4 per head. However, he said there will be large differences by quarter, with losses near $16 per head in the first and the fourth quarters and profits of about $8 per head in the second and third quarters.

“The bottom line is that the pork industry has already expanded enough to drive prices back below costs of production. Any further expansion in the pork industry at this time will likely lead to even larger losses,” he suggested.

Hurt said expansion in the beef and poultry sectors also means more abundant meat and poultry supplies in 2016.

“Retail meat and poultry prices will need to move lower to move these larger supplies," Hurt said. "In addition, the strong U.S. dollar and weak non-U.S. economic outlook likely mean that trade prospects could be an additional factor that could weaken hog and pork prices.”

Market recap

Cattle prices have been higher recently after Winter Storm Goliath hit the Southwest. Higher boxed beef prices have also provided some support.

February fed cattle futures finished lower Monday at $136.425/cwt. Despite closing higher Tuesday, nearby contracts fell to close lower Thursday at $133.525/cwt.

January feeder cattle futures were mostly higher this week. Nearby contracts closed higher Monday at $167.625/cwt. and climbed to $168.325/cwt. by Wednesday’s close.  By Thursday, however, outside pressures sent markets lower to close at $163.825/cwt.

The beef cutouts have increased significantly over the past couple of weeks. One analyst noted that it’s impossible to gauge whether the increase is demand related or if it is just the effect of holiday-shortened slaughter schedules. On Thursday, the Choice cutout was 39 cents higher than two weeks ago, at $230.59/cwt., and Select closed higher at $223.89/cwt.

February lean hog futures were mixed this week. Nearby contracts closed lower Monday at $59.425/cwt. and, despite some gains Tuesday, closed lower at $59.55/cwt.

Pork cutout values also were mixed this week. The wholesale pork cutout finished lower at $69.78/cwt. Loins also closed lower at $74.79/cwt., while hams and bellies both finished higher at $50.76/cwt. and $108.32/cwt., respectively.

Hogs delivered to the western Corn Belt closed at $50.67/cwt. on Thursday.

In the poultry markets, the Georgia dock was unchanged Wednesday at $1.13/lb.. Breast meat prices were lower at $1.465/lb. Leg quarters decreased to 35 cents/lb., while wings climbed to $1.53/lb.

According to USDA, California and regional egg prices were steady Thursday, with a mostly steady undertone. Offerings and supplies ranged from light to heavy but were mostly moderate to heavy.  Demand was light to good, but mostly moderate.

Large eggs delivered to the Northeast were 99 cents to $1.03/doz. Eggs delivered to the Southeast and Midwest were $1.00-1.03/doz. and 92-95 cents/doz., respectively. Large eggs delivered to California dropped to $2.05/doz.

The turkey markets Thursday were steady to weak, with unchanged to lower offering prices and light demand. Prices for hens and toms declined to $1.12-1.19/lb. and $1.12-1.38/lb., respectively.

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