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LIVESTOCK MARKETS: Oversupply, fewer global buyers plaguing pork sectorLIVESTOCK MARKETS: Oversupply, fewer global buyers plaguing pork sector

Losses to average about $25 per head during fall and winter.

Krissa Welshans 1

July 12, 2018

6 Min Read
LIVESTOCK MARKETS: Oversupply, fewer global buyers plaguing pork sector

The pork industry appears to be headed for a period of large losses wherein excess pork supplies will force prices below costs of production and tariffs on exports to China and Mexico will likely weaken global demand, according to Purdue University agricultural economist Chris Hurt.

On a positive note, Hurt said China's tariffs on U.S. grains and soybeans, along with favorable growing season weather, have been helping erode livestock feed prices.

Nonetheless, the industry has expanded the breeding herd by 3%, as reflected in the U.S. Department of Agriculture’s “Quarterly Hogs & Pigs” report, which Hurt said is the highest rate of breeding herd expansion since this expansion phase began in 2015.

“A breeding herd of this magnitude is likely to be a primary contributor to excess supplies in 2018 and 2019,” he said.

The market herd was 3% higher, and farrowing intentions for this summer and fall were 2% higher. With the increase in the breeding herd, Hurt said there is concern that actual farrowings this summer and fall could be higher than the 2% increase expected by survey respondents.

The increases mean that pork supplies will be large. Hurt pointed out that first-half supplies this year have been up 4% and are expected to be 5% higher in the third quarter this summer and 4% higher in the final quarter of 2018. As of right now, expected supplies are up 4% for the first half of 2019 and up 3% in the last half of 2019, he added.

The second driver of the large losses the pork industry faces revolve around the current trade war, Hurt said.

“The U.S. pork industry has done an amazing job of producing low costs and high-value pork products and adapting them to our foreign customers. As a result, we have targeted exports as a strategic objective to grow the U.S. pork industry,” he explained

In fact, Hurt said increasing U.S. pork exports to 22% of production was why pork became a target of both China and Mexico.

Hurt reported that pork exports started the year with a lot of promise — up 9% at the end of April compared to the January-to-April period last year — but China's tariffs on U.S. pork began on April 2 and were raised again on July 6, making for additional tariffs of at least 50%. Mexico placed tariffs on U.S. pork of 10% on June 5 and then raised those to 20% on July 5.

Weekly export data from USDA suggest that a sharp drop in pork export sales — about a 25% decrease from last year — occurred during the month of June.

“Weakness in exports will be expected as long as the tariffs stay in place,” Hurt said. “China has also placed tariffs on U.S. beef and poultry, which may reduce U.S. exports of these competitive meats.”

Just how large are the loss prospects right now, considering the large pork supplies, reduced exports due to tariffs and reduced feed prices due to tariffs and favorable growing conditions?

Hurt said liveweight prices for 51-52% lean carcasses are expected to average about $49 in the third quarter of 2018 before dropping sharply in the last quarter to near $40. Current estimates of the cost of production are close to $50.

In 2019, prices are expected to be below costs for much of the year, Hurt noted. Liveweight prices are expected to be in the low $40s in the first quarter and then move to near $50 for averages in the second and third quarters before dropping back to the low $40s for the final quarter.

“Estimated losses are expected to be large this fall and winter, with losses averaging about $25 per head for this six-month period. Hog prices may be close to breakeven in the second and third quarters before returning to losses greater than $20 per head in the last quarter of 2019,” he explained.

Losses are estimated at $10 per head for calendar year 2018 and $12 per head in 2019, he added.

Feed costs are expected to be somewhat lower in the second half of 2018 versus the first half, Hurt reported. Prices in Decatur, Ill., for high-protein soybean meal were close to $365 per ton in the first half and are expected to fall to around $340 per ton in the second half, but Hurt said corn costs may be similar in both halves of the year, meaning that the modestly lower feed costs will not be enough to offset low hog prices.

“My prices for hogs and feed are primarily based on futures prices on July 9,” Hurt said. “Clearly, agricultural product markets are in a period of high uncertainty and volatility. Weather will continue to be a driver of crop prices over the next six to eight weeks. What happens to tariffs on U.S. exports of crops and animal products will also add dynamic price potential.”

Given the heightened level of uncertainty, he emphasized that most pork producers will not want to make long-term decisions at this point. “That means carrying on as best they can with short-term plans. The current trade war that agriculture has been unwillingly forced to participate in has an unknown and difficult-to-predict outcome. Only time will help bring the ‘end game’ into better focus,” Hurt concluded.

Market recap

August live cattle futures fell for most of the week, although they finally saw some support Thursday. Contracts closed lower Monday at $106.125/cwt. and Wednesday at $103.85 before closing higher on Thursday at $105.025.

August feeder cattle futures were mixed this week, closing lower Monday at $151.45/cwt. and higher Thursday at $151.025.

The Choice and Select beef cutouts closed lower Thursday at $206.58/cwt. and $197.01/cwt., respectively.

August lean hog futures plunged this week, closing lower Monday at $72.775/cwt. and Wednesday at $68.80. However, they found some support Thursday, closing higher at $70.425/cwt. but still down from $76.050 the prior week.

Pork cutout values were mostly lower this week. The wholesale pork cutout closed lower at $83.51/cwt. Loins were higher at $80.99/cwt., while hams and bellies were lower at $52.20/cwt. and $171.99/cwt., respectively.

Hogs delivered to the western Corn Belt were lower, closing Thursday at $76.38/cwt.

The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price on July 6 at $1.1628/cwt.

According to USDA, egg prices were steady, with a steady to weak undertone. Offerings and supplies both were in a full range of light to heavy. Demand was moderate to good.

Large eggs delivered to the Northeast were slightly higher at $1.46-1.50/doz. Prices in the Southeast and Midwest were higher at $1.54-1.57/doz. and $1.40-1.43/doz., respectively. Large eggs delivered to California were higher at $1.98/doz.

For turkeys, USDA said the market was steady. Offerings have been light to moderate, and demand has been light. Prices for hens and toms were lower on the lower end of the range at 73-84 cents/lb. and 74-86 cents/lb., respectively.

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