The pork outlook in August was bleak as concerns over large pork supplies and trade import tariffs Mexico and China applied to U.S. pork exports appeared to be disastrous to hog prices, Purdue University agricultural economist Chris Hurt noted this week.

In August, his forecast was for losses of $40 or more per head in the fall and winter, the worst since 1998. While the outlook is still suggesting losses this fall and winter, he said they are much less than the August forecast.

Hurt said the U.S. Department of Agriculture's recently released “Hogs & Pigs” inventory report showed that pork producers continue to expand the breeding herd by 3.5% above year-ago levels. Additionally, he pointed out that the breeding herd has been expanding steadily since 2014, when the porcine epidemic diarrhea virus caused large baby pig losses that resulted in skyrocketing hog prices and profits. The second driver since 2014 has been lower feed costs, he said.

Producers reported that the market herd is 3% larger. Hurt explained that this represents the supply of hogs to come to market over the next five months.

Farrowing intentions for this fall and winter were up 2%. The increased number of pigs per litter also means that the number of market hogs in the spring and summer of 2019 are expected to be up about 3%.

“Pork production will reach record levels in 2018 near 26.5 billion lb. That record is expected to be broken in 2019, when production may reach 27.3 billion lb. -- another 3% increase,” he said.

As for why lean hog futures collapsed this summer, Hurt said that it’s known that futures markets anticipate supply and demand conditions into the future and that, sometimes, the anticipation of bad news is more severe than the reality.

“This seems to be the situation this year, especially related to the late-summer anticipation of the negative impacts of Mexican and Chinese tariffs on U.S. pork export,” he said. “Pork exports represent 22% of production and, thus, have become very important to the price of hogs. In addition, the tariff situation was a new event, with little historic precedent for the market to draw on.”

The magnitude of the price drop was huge, Hurt said.

“December lean hog futures, as an example, fell from about $60 in June to $44 by early August,” he noted.

The good news, he said, is that prices have recovered most of the decline, rising back to $58 by Sept. 28.

So, what are export prospects, and what do we know so far about the influence of the tariffs? He said USDA analysts expect pork exports to rise by a strong 6.3% this year. Official census trade data through July showed that exports had been up 6.5%, which is encouraging, he added.

However, July was the first month of China's full tariffs on U.S. pork. Hurt said U.S. pork exports to China and Hong Kong during the month were down 17%. Exports to Mexico, which is the largest export customer for U.S. pork, were down only 1%, he noted.

“More importantly, total pork exports were up nearly 9%, with notable increases to Japan and South Korea, our second- and fourth-largest export buyers,” Hurt added.

According to Hurt, weekly USDA export sales reports extend through the week ending Sept. 20 and show total commitments (already exported plus unshipped sales for this year) that are up 5.3%. On this more extensive data, China's (plus Hong Kong) commitments for the year are down 32%, Mexico is unchanged, Canada is up 11% and South Korea is up 37%. Together, this information helps support the idea of stronger exports, Hurt said.

“Mexican purchases seem to not be affected much by the tariffs, and they are our largest customer, purchasing 32% of all pork export volume in 2017,” he said.

Exports to China and Hong Kong have been negatively impact, but Hurt said these regions are much smaller, representing just 9% of exports in 2017.

Other buyers have more than compensated for the lost volume to China, he pointed out.

ASF in China providing some optimism

Hurt said the second factor providing more optimism to lean hog futures has been the concern over potential hog death losses in China from African swine fever (ASF).

“ASF is difficult to control, and animals must be destroyed in order to control the disease," he explained. "China’s pork production is 4.5 times that of the U.S. In addition, they raise 97% of their consumption domestically and import only 3%. So, a 1% loss of their production means they will need to increase imports by about one-third.”

If ASF does result in China increasing its imports, Hurt said the U.S. may not get that business; rather, Canada and the European Union will. Still, the advantage for the U.S. will be increased exports to some of the other destinations to which Canada and the EU were shipping, he explained.

Hurt’s forecast for liveweight prices for 51-52% lean carcasses during the fourth quarter of 2018 is an average in the low $40s. He expects an improvement to the mid-$40s for the first quarter of 2019 and the low $50s in the spring and summer quarters, with his price forecasts for the fall of 2019 dropping back to the low to mid-$40s.

Hurt’s cost of production estimates are in a range of $49-51/cwt. “My outlook is for losses of $10-20 per head this fall and winter and then for profits of $5-10 a head next spring and summer, before returning to losses late in 2019,” he said.

Overall, Hurt said the pork outlook has improved, even with considerable uncertainties.

“What does seem assured is that pork supplies will be at record levels,” he said, adding that the recent rate of U.S. pork expansion probably cannot be sustained. “The industry will simply reach a point where supplies are too large to sell at profitable prices,” Hurt noted.

Market recap

December live cattle futures started the week higher but fell as the week progressed. Contracts closed Monday at $118.95/cwt. and Tuesday at $119.475/cwt. but fell to Thursday’s lower close of $118.375/cwt.

November feeder cattle futures followed the same trend. Contracts closed higher Monday at $159.025/cwt. but fell through Thursday’s lower close of $157.75/cwt.

The Choice and Select cutout closed lower Thursday at $203.86/cwt. and $191.98/cwt., respectively.

December lean hog futures were mostly lower this week. Contracts closed higher Monday at $59.85/cwt. but fell to $55.325/cwt. by Thursday’s close.

In the pork cutout this week, the wholesale pork cutout closed lower at $79.91/cwt. Loins and hams were lower at $80.15/cwt. and $61.78/cwt., respectively. Bellies were higher, closing at $125.69/cwt.

Hogs delivered to the western Corn Belt were higher, closing Thursday at $63.28/cwt.

USDA reported the Eastern Region whole broiler/fryer weighted average price on Sept. 28 at 85.92 cents/lb.

According to USDA, egg prices were steady, with a steady to firm undertone. Supplies varied, ranging from light to heavy in some instances, but usually moderate for trading purposes. Demand was light to moderate.

Large eggs delivered to the Northeast were slightly higher at $1.06-1.08/doz. Prices in the Southeast and Midwest were also slightly higher at $1.08-1.11/doz. and 95-98 cents/doz., respectively. Large eggs delivered to California were higher at $1.60/doz.

For turkeys, USDA said the market was steady to firm. Offerings have been light. Frozen and fresh demand has been light to moderate. Prices for hens were unchanged at 78-89 cents/lb., while prices for toms were higher on the lower end of the range at 78-85 cents/lb.