Despite markets, China still needs product
“Regardless of what happened in our markets in the last week and a half, and what has happened to the stock market and what might be there for a recession, China still needs a lot of product.”
Dr. Steve Meyer with Kerns and Associates said that’s an important fact to remember as he shared his market outlook with pork producers and industry peers during the virtual 2020 Vita Plus Swine Summit.
The U.S. exported 229 million pounds of pork to China in December 2019 – that’s more than twice the amount leading experts predicted. Meyer reminded the audience that significant growth happened despite tariff issues between the U.S. and China.
With estimates of two-thirds of its total swine herd wiped out by African Swine Fever, Meyer said it will take a long time for the country’s pork industry to recover, especially without a vaccine to combat the disease. Subsequently, the Chinese will have a “pork gap” of 24.5 million metric tons (54 billion pounds) this year. Some, but not much, of that gap will be filled with other proteins. Meyer said, although the price of pork in China has skyrocketed, it is still less expensive than beef and lamb, limiting consumption of those proteins for many consumers. Although chicken feet are a favorite food, Chinese consumers don’t have much of a taste for chicken meat.
Meyer said this will continue to bode well for U.S. pork exports. Current forecasts predict monthly exports of 300 million pounds by December 2020. In total, the U.S. will export about 29.5% of its total production this year.
Switching to inputs, Meyer said current crop conditions can provide pork producers with some optimism. The U.S. does not have much for drought conditions so far, especially in major portions of the Cornbelt. Weather predictions indicate planting season conditions to be warmer and moister than average. Globally, Meyer said corn and soybean supplies are still ample. With that in mind, Meyer said he predicts a 2020 breakeven point at about $62 per hundredweight for the top 25% of pork producers. That’s the lowest it’s been since 2010. He said breakeven would likely average about $67 across all farms.
Domestic demand is probably more difficult to predict, according to Meyer. Last week showed a huge surge in retail pork sales as consumers rushed to the store in response to coronavirus (COVID-19) concerns. He said that has packers pulling pigs ahead to fill the surge in demand. He reminded producers, although a lot of product was sold last week, it wasn’t eaten right away and is sitting in home refrigerators and freezers.
A U.S. recession will impact domestic demand. Meyer said, in 2009, the food service industry was hit hardest, and food service accounts for a bigger portion of total U.S. expenditures today. Historically, pork has had lower exposure and thus fared better than other proteins. However, Americans’ increased demand for bacon could change how that plays out in 2020.
“If you live by the belly, you die by the belly,” Meyer said.
Meyer said his overall concern with domestic demand is money. As Americans see job layoffs, they’ll have less disposable income, leading to lower demand in the aggregate. Meyer said the caveat is pork has fared better than beef and chicken in the past.
Labor continues to be another major concern as “farms and plants don’t allow working from home.” The USDA and other companies have said they will handle plant employee cases of COVID-19 on a case-by-case basis. Thus, Meyer said plant slowdowns are probably more likely than plant shutdowns at this point.
“The fourth quarter still scares me,” Meyer said as plants don’t have the capacity for the gilts and barrows that are coming. He predicted a cash price of $54 to $57 per hundredweight in the fourth quarter. Today, Meyer predicts $4 per head profits for the top 25% of swine producers, but the average could be looking at a loss of $5 per head.
As he concluded his presentation, Meyer said early March’s “tariff waivers are a huge change” and should have positive impacts for U.S. exports as China takes about 10% of U.S. output. If Phase Two of the trade deal with China eliminates the retaliatory tariffs, the U.S. will be more competitive in the global marketplace. However, Meyer said “all bets are off for phase two” amidst U.S. response to COVID-19.