Analyst paints picture of tough year for hog industry
After initial disruptions by the COVID-19 pandemic last year, pork packing plants have recovered and are running at a 96% harvest capacity overall.
During a recent webinar, Dr. Steve Meyer, Partners for Production Agriculture, reported packing plants were operating at extremely high levels at the beginning of the pandemic to meet consumer demand. However, as COVID-19 cases rose and packing plants slowed or closed, industry-wide harvest capacity dropped as low as 44% at one point, causing flow disruptions on farms for hogs destined for market.
Meyer said those disruptions, along with restaurant closures, caused hog prices to plummet and wholesale pork prices to go through the roof. In turn, packers captured large gross margins. Those margins, he said, quickly returned to more “normal” levels, but he expects consumers will see larger gross packer margins moving forward due to higher operating costs.
While packing plants should operate at more sustained levels moving forward, Meyer said the best solution to help lower gross packer margins is to build more packing plants. However, no immediate plans have been made for packer expansion, and many existing plants are operating at only one shift per day due to labor shortages.
Meyer believes this recession is likely over, but does see necessary adjustments coming to our daily lives, such as fewer business meetings and less travel, and he predicts more available commercial real estate moving forward. Because of these adjustments, Meyer foresees a “shadow recession” coming that may be more painful than the recent one and longer lasting.
“We are going to have to adjust the economy to a new reality and discover a new way to do things,” Meyer said.
Future of inputs
Meyer says the U.S. is currently exporting corn and soybeans at very high levels. Ethanol production continues to struggle, mostly due to fewer people driving. Less ethanol and high demand means distillers grain and soybean meal prices may continue to increase. Some producers may even struggle to find soybean meal this summer, he added.
Meyer expects the average cost of production for a farrow-to-finish operation in 2021 to be around $80 per hundredweight (cwt) on a carcass basis. However, given such high costs of production, even with friendly hog futures at $85 per cwt on a carcass basis in the summer months, this translates to being only marginally profitable, if at all profitable, for producers.
Meyer says producers will need good growing conditions this year to push input prices back down in the fall to help boost profits.
“Right now, they are predicting a normal crop for this year, but that still leaves costs at very high levels,” Meyer said.
Meyer expects the overall 2021 pork harvest to be virtually the same as last year with pork production increasing by less than 1%. While pork exports increased dramatically last year by 17.8%, it was largely driven by a 136% increase in exports to China. Even with encouraging increases in exports to Mexico and Japan, Meyer believes overall exports in 2021 will decrease by 2% to 3%, with exports to China decreasing by 15% to 20%.
Meyer predicts early peaks in May for both the pork wholesale market and the hog market. The futures market values indicate hog prices rallying to $85 per cwt on a carcass basis in the third quarter before settling between $70 and $80 per cwt in the fourth quarter. This may offer some pricing opportunities for hogs, but he cautioned that production input costs should be locked in before profits can be locked in.
Producers could see losses
Looking at his profit model, Meyer predicts the best 25% of producers will have small profits for this year based on lean hogs, corn and soybean meal futures. However, he said the average producer could see losses at about $8 per head.
“This paints a picture of a pretty tough year, mainly due to higher costs going forward,” Meyer said.
In closing, Meyer said the pork industry will have to find ways to maximize profits in light of new or atypical constraints. Some constraints he is watching are COVID-19 and how long it will last, California’s Proposition 12 and its far-reaching impact on animal housing requirements, the new presidential administration’s climate change and trade policies, social and cultural pressures, and renewed regulations.