Pork supply is large
A March 27, 2015 United States Department of Agriculture (USDA) report indicated sharply higher supplies of hogs and pork in 2015, caused by an over-expansion of animal breeding in a proactive effort to compensate in case the Porcine Epidemic Diarrhea Virus (PEDv) epidemic repeated itself during the 2014 winter. Fortunately it did not. Therefore, the March 1, 2015 inventory for market hogs was 7.7% higher than the March 2014 inventory when the industry was struggling with PEDv, and even 1.3% higher than the spring 2013 inventory when the herd was PEDv-free. Moreover, the increase in reported breeding-herd numbers is the third increase in as many quarters, signaling that the industry has expanded its capacity to produce pigs.
Through the week ended April 18, 2015, actual year-to-date pork production was up 5.1%. If we use the USDA hogs and pigs numbers as the best estimate of future supplies, pork production will be up by about 7% to 9% for the year 2015. Quite possibly, there will be record-high pork production for the year.
Pork demand is soft
Recently, there have been several factors affecting pork demand, including U.S. dollar appreciation, the loss of export trading partners, the West Coast port strike, and competition from other protein sources.
The strong U.S. dollar and the West Coast port shutdown negatively affected export demand. While the USDA forecasts that pork exports will be down only 2.2% for 2015, exports decreased 13.4% through the first three months of the year. The USDA is predicting that the EU will export more pork than the U.S. in 2015. Because the U.S. typically exports one of every four hogs it produces, the loss of trading partners has an effect on domestic supply, and ultimately, domestic prices.
A consequence of lower exports has been large cold-storage inventories. March 2015 inventories were the third largest in history. But March was only 2.6% lower than February, so there is hope that inventories will correct now that the port strike is settled.
For the past few years, low beef and chicken supply, along with high prices for these same competing meats contributed to strong pork demand. As referenced in the table below, in 2014, and into 2015, chicken supplies have increased and chicken prices have declined. So chicken will compete with pork for the consumer’s dollar in 2015.
On the other hand, beef supply has decreased in recent years, accompanied by record-high beef retail prices. Low pork product values and firm beef pricing have resulted in a record-price spread between beef and pork, setting the stage for the consumer’s preference for pork at the meat counter.
Margins are subpar
Despite “cheap” hogs, pork packer margins have not benefited. Gross margins for pork processors have been running between $15 to $40 per head thus far in 2015, compared to a range of $30 to $65 per head in 2014. Additionally, gross margins have been about $5 per head below the five-year average gross margin per head for hogs.
The culprit has been the huge reduction in the value of pork by-products. Meat and bone meal have fallen into some disfavor, as livestock and pet owners move to “vegetarian” diets. Porcine blood plasma fell out of favor when it was suspected of being a vector for PEDv. Other by-products — organ meats, snouts, and masks — are dependent on export markets, particularly China and Mexico.
Lower prices challenge producers and first stage slaughterhouses, yet benefit further processors
Soft demand and increased supply have resulted in much lower hog and pork prices as depicted in the chart below.
Most wholesale pork cuts prices in 2015 are sharply lower than last year, but values of retail pork cuts (loins, butts, and ribs) sold fresh are holding their five-year averages. Processing cuts like bellies, hams, picnic, and trimmings are 30% to 50% below their respective five-year averages.
Importantly, while the pure pork slaughterhouses are incurring disappointing margins, the current low prices of bellies, hams, loins, picnics, and trimmings are benefiting the upstream pork processors that add value such as sausage processors, salami processors, dried meat snacks processors, bacon processors, etc. Currently, these raw materials can be purchased by further processors for 40% to 50% of their five-year averages.
What is the sector outlook?
Higher production rates together with lower net exports are expected to depress 2015 hog prices to levels below year-over-year 2014 prices, and below 2013 prices. For 2015, live hog prices viewed on a carcass value are expected to average $68 per hundredweight basis (cwt), which represents a 33% decline from 2014 and 26% decline from 2013, according to a consensus of forecasts by leading land grant universities and the USDA.
While the year-over-year price declines are steep, hog production costs have also declined from an estimated $85 per cwt in 2014 to an estimated $68 per cwt on a carcass weight basis, making 2015 a break-even proposition for hog producers.
Up the food chain, pure pork slaughterers that sell commodity pork will experience narrow margins during the remainder of 2015 due to weak demand factors. However, value-added processors of pork that acquire bellies, hams, and trimmings should benefit as wholesale prices will decline faster than retail prices.
Ted Tice, Wells Fargo Agribusiness Consultant, joined Wells Fargo and the Agricultural Industries Group in 2011. He has responsibility for a diverse range of agribusiness processors across the entire Wells Fargo footprint.
Ted possesses extensive experience in Agribusiness lending and farm management. He is a graduate of Iowa State University, where he earned a BS in Ag Economics, and of Washington University, where he earned his MBA. While a member of the American Society of Farm Managers and Rural Appraisers, Ted also earned his Accredited Farm Manager designation.