Pork producers have definitely seen better times than the present, but there are some bright spots on the horizon. Thankfully, prices haven’t declined as far as many analysts expected, but producers have a long way to go before they’re consistently making money. Here are six key factors that will influence pork producers’ profitability in 2017.

1.  Grain Prices Will Remain Low
Many pork producers are also grain farmers, but whether you buy your inputs or raise them, the cost of production for pigs will remain low in 2017. The U.S. Department of Agriculture reports that a sharp increase in corn supplies in Argentina and Brazil is expected to intensify the competition facing U.S. exports during the latter part of 2016/17.

Despite strong export commitments, U.S. export prospects are unchanged, reflecting increased competitor supplies and the expectation of slower pace of sales when countries of the Southern Hemisphere start exporting new crop,” wrote Tom Capehart and Olga Liefert in USDA’s recent Food Outlook report. With global consumption projected only marginally higher, global ending stocks will rise.

Increasingly, the prospects for major price changes in both markets are linked to South American production outcomes and the ability to export corn and soybeans into foreign markets.

With bean meal around $325/ton, producers can book bean meal and hedge, “or go to a crusher and book it just as far out as you can,” Steve Meyer, Vice President of Pork Analysis, EMI Analytics said. “If we have record crops here and in South America next year, it might go down to $270, but locking it in now is probably a good idea. It’s near the bottom side of the range,” he said.

2.  Low Market Prices: Lots of Pigs and Lots of Protein
It’s a good thing grain prices are low, because with the expansion the industry saw after 2014, and steady productivity improvement following Porcine Epidemic Diarrhea virus, the U.S. has a lot more pigs than it does slaughter capacity. Don’t expect the trend to change in 2017.

Unfortunately, prices have declined significantly more than cutout value, which reflects wholesale prices.

“Over the last decade hog carcass prices averaged above 90% of pork cutout value,” Ron Plain, Professor Emeritus at the University of Missouri, said. “This fall, it was below 70% of pork cutout and falling. Whenever hog slaughter approaches slaughter capacity, packing plants become a bottleneck in the flow of pork, causing hog prices to drop much faster than wholesale pork prices. Hog prices as a percentage of pork cutout are expected to remain unusually low until the new hog slaughter plants open later in 2017,” he said.

There is a positive component to this scenario, however. If you’ve been to the supermarket lately, you’ve noticed low retail prices on pork, which is a primary driver of demand.

“We do not have a demand problem at this point. The economy is a little soft and I’m concerned about that, but I think it is remarkable consumer attitudes have held up, because they usually go down in an election year,” Meyer said.

“One measure of meat demand is expenditures and even though expenditures were down 2.5% this year, I’m not concerned because we’re comparing to numbers that were remarkably strong a year ago,” Meyer said.

“With lower prices, we’re incentivizing people to eat more meat, and we’ll have a high level of availability,” Meyer said, “but we’ll have huge slaughter numbers, and we don’t see an end to the growth at this time.”

3.  Exports Vitally Important
The repeal of mandatory country-of-origin labeling (mCOOL), low U.S. pork prices, and relisting of plants for export to China are encouraging indicators for U.S. producers, despite a strong dollar. China is the world’s largest producer of pork, but it is expected to import even more product in 2017. Pork prices have been low in China and its growing economy allows Chinese consumers to add more meat to their diets. In fact, China has already become the world’s largest pork-importing country this year, snatching the spot held by Japan for more than two decades.

“Unfortunately, the U.S. pork industry was able to capture only a small portion of China’s import demand,” Ron Plain, Professor Emeritus at the University of Missouri, said. “Most of the benefits went to the European Union. From 2005 through 2014, the U.S. was the largest pork exporting nation. Now, we are second to the European Union.”

Rabobank’s 2016 fourth quarter report finds that abundant supply and looming slaughter capacity constraints in the U.S. are pressuring global pork prices, a situation exacerbated by slowing Chinese imports.

“This will result in a further decline of the Rabobank Five-Nation Hog Price Index in Q4, which turned unexpectedly in Q3, says Albert Vernooij, Animal Protein analyst at Rabobank. “Prospects for 2017 are weak, with global trade expected to stabilize and all main producers in expansion mode, making supply discipline key to the outlook.”

Competition for the Chinese market will intensify as more countries and companies obtain export permits. For Europe, 2017 prospects are soft, with rising competition in Asia and the declining British pound pressuring returns from this important local market, according to Rabobank. Herd expansion needs to stop or decline to support prices. However, Europe still has a competitive advantage over the U.S. because its exchange rate is so much better. This year, the EU had 70% market share of imports to China.

Brazil has seen a slight rebound in prices. Combined with the expected decline in feed costs, Rabobank believes this will support production and exports in 2017.

The Trans-Pacific Partnership would have been a huge benefit to U.S. pork producers. The new administration includes a number of people who support trade, which is encouraging. Industry analysts hope President-elect Trump will take a more moderate approach toward trade, as he has on some of his other far-reaching claims made during the campaign.

Ports will need to remain open and relationships with major trade partners must be solvent as well for trade to remain the important component it is. The United States is one of the top three producers and exporters of pig meat in the world (the EU and China being the other two producers and the EU and Canada being the other large exporters) and, therefore, its influence on the global market is significant.

4.  Retailers and Food Service Will Influence Production Practices
Major food service and retail companies will require hogs to be raised under certain management conditions in 2017. For example, some suppliers say they’ll purchase products from suppliers who no longer use individual sow housing. Dallas Hockman, Vice-President of Industry Relations for the National Pork Producers Council (NPPC), said these requirements have created a lot of discussion, and NPPC has had multiple conversations with McDonalds on origin and traceability.

Whether these changes are being required based on activist pressure or consumer demand is debatable, but arguing with reality is futile. In other words, it’s unlikely recognized management practices or science will turn the ship around.

Another important change is the desire by consumers to know their food’s origin from farm to plate. That’s easier to accomplish with other species, explains Hockman.

“It’s one thing to talk about muscle meats, but when you get into trim from all different parts of the pig, these companies are buying based on spec codes. We’re making progress in moving in that direction and we’ll see what happens going forward,” Hockman said.

While these requirements are difficult to meet in commodity pork products, some processors will dedicate lines to identity-preserved products. It also creates opportunities for producers who wish to develop niche markets.

5.  Consumers’ Influence
We live in the age of activism, Hockman said, and it’s driven by three primary factors: foodie influencers, social media and retailers desire to differentiate themselves.

Foodie influencers like Dr. Oz, the Food Babe, members of the media or other self-proclaimed experts have found a home on social media. Consumers tend to “share” philosophies that agree with their own, whether factual or otherwise, and it’s proven that “fake news” has more lasting power than real news. Until consumers are willing to do their homework by checking facts, this trend is likely to continue.

Sadly, activist groups have capitalized on this phenomena and “feed into” consumers distrust of agriculture and food production. As the result, the industry often find itself in a defensive position. 

The world of social media is changing how people feel about food, and there is turbulence in the food-service arena. Geographic expansion is no longer the only factor that ensures marketplace profitability, so retailers and food-service companies are looking for ways to differentiate themselves.

“We live in an era of activism dominated by books,” Hockman said. “We have lots of activities taking place with key players in the media world and with activist groups surrounding antibiotics, sow housing and other issues. There are either attacks on brands or it’s driven through the political side of the equation, and it’s all resulting in what we consider to be nervousness.”

“What drives most retail sales is what we call the ‘golden horseshoe,’” Hockman said. It’s the center aisle of the retail store, which consists of branded items that can be found in most stores.

“Where retailers differentiate themselves is on the perimeter, which is primarily with the commodities: milk, dairy, produce and meat.”

6.  Regulatory Restrictions

The Veterinary Feed Directives go into effect on Jan. 1, 2017 and while industry groups have worked diligently to prepare producers, the impact of the VFD remains to be seen. The dialogue surrounding disease resistance isn’t going away anytime soon, but it is our hope that the human medical profession will take more responsibility for the issue, since it’s proven that the misuse of antibiotics is the major source of resistance.

While the industry has done an excellent job of self-regulating in terms of best management practices surrounding antibiotic use and humane handling practices, more government oversight may be inevitable, perhaps not in the next four years but certainly long-term.

The recently announced proposed changes to the Grain Inspection Packers and Stockyards Administration (GIPSA) are a good example of how government agencies are likely to continue their overreach. That means producer organizations – and producers themselves – will need to remain diligent in protecting their interests.