Editor's note: The following article was written by Ron Plain, Professor Emeritus of Ag Economics at tje University of Missouri, and published in the June issue of PORK Network.
Hog prices have lagged behind the pork cutout value in recent months. From 2002 through 2014, the average base carcass price paid for slaughter hogs averaged 91.9% of the pork cutout value. In 2015, base hog prices averaged 83.9% of cutout and in the first 18 weeks of 2016, hog prices have averaged only 78.7% of the pork cutout value. There were several weeks last winter when the base carcass price was less than 70% of the cutout value. The lower ratio reflects, in part, the high utilization rate of slaughter capacity in recent months. When there are lots of hogs, packing plants operate on Saturday. The two biggest Saturday hog-slaughter totals ever both occurred last winter. The lower ratio of hog prices to cut out value also indicates good margins for packers. That in turn, helps explain why there are two large new packing plants currently under construction.
Corn prices aren’t what they used to be. Corn started this century like it ended the last: $2 per bushel, give or take. The growth in demand for corn to make ethanol along with some bad weather pushed corn prices above $6 per bushel in 2011-2013. Better weather and slower demand growth has caused corn prices to fall back below $4 per bushel. USDA’s early prediction for this year’s corn harvest is for a record 14.4 billion bu., thanks to the most corn acres since 2013 and, hopefully, the third highest yield ever. Of course, Mother Nature may have a different opinion. The futures market is predicting a slow increase in corn prices back to $4 per bushel. If USDA’s outlook is right, 2016 cost of production for hogs should be in the low $50s/cwt on a live weight basis and the upper $60/cwt on a carcass basis.
Americans like to eat meat. In 1950, the average American ate 164 lbs. of red meat, poultry and fish. By 2006, we were averaging 238 lbs. per person per year. For nearly 60 years, the long term trend was 1.2 lbs. more meat per person per year. High feed costs during 2008-2013 caused livestock and poultry production to contract, and lower meat production also meant lower meat consumption. In 2014, the U.S. per capita meat consumption was 14 lbs. less than in 2008. Lower corn prices is recent years have caused a jump in both meat production and consumption. USDA says per capita consumption was up 9.1 lbs. in 2015. It predicts a 3.3 lb. increase this year and another hike of 2.6 lbs. in 2017. Meat consumption is still below trend, but we are quickly closing the gap. Of course, increased per capita supplies are likely to mean lower prices.
Last year the U.S. exported more than $5.5 billion of pork and pork byproducts. The five biggest buyers of U.S. pork are Mexico, Japan, Canada, South Korea and China. Prior to 2014, Japan had been the largest foreign buyer of U.S. pork for more than 25 years in a row. Each of the last two years, Mexico has been the biggest importer of U.S. pork. Canada is the third largest buyer of U.S. pork. China is an inconsistent market for pork: it buys lots of pork when production is down and little when production is up. Currently, the Chinese hog inventory is down and pork prices there are very high. During the first quarter of 2016, U.S. pork shipments to China were up by 255%. Shipments to China are expected to remain strong through the rest of 2016.
There are lots of factors that impact exports. Perhaps the most important is the exchange rate of the dollar for other currencies. The stronger the dollar, the more expensive U.S. products are for foreigners to buy. Relative to major foreign currencies, the dollar was down in value in 2011. That year, the U.S. set a new record for pounds of pork exported. We also set new records for beef, chicken, and turkey exports. The value of the dollar was up in 2015 and exports of beef, chicken and turkey were each down, while pork managed a modest 1.7% increase in exports. Last year, the European Union passed the U.S. as the world’s largest pork exporter. The dollar has been declining in value in recent weeks. If this trend continues, then U.S. pork exports should increase more than the 5% USDA currently predicts.