After enduring the severe challenge to hog margins posed by the 2012 drought and record feed prices that followed, pork producers are more than ready for a much-needed return to profitability. While the past six months have undoubtedly been a harsh test, costing the industry over $1 billion in lost profits, the situation may be about to improve substantially.
“The U.S. pork industry is poised to have a very fine 2013,” says Joe Kerns, Kerns and Associates, Ames, Iowa. According to Kerns, the combination of input prices and revenues are setting up for what he expects will be a “potentially wonderful” 2013 for North American producers.
While Kerns believes input prices will remain a daunting factor in the new year, he also believes producers are still going to have an excellent year as they “stretch a ground-rule double into a triple.”
“The robust pork export opportunity awaiting our producers could carry the day,” Kerns says. His optimism is based on a shifting demand curve that may already be taking shape. And, indeed, October 2012 pork exports (the latest available) seem to have set the stage. U.S. pork exports set new monthly records in October, according to statistics compiled by the U.S. Meat Export Federation, reaching 218,000 metric tons valued at $607 million. Export volume for the month also broke the previous monthly record set in November 2011.
“As long as the pork production community and U.S. lawmakers don’t do anything to thwart the effort, the United States will rule in pork exports through 2013,” Kerns predicts. High feed prices will drag down what otherwise would be record profits in 2013, he adds.
Part of Kerns’ optimism on his outlook for U.S. pork exports is the implementation of the European Union’s ban of sow-gestation stalls that went into effect Jan. 1. He expects a 5 percent to 10 percent decline in 2013 E.U. sow numbers as a consequence of the ban as well as increased regulatory requirements in the world’s second-largest pork exporter after the United States. “I expect a solid 5 percent reduction in 2013 E.U. pork production.”
Kerns’ estimate of E.U. 2013 pork production is considerably lower than reported in a recent estimate by the USDA. The “Livestock and Poultry: World Markets and Trade” report forecasts E.U. pork production to ease by just 1 percent to 22.6 million tons as member countries cope with the ban on sow-gestation crates. The report predicts that E.U. pork exports will actually grow in 2013 by 4 percent to a record 2.4 million tons. (See http://1.usa.gov/i5bTCu.)
Meanwhile, the United States is forecast to be down 1 percent in total pork production to 10.4 million tons as producers reduce slaughter weights in an attempt to minimize feed costs. The report predicts only modest reductions to the U.S. breeding herd, leaving producers prepared to accelerate pig production in the latter part of 2013. U.S. pork exports are forecast to be up 1 percent to a record 2.4 million tons, according to the report.
China is the world’s largest pork producer by far. The nation is expected to produce 52 million tons of pork in 2013, yet remains a net pork importer. “China represents the biggest opportunity for increasing the level of U.S. pork in 2013, especially considering reduced E.U. output,” Kerns says. “In addition, U.S. pork will continue to be competitively priced in markets of steady trading partners including Japan, Mexico and South Korea.”
Kerns believes that U.S. pork exports will continue to enjoy robust growth, perhaps nearing 30 percent of total production in 2013. However, he quickly adds the caveat that producers must maintain their excellent record of disease prevention within herds. “And, as long as the United States does not adopt measures and practices that make U.S. pork uncompetitive in foreign markets, we will continue seeing robust increases in exports,” he adds.
While lean-hog futures are indicating a possible return to profitability in the second quarter, Kerns believes producers should still remain cautious. “My outlook is not without trepidation,” he says, recommending a put option strategy that offers a level of protection in the case of a disease outbreak or other unforeseen event that may befall U.S. pork exports. “Putting in a stopgap is a very responsible way for producers to manage that risk.”