We’ve just passed the mid-point of 2005, which is a good time to take stock of the industry.
By all indications at last month’s World Pork Expo, life in the pork industry is good. Producers have faced a solid stretch of profits. Packers and processors have been selling pork at home and overseas at a steady clip. The positive vibes have trickled into the allied industry, which benefits from producers having a bit more cash in their pockets.
Hey, it’s summer; the sun is shining, your business is profitable, what’s not to like?
Not to throw cold water on your good mood, but when everyone is feeling this positive a contrarian view can be helpful.
Between the time I wrote this column and the time you read it, USDA will have released its June Hogs and Pigs Report. Regardless of what it shows, you know the industry won’t stand still.
“We keep hearing reports of expansion plans for the next two to three years,” says Glenn Grimes, University of Missouri agricultural economist.
As we visited at WPX, a lender walked by and inquired: “Glenn, can’t you convince a couple of these operations not to expand?”
Today more than ever, it takes only a couple operations to change the course for the entire industry. Of course lenders don’t get a free pass in terms of influencing this issue either.
The pork industry can extend its profitability another five to seven months, says Grimes. But that requires long-term discipline, and even those running ultra-large operations can’t suppress the urge to expand indefinitely.
Grimes can build a case where production could exceed slaughter capacity sometime in 2006 and 2007, even with plant expansions.
Something that can’t be emphasized enough is that your recent profit run occurred in the face of a supply increase. Specifically, 2004 hog prices increased 52 percent while pork supplies increased 3 percent. Grimes says 6 percent of that was due to lower beef trade worldwide, 20 percent was due to higher U.S. pork exports and the rest was due to demand.
So, have the planets realigned and changed pork demand that dramatically?
Last year’s high-protein diets provided a nice boost, but that party appears to be over. While the global trade challenges for beef and poultry partially remain, that too will change.
Remember, demand doesn’t simply mean disappearance — we eat what we produce. Demand in this case means selling more product at higher prices.
While live-hog demand is still strong, margins are narrowing. Remember live-hog demand is very inelastic, which means any supply change results in volatile price swings — both positive and negative.
Cold storage pork supplies continue to build, suggesting that demand is weakening. Hog-slaughter weights have been running high, with carcass weights averaging 200 pounds for at least a few weeks this spring.
Long term, productivity has not peaked. The 3 percent annual gains that we’ve seen during the past few years might slow, but there’s still room to grow.
Production costs will climb. Gas and other energy prices have risen and won’t likely decline any time soon. Interest rates have no where to go but up. An unknown or overlooked cost increase points to corn. The push on ethanol production will boost the competition for your favorite feedgrain.
On a positive note, it looks like 2005 will produce a 14th record year of U.S. pork exports; and USDA predicts 2006 will exceed 2005 levels.
Among the other points worth noting is that the hog-price cycle has not gone away. It no longer cycles around with 3.5-year precision, but it still exists. In the future, “you will have to have deeper pockets to ride out the down cycle,” says Grimes.
Finally, domestic pork demand increases about 1.5 percent a year. “So, the way to keep good prices is to keep product growth under 1.5 percent,” notes Grimes.
After all, you are producing a food product and demand sets the stage. There is a price to pay for getting too far ahead of that curve.