What a year; 2011 is certainly one for the record books. In hindsight, the La Niña-driven snowstorm that swept nearly 1,000 miles through a major section of the country last winter was only a signal of the drama to follow.

The worst drought since the Dust Bowl devastated Oklahoma and Texas, and signs now suggest it could expand north. Meanwhile, record-setting flooding damaged cropland in both western and eastern Corn Belt states. Hurricanes bypassed the Gulf and skipped up the East Coast, creating issues further north. Globally, the most major impact was the earthquake and tsunami that rocked Japan.

Economic woes continue to plague the United States, but not to be outdone, the European Union has added to the uncertainty. The fix in either case will not come quickly. For the United States, election-year politics will only emphasize the numerous recovery challenges.

Agriculture commodities pushed into new territory last year as corn, soybeans, hogs, beef and others set price records. Pork and beef exports were expected to set records as well. Overall, there will be less meat available to U.S. consumers in 2012, in part due to expanding global markets and drought-induced beef herd culling. The consensus is that ag commodities are permanently shifting to new, higher territories, but the uncertainty and volatility are not over.

Agriculture, including pork production, is a bit like poker. You play the hand you’re dealt. The question is, what’s in the cards for 2012? Here to provide insights are priorities and predictions from various experts in the pork industry.          

For many years, those in the pork industry grew accustomed to the hog market cycles, and combined with relatively steady feed costs, the future appeared much more predictable.  It may not have seemed so easy at the time, but in retrospect even five years ago the environment was relatively calm compared to today’s many wildcards.

What’s more, these wildcards come from all directions. Consider these examples: world grain demand, ethanol policy changes, currency exchange rates, increased government regulation, heightened social demands, energy prices, a potential global economic crisis or animal disease outbreak.

As a result, having a sound risk-management strategy is essential for survival. “It is a key management component that we and most other lenders will look for in our producer clients,” Wiepen says. “The good news is that the turmoil of the 2008 and 2009 period generated notable improvements in producers’ ability to manage risk.”

He notes that his customers are devoting significantly more time and effort to this critical task. “Some are taking advantage of relatively small windows of opportunity in the futures markets to lock in input costs, such as corn and soybean meal, as well as their revenues, using forwarding contracting and options,” he says. “Using another type of risk management, other producers have become more vertically integrated (as opposed to expanding the breeding herd) to add stability to their operations. Some producers are seeking to align with the processing side of the business.”

 Still others are taking more control over feed inputs by getting more involved with crop production or by adding storage to take physical possession of feedstuffs, or both. “These trends will likely persist, and we’ll continue to look at how producers balance these relationships and maintain adequate capital positions.” Wiepen says.

Pork producers’ capital positions have improved during 2010 and 2011. “Balance sheets didn’t look so good after 2008/2009, but most producers have rebuilt the liquidity lost,” he notes. “They recognize the importance of maintaining high levels of working capital as part of their overall risk-management strategy, especially in light of higher costs and market volatility.” Lenders will continue to stress the need for high levels of working capital. “We also advise our customers to make responsible and sustainable business practices part of their overall risk-management strategy,” Wiepen says.

While cost control is important, it’s no longer good enough to be the lowest-cost producer. “Cost of production, relative to peers, will continue to get our attention, as it’s related to the ability to manage feed costs,” Weipen says. “But those who focus on reducing other expenses, such as the cost of space and labor, will improve their ability to prosper in this environment.”

Productivity has been a bright spot, as producers continue to get more pigs per sow out the door. “This may very well be a result of 2008/2009, where more emphasis was placed on improving production rather than expansion,” he says. It has definitely raised the bar. “Increased numbers over the same level of fixed assets has a positive impact on the cost of production,” Wiepen adds. “On a side note, those added pig numbers have definitely had an impact on finishing-space demand, which is offset only slightly by increased efficiencies in finishing.”

Looking ahead, Wiepen expects 2012 to be a decent year for pork producers. Costs are high, but so is demand. “We see opportunities for good profits in the middle two quarters, with slight profits in the first and fourth quarters,” he says. “Many of our customers also are working ahead by nearly a year to lock in feed costs and prices for the pork they produce.”

But, there are always wildcards to consider. On the plus side, there are the recently approved free-trade agreements. South Korea was a strong U.S. pork customer in 2011, pushing it into the No. 4 slot. On the other hand, the March 2011 tsunami in Japan had a decidedly negative impact on U.S. pork prices, though it was short-lived. The take-home point, “We can’t predict when or where the next cataclysm will strike,” Wiepen notes, “but the potential for such an occurrence reinforces the need for a sound risk-management strategy.”

Sweet, Sweet Profitability: The single biggest factor impacting pork production profitability in recent years has been the extreme increases in feed prices. In 2008 and 2009, producers could not pass those higher costs on to consumers and had to absorb them as negative margins. “These losses caused discouragement and bankruptcy which led to production cuts and ultimately to higher hog prices,” Hurt says. “This is the normal process of passing higher costs through to the consumer, and it takes time.” 

In 2007, when feed was still cheap, producers supplied 50.8 pounds of pork for each American. This year’s supplies will drop to just 46.2 pounds. As a consequence, retail pork prices have risen from $2.87 per retail pound in 2007 to an estimated $3.50 in 2012. That’s a 22 percent increase, and pork producers finally move back to profitability.

Feed Prices Have Turned the Corner: Feed prices may have reached their highs and will now moderate in 2012 and beyond, Hurt says. The two biggest reasons for the feed price rally were the surge in corn used for ethanol (largely due to Washington mandates) and China’s jump in soybean purchases. “Those two demand shifters were nearly equal in size, and together increased demand for U.S. land by about 30 million acres from the 2005 to the 2010 crops,” Hurt notes. “The ethanol mandate will grow much slower from the 2011 to the 2014 crops.” Also, land expansion in South America is increasing soybean production and is absorbing more of China’s demand growth. 

The U.S. pork industry had to adjust production as corn prices rose from $2 to $7 a bushel, but producers can now compete with corn at $6 to $7 a bushel. “If feed prices are indeed moderating, then pork producers may be in for a favorable profit period,” Hurt says.

Watch the Weather: Lower 2012 feed prices are not assured because weather threats to U.S. feed supplies remain. Severe drought in the Central and Southern Plains continues, the southeastern states have joined in, and the western Corn Belt is showing signs of impending dryness. The National Oceanic and Atmospheric Administration’s drought forecast shows the entire tier of southern states, from Southern California to the southeast coast, falling into drought.

“If weather once again cuts yields in 2012, lower feed prices aren’t likely,” Hurt says. “So pork producers should focus an eye to the sky and avoid expansion until 2012 crop sizes are better known. Favorable weather should drop corn well under $6 a bushel.”

Watch the Globe: There are many reasons to watch the world news. The first, and most positive, is the rapid growth in the global pork market. While domestic consumers are still pork’s biggest market, global customers offer the greatest growth potential in 2012 and beyond. Total U.S. pork consumption will hold mostly static in the coming years because population growth is slow and per-capita consumption is trending down somewhat, Hurt points out.

Pork’s big growth market is Mexico, with annual population growth  near 2 percent and per-capita pork consumption also up 2 percent. That’s a 4 percent annual growth rate. Other hot spots — China’s annual pork consumption is growing by 3 percent and South Korea is just slightly lower. The U.S. pork industry’s future growth will  depend on expanding into these regions, and based on 2011, it’s on its way. USDA expects 2012 exports to reach 22 percent of production.

The downside of watching the world may be continued uncertainty surrounding income growth and fears of a second global recession. “The European debt issue is a concern, as it not only slows income growth there but spills over to the rest of the world. In addition, U.S. policy makers have shown their inability to address debt and budget issues, thereby raising uncertainty,” Hurt adds. “Finally, while growing pork export markets benefits producers, increasing reliance on such highly variable markets can increase uncertainty and volatility.”

Herd health has a direct effect on pork producers’ profitability, and porcine reproductive and respiratory syndrome will continue to be the center of attention in 2012.  Donavan points to a 2011 report by the National Pork Board and Iowa State University that estimates PRRS costs the U.S. pork industry $664 million annually. With such a staggering impact, it’s no surprise that stopping the effects of this disease is top priority.

“This past year we’ve seen a strong force of veterinarians and producers working together to control and, in some cases, eliminate PRRS,” Donavan says. “A really exciting tool that has assisted veterinarians in gathering more comprehensive health data is oral fluid testing for PRRS virus.” Research efforts to help solve this devastating disease also continue to supply the industry with technologies that can be used in the field.

Part of achieving a healthy herd requires the judicious use of antibiotics.  This past year, the National Institute for Animal Agriculture held a first-ever symposium on the topic that included collaboration between human and animal health experts. “As a practitioner, I value having antibiotics to treat sick pigs, relieve suffering and cure disease,” Donavan says. “In addition, they play a key role in disease prevention, which promotes healthy pigs and safe meat. Pork producers and veterinarians will continue to be diligent in the careful use of antibiotics, and effectively communicate and demonstrate our commitment to providing safe food for all consumers.”

Producers are responsible for providing the best animal care every day, which includes having a swine-welfare program that encompasses disease prevention and health security. This applies to individual herds as well as the industry. “Preventing foreign-animal disease will be improved with the continued efforts of the Comprehensive and Integrated Swine Surveillance Program,” Donavan notes. “The program was started to enhance existing disease surveillance programs and includes herd monitoring for early disease detection and proof of disease freedom.”

Among the diseases being monitored is swine influenza virus.  SIV continues to evolve as a serious threat to global pig health, and its potential for zoonotic disease further underscores the need for continued research and surveillance in pigs, Donavan says. 

“Maintaining the health of our swine herds will ensure profitability for our businesses in 2012,” she adds.

Corn prices moved steadily higher from January through August 2011, gaining nearly $2 per bushel. A late-year decline dropped prices close to where they started the year, but they are still well above the $4 mark where the most recent rally began in July 2010. 

What about prices in 2012?  “It almost goes without saying that prices will likely trade in a wide range but will be difficult to anticipate due to the large number of unpredictable factors,” Good says.

Leading that list are the traditional ones, such as the size of the U.S. and world grain crops and demand strength as revealed by the ongoing consumption rate.  Non-traditional price factors will be associated with the state of U.S. and world economic and financial conditions. 

On the corn production side, USDA will release its final 2011 crop-size estimate on Jan. 12. “History suggests one should not expect a large change from the November forecast, but a surprise is always possible,” Good says.

It appears that Southern Hemisphere crops, including South American corn and Australian wheat, which will be harvested in early 2012, will exceed the 2011 crop yields and offer export competition to U.S. corn. A rebound in U.S. corn production is expected in 2012 due to increased harvested acres and a return to trend yields. “More harvested acreage would come from a decline in both prevented plantings and abandoned acres,” Good notes. “The combination of more acres and higher yield could result in a crop that is 1.5 billion bushels larger than in 2011.”

The first hint of this year’s potential crop size will come from USDA’s March 30 Prospective Plantings report.  “Late in the year, the prospective size of feed grain crops in the rest of the Northern Hemisphere will become important,” Good adds. “Some decline from 2011’s record production would not be a surprise.”

On the demand side, U.S. corn exports are expected to remain weak in the first half of 2012 but could accelerate modestly in the fourth quarter. Ethanol production in the past two years has exceeded mandated levels, as domestic blending margins were favorable and exports expanded in 2011. The end of the blenders’ tax credit as of Jan. 1, the eventual return of Brazil as an ethanol exporter and the approaching domestic “blend wall” for ethanol suggest that ethanol consumption in 2012 and beyond could retreat to the mandated level. “If so, corn used for ethanol production will increase at a much slower rate and could decline modestly late in 2012,” Good notes.

The level of feed and residual corn use is uncertain due to mixed signals provided by USDA’s quarterly Grain Stocks reports over the past two years, he says. The larger-than-expected Sept. 1, 2011, corn inventory resulted in a low use estimate last year, which resulted in a low forecast for the current year. “The December stocks estimate, to be revealed on Jan. 12, will provide some additional evidence about the consumption pace,” Good adds.

Concerns about world economic and financial conditions center on the debt crisis in some European countries and prospects for slower economic growth in Asia, particularly China.  “These concerns are likely to continue well into 2012, with expanding debt problems likely,” Good adds. “These conditions will tend to buffer enthusiasm about commodity demand and prices.

“Taken together, these factors suggest a sideways price pattern for corn in the first half of 2012. There is more uncertainty about the last half, but if a large U.S. crop does develop, prices would be expected to weaken further.”

 Finally, 2012 corn prices are expected to average well below 2011’s average. As a benchmark, Good points to the average price that Illinois corn producers received in calendar year 2011, which was over $6.15 a bushel, while the average bid price at country elevators was near $6.65. It appears those prices could be $1 lower in 2012, he notes.

Feed will continue to be a primary factor for pork producers to watch — feed cost, feed efficiency, feed usage and feed stuffs.  Higher commodity grain prices are here to stay.  “Look for continued interest in alternatives to corn for swine diets and management focus on practices to improve feed efficiency and minimize feed usage,” See says.

Because feed is the leading pork production input cost, least-cost formulation has always been important. But as feed has claimed an even larger share of production costs, it demands even more attention. “Feed costs also can be reduced through careful management of feed budgets, feeding programs and feeder adjustments,” See notes, “so those areas deserve more attention.”

Consumer acceptance of pork producers and the social license to raise pigs will continue to impact many production decisions such as sow housing, animal care, management practices and manure management.  “How sows are housed and managed will continue to evolve,” See says. “This evolution has been continuous for the last century, and producers will refine sow care to better improve productivity and animal well-being.”

Consumer acceptance is not only dependent on doing the right things and improving the management of swine farms, but also on communicating how pigs are raised and the level of stewardship that today’s pork producers provide. 

See points to immunocastration as a technology to watch in the coming year, as it plays a role in both the feed efficiency and consumer acceptance discussions.

Another area to watch is mortality of pigs of all ages.  This can be influenced by a combination of health, biosecurity practices and management.  Focusing on reducing pre-weaning, grow/finish or sow mortality also demonstrates that animal well-being is a priority, while improving production efficiency and feed costs.  

Reproductive management also deserves continued focus on such things as sow body condition, insemination protocols and lactation sow management. “Focusing on sow management can increase pigs per sow per year, minimize seasonal infertility and enhance sow longevity,” See notes. “Often these areas seem routine, but taking care of the basics is what makes the most sense for the sows and the farm.”

There’s not even a question about what is the most pressing issue in Washington, D.C., today and moving forward — it’s the budget/debt crisis. Markets, industries and consumers all want answers to how much the government is going to spend and how it will be funded. Obviously the Super Committee was a debacle, as it passed the buck back to Congress. “We need to see that our political system still works and can make decisions. We haven’t seen that,” Anderson points out. “Taxes and spending are fundamental issues, and markets don’t like this kind of uncertainty.”  

It doesn’t help that the sovereign debt crisis in Europe is adding to the financial insecurity. He advises pork producers to pay close attention to this, as it has the potential to affect the U.S. and broader global economies. It influences how U.S. and foreign consumers spend their money and where. “We don’t know if (E.U.) countries will default or if there will be a breakup of the Euro Zone, but it will have a bearing on how the general U.S. economy performs in 2012. Exports could get hit,” Anderson notes. 

Part of the overriding challenge is that the U.S. economy is growing at a very slow 1.5 percent to 2.5 percent, which is not exactly a healthy position. The point being, there isn’t much room to absorb a negative shock.

Budget uncertainties will spill over into the 2012 Farm Bill negotiations. Since the Super Committee failed to set the course for the next farm bill, Congress will need to pick up the torch. The process will start from scratch, and the dominant questions are how much money will be cut from agriculture and what will those programs look like? “It’s a very unsettled environment; we didn’t expect to be in this position,” Anderson says. “I think there will be significant cuts; anything is on the table.”  

Congress doesn’t always complete a farm bill in the year it’s due, but Anderson looks for a final bill before Congress adjourns next September. “There will be a lot of pressure to get the farm bill written before fiscal year 2012 ends,” he notes.

Trade is becoming the profitability backbone for U.S. agriculture, and certainly for pork producers. Last year, the three free-trade agreements (South Korea, Panama and Colombia) finally received Congress’ blessing. February is the targeted implementation date for the South Korea FTA. “I hope the delay on those FTAs was a unique situation and that we don’t replicate that again,” Anderson says. “There’s a lot of support for trade, and while I don’t know that there will be any FTAs this year, it’s an issue to watch.” 

Always smoldering on the backburner in Congress are issues such as animal rights, antibiotics and the environment. Action on any one of those topics is not necessarily expected for 2012, but they continue to gain traction as there are fewer people in agriculture among the U.S. population and lawmakers alike. “At any moment anyone of these issues could surface and change the landscape for our producers very quickly,” Anderson says.

For example, the Environmental Protection Agency’s Total Maximum Daily Load requirements for the Chesapeake Bay are getting a lot of attention and will set the stage for other watersheds, such as the Mississippi River. “The perception is that somebody else is to blame, and agriculture takes the brunt of it,” Anderson says. “We’re talking about a watershed with tens of millions of people impacting it.” While action won’t occur in 2012, regulations that spawn from efforts to clean up the bay could be devastating long term on agriculture and industry.

Finally, you can’t talk about Washington, D.C., without acknowledging that it’s a presidential election year. “It will make a difficult environment to get big things done, and that’s unfortunate because we need to get big things done,” Anderson notes. “It’s very frustrating and goes back to the No. 1 concern of the budget and debt. No one wants to give the other party a victory.” 

 

As 2012 begins, the U.S. pork industry looks to be in good shape. With record prices, flat production, booming exports and moderate supplies of competing meats, the industry outlook is encouraging.

“We believe that U.S. pork production will be flat to moderately higher in 2012 due to productivity gains and possible herd rebuilding,” Hendricks says. “Sow slaughter levels ran high in the second half of 2011 due to record grain prices. However, the futures market presented producers with an opportunity to lock in positive margins for most of 2012, incentivizing reduced sow slaughter and modest expansion.”

Retail pork prices and margins signal healthy consumer demand in spite of the economic concerns at home and abroad. USDA’s most recent data shows a record $1.96 per pound price spread between U.S. retail and wholesale prices, providing an incentive for retailers to continue to promote pork.

Regarding the global pork sector, Hendricks offers this snapshot:

United States: Supporting the outlook for U.S. pork in 2012 are significant cuts in beef and poultry supplies. Rabobank expects beef production to be substantially lower as cattle forced into feedlots early by the drought move through the system and producers increase efforts to retain stock to rebuild the herd. Poultry production is expected to be down 4 percent to 5 percent. Tight beef supplies are expected to result in record-high prices that will provide an umbrella for pork prices.

“With exchange rates suggesting that U.S. pork will remain among the most competitive in the world, and a potential decline in European pork production of as much as 4 percent, the outlook for U.S. hog and pork prices is robust,” Hendricks says.

European Union: Europe is a wildcard for several reasons. Europe’s pork industry is in the middle of a long-term structural adjustment.  The E.U.’s ban on genetically modified crops and high regulatory hurdles on animal welfare, environmental policy and spatial planning make E.U. hog production costs increasingly uncompetitive. “Challenges will be exacerbated by a recent policy change that clears Romania, a low-cost producer, to sell pork throughout the European Union. As a result, western European pork production and exports will continue to decline,” Hendricks notes.  “All told, the damage to the industry will likely reduce E.U. production and export availability in 2012.”

China: Total pork consumption has increased 1.6 times between 1996 and 2010.  Rising income levels are the main reason, but lifestyle changes, urbanization and supermarket growth also are changing consumers’ dietary and purchasing habits. Pork is China’s most consumed meat and will hold a dominant position, although its share is gradually declining.  High input costs and swine diseases have challenged the sector, which caused big gains in U.S. pork exports to China last year.

It’s difficult to predict China’s future requirements for U.S. pork, as their buyers jump in and out of the market. However, it seems clear that China has a structural challenge to produce enough grain and pork to keep retail price inflation under control.  “China’s pork prices have slipped from recent highs but remain historically elevated,” Hendricks says “We expect to see both ongoing grain and meat exports into China to help balance a precarious situation.”

China’s pork industry is moving aggressively from an unorganized sector toward industrialization and is restructuring the pork supply chain. “Large-scale production is gaining market share at the expense of small producers. That trend is reshaping the relationship between slaughterers and producers, moving from a spot market to a more coordinated supply chain,” Hendricks says. “Consolidation also is occurring in the processing sector.” It’s expected that by 2020 slaughterhouse numbers will drop from 12,000 to 2,000.

Long term, China is determined to maintain its self sufficiency in pork. However, recent volatility and swine diseases have caused small farmers to shrink faster than large farmers can expand, allowing production to fall behind demand. U.S. producers have taken the opportunity to fill the gap.

“Rabobank believes the next shoe to drop will be large-scale Chinese corn imports to meet the feed requirements of growing industrialized livestock producers,” Hendricks notes. “The next decade of China’s emerging economy is likely to be the most interesting to date for the global pork market, as the magnitude of its growth is about to expand and deepen.”

Prospects for the U.S. hog sector in 2012 look robust.  There will be plenty of volatility along the way, but producers can expect to see opportunities to do well in 2012.