It’s hard to believe, but 2012 has hit the half-way point. An amazingly mild winter and spring has lifted most people’s moods. Certainly it has been positive for folks in agriculture as spring planting moved early, quickly and without a hitch.
Corn users look to be particularly strong beneficiaries as record corn acreage will help rebuild stocks even though most of the crop season lies ahead. Mild temps kept market hogs growing, and exports held strong, working hard to keep pace with 2011’s amazing records.
Of course, uncertainty involving global and U.S. economic conditions are keeping consumers on guard, and buying patterns remain conservative. Indecision and inaction in Washington, D.C., regarding debt and taxes, are keeping consumers further in limbo and election-year politics are not helping matters.
From a risk-management standpoint, it’s wise to check up on your key markets and their influencing factors, and take stock of your strategies as you enter the second half of 2012. Here’s a look at the big three — the hog complex, feed grains and exports.
Impacts of a Lost Spring
The hog and pork outlook for the rest of 2012 has been muted by this year’s “lost spring” for pork producers, says Steve Meyer, president of Paragon Economics. “The situation is reminiscent of 2009 when H1N1 influenza cast an unwarranted pall over the pork complex in late April,” he adds. Lingering impacts on exports and surprisingly large hog numbers kept pressure on prices into July of that year. The question is could that happen again?
Meyer reviews this year’s factors that failed to launch a normal spring rally.
The “pink slime” controversy surrounding lean, finely textured beef, or LFTB, hurt the pork market even though pork was far from the target. “Bad publicity for one meat tends to be bad publicity for all meat, at least in the short run,” Meyer notes, “and the latest BSE case did not help.”
Trimmings products used in processed meats are interchangeable to some degree, so the 50 percent drop in the price of 50 percent lean-beef trimmings had a direct impact on pork trim prices for several weeks.
Another consequence — lower-than-expected beef prices had a negative impact on pork demand as consumers substituted some cheaper-than-expected beef for pork, Meyer says.
Lagging per-capita disposable income and near-record gas prices left consumers with fewer dollars to spend on relatively expensive meat proteins. “Add in a slow economic recovery to consumer sentiment and one has to think that consumers are still somewhat reluctant to spend even the fewer dollars they have,” Meyer adds.
Significantly heavier hogs since March 1 and significantly more hogs since mid-April. (See accompanying charts.) Added together, you have pork production running 2 percent higher since March 1 and 6.3 percent more pork from mid-April through mid-May, Meyer points out.
Higher exports than 2011, but lower exports relative to last fall’s record pace. First-quarter 2012 exports were 16 percent higher than last year, but March exports were down slightly and exports could soften through the rest of 2012, Meyer notes.
So, what can you expect for the rest of 2012 and into 2013?
“I expect pork demand to grow slowly but steadily. Higher beef and chicken prices should provide value space for pork prices to rise,” Meyer says. Continued, but slow, growth in the U.S. economy will eventually increase disposable income.
“Exports must run near 95 percent of last year’s pace for the rest of 2012 to match 2011’s record,” he adds. “That’s doable given ample product availability and a U.S. dollar that’s still very weak in historical terms.”
Hog supplies should exceed last year’s levels through the year. “The only caveat to that is if May’s supplies are due to exceptional performance that pulled some marketings forward out of summer months,” Meyer says. He points out that the market has had no shortages due to last summer’s heat or last winter’s porcine reproductive and respiratory syndrome losses.
It also appears that the winter and spring weight gains will be permanent. “Packer matrixes that pay well for heavier hogs, genetics that allow efficient late-stage growth and sufficient space in finishing barns will all support heavier hogs over the long run,” he adds.
The U.S. and Canadian breeding herds are growing, albeit slowly. “I expect that to continue, but it doesn’t mean output will match that slow pace,” Meyer says. U.S. producers have grown litter size by 2 percent annually for the past four years. While that pace may slow, adding 1.5 percent to 1.7 percent to litter size over the next few years is entirely possible. “So, more pigs will continue to come even with a slow-growing breeding herd,” he adds.
U.S. packing capacity is a greater concern. Meyer points to the accompanying chart and says, “weekly slaughter totals this fall will, on some occasions, exceed my current estimate of U.S. slaughter capacity. That can happen for short periods as packers extend hours or add Saturday shifts. But it can’t happen for long, and the amount of the difference between actual numbers and capacities cannot be large.”
He emphasizes, “If you add 2 percent to the fall of 2013 and consider that no major additions to capacity can be brought on line by that time, things could get very tight indeed — tight enough to have some significant negative impacts on hog prices.”
Regarding the 2012 price outlook, Meyer says he still expects a hog price rally this summer but has reduced it to the low- to mid-$90s (carcass weight) for the national weighted-average net price across all pricing methods. “It’s not unusual to see an August high for the year and that’s still quite possible in 2012,” he says. “If that rally materializes, fourth-quarter prices should fall to the low-$80s. I expect 2013 prices to be 4 percent to 6 percent lower than this year as pork supplies grow.”
Abundant Corn, but Tighter Soybean Supplies
“It is a little early in the season to be confident of specific forecasts, but it appears that the tight-supply, high-price scenario of the 2011/2012 corn marketing year will give way to a large-supply, lower-price scenario moving into 2012/2013,” says Darrel Good, agricultural economist, University of Illinois. “In contrast, continued supply tightness is expected to keep prices in the soybean complex at near-record levels.”
The current tight stocks supply reflects below-trend yields for both the 2010 and 2011 U.S. corn crops. Stocks also are impacted by a drought-reduced crop in Argentina this year and rapid corn-ethanol growth over the last three years. Tightness will remain through the summer, but prospects for increased wheat feeding and more corn to be harvested earlier than normal will augment old-crop corn supplies, Good points out. USDA’s June Grain Stocks report will provide a better indication of the supply situation that corn users face.
Prospects for increased corn and total feed-grain supplies in 2012/2013 reflect farmers’ intentions to increase corn plantings by nearly 4 million acres and optimism that average yields will meet or exceed trend value. With spring planting underway early, USDA’s forecasts projected a 166-bushel record corn yield and a record 14.79 billion-bushel crop. USDA’s June Acreage report will provide an estimate of planted and harvested acreage of all crops.
“Anecdotal evidence suggested that some acreage intended for corn was switched to soybeans, but there also is some uncertainty about the magnitude of total planted acreage of all crops,” Good notes. “Summer weather conditions will determine actual yields. While there’s no widespread threatening weather in the forecast, the unusual weather of this past winter and spring creates some nervousness about possible future conditions. Large corn supply prospects would get an additional boost if yields return to normal in Argentina in 2013.”
Corn demand this year will be limited as ethanol production is leveling off and E15 implementation is delayed. Also, there’s little growth from domestic livestock and poultry production. “Exports, however, could expand substantially as China buys larger quantities and U.S. corn fills the gap left by the small Argentine crop,” Good says.
Prospects point to a substantial build-up in corn inventories by the end of the 2012/2013 marketing year. “If this year’s crop develops as forecast, prices will continue to moderate into 2013. A return to the price levels of the 2007 to 2010 marketing years would be expected,” he adds. “Farm price during those three years averaged just under $4 per bushel.” While lower prices are expected, volatility will occur as supply and demand prospects unfold, Good points out.
As for soybeans, tight supplies reflect production shortfalls and strong demand over the past year. Production declined in 2011 as growers cut acreage and summer weather produced a below-trend yield. Additionally, drought dropped Argentina’s and Brazil’s 2012 combined production by 715 million bushels (18 percent) short of early-season projections.
“Demand strength has been mostly the result of China’s large purchases,” Good notes. “U.S. soybean stocks at the end of the 2011/2012 marketing year will be much smaller than forecast earlier.”
For this year, U.S. soybean growers report intentions to cut plantings by nearly 1 million acres. Even with a return to trend yields, it would mean a crop that’s well below the 2009 and 2010 record levels. However, planted acreage may exceed intentions due to the late-winter/early-spring price rally, Good says. He also points out that double-cropped acreage could get a boost from an early-harvested winter wheat crop.
USDA will release estimates of planted and harvested acreage on June 30. “The best chance for increased supplies will come with a rebound in South America’s 2013 production, but that of course is a long way off,” Good says.
U.S. soybean demand is expected to remain robust in the 2012/2013 marketing year. China’s demand will remain strong and the United States will have to fill the gap left by South America’s shortfall. “Early USDA projections point to a return to record U.S. soybean exports and marketing-year ending stocks of only 145 million bushels,” Good adds. “The stocks projection equals 4.4 percent of projected use, a historically low level that likely represents the lowest possible stocks-to-use ratio.”
Like corn prices, soybean prices will fluctuate in a wide range over the next year. In contrast to generally lower corn prices, soybean and soybean-product prices are expected to remain historically high until supply tightness dissipates, Good notes. USDA’s early forecast is for a 2012 average farm soybean price between $12 and $14 per bushel.
Still the Second-best Year
No question, 2011 was blazing hot for U.S. pork exports, with 27 percent of the year’s production sold to foreign customers and sales topping $6 billion for the first time. Records like those are hard to break, especially with global economic uncertainties and world pork production pegged to surpass last year’s level by 2.7 percent.
Still, for the first three months of 2012, U.S. pork exports were up 20 percent in volume and 8 percent in value. “It’s going to be somewhat of a challenge to repeat that record-breaking performance because 2011 was such a good year, courtesy of China and South Korea,” says Phillip Seng, president and chief executive officer of the U.S. Meat Export Federation. “We do feel the first three months are somewhat a predicate of the rest of the year.”
While he looks for U.S. pork exports to exceed $6 billion again this year, the final tally could show a flat trend line. However, 2012 is projected to at least be the second-best year ever. Seng breaks down the major markets for perspective.
North America: USMEF has stepped up promotions in Mexico, and it’s paid off in volume and value sales, with both being up 17 percent over 2011. A severe drought has increased Mexican producers’ costs and made U.S. pork very competitive. Already U.S. pork’s largest volume market, Mexico has become a reliable buyer and Seng expects that to continue “for the foreseeable future.”
Looking north, Canada has purchased 26 percent more U.S. pork in volume and 32 percent in value in the first quarter of 2012. “This is a testimony to the NAFTA agreement,” Seng notes. “Both markets have performed well; they know our product and sales are progressing well.”
Japan: As the worlds’ No. 1 pork importer, Japan imports nearly 1 million metric tons of pork annually, of which the United States provides 45 percent. “But there’s still a long way to go,” Seng says. “If you look at the total frozen and chilled segment, U.S. pork accounts for only 17 percent of overall consumption. So we see opportunity for growth.”
Japan is a high-value market and already is U.S. pork’s No. 1 customer, based on value. It’s also the most diverse and competitive market, with about 25 countries vying for a share. “In most markets, U.S. pork goes into further processing, but Japan wants muscle cuts,” Seng notes. “So sales there can really move the needle, and that’s important to the profitability of our industry.” That’s no small matter, as nearly 50 percent of a market hog’s value comes from exports.
For 2012, Seng looks for U.S. pork sales to Japan to increase 1 percent.
South Korea: U.S. exports to this market more than doubled in 2011 versus 2010, driven by a foot-and-mouth disease outbreak that reduced the swine herd by 30 percent. To meet pork demand, Korea’s government suspended its tariff-rate quotas several times, which opened the door for substantial picnic and belly sales.
South Koreans are rebuilding their hog herd, but there’s still future potential in that market. At 491,000 metric tons of pork imported annually, it’s comparable in size to Mexico, which imports 456,000 metric tons.
“We’re down about 27 percent in South Korea this year,” Seng notes, “but recognizing that we doubled our exports in 2011, we’re still ahead of 2010.”
China/Hong Kong: Even though China is 99 percent self-sufficient in pork production, it’s the crown jewel for exporters based on volume alone, because China consumes half of the world’s pork. “China’s producers are challenged to keep pace with China’s economic growth and pork demand,” Seng points out, “and we see that continuing ad infinitum.”
That growing pork demand helped move 485,000 metric tons of U.S. pork into the China/Hong Kong region last year, as the government worked to quell food and overall inflation. “Pork is a strategic commodity in China and pork prices are key to stability,” Seng notes.
U.S. pork sales this year are likely to be softer, as China's pork production is up and its government is trying to balance producer profits to ensure longer term productivity.
But China’s less-than-transparent market is ripe with challenges — government policies, animal diseases and weather’s impact on crop production are all wildcards that can change that market’s direction. “There will always be opportunity for us to sell to China,” Seng says. “There is something like 160 cities in China each with 1 million or more people. You simply have to pay attention to China.”
Looking further out and across the globe, Seng points to urbanization as well as information and communication advances as major beneficial changes. Growth in supermarkets and “big box” outlets are more accommodating to exports. “These are opportunities; they understand our product — the reliability and safety of it,” he adds. It also aligns well with branded products, which works in U.S. pork’s favor.
But the competition will not let up. Seng points out that many pork-importing countries also want to export pork. “For consumers, that means they can have more of what they want,” he adds. “For producers, there’s so much diversity, it makes export opportunities extremely positive.”