It is no surprise that the prospects for the global pork industry have taken a downturn due to rapidly rising feed costs. Pork producers’ hedge positions, ability to source feed and liquidity will be differentiating factors moving forward. It also will be important for the industry to push cost increases downstream and share risk.

The U.S. drought conditions and their impact on feed grain costs have changed the picture since USDA collected data for its June Hogs and Pigs Report. The price of September corn futures on June 1 was $5.145 per bushel. By June 29, when the report was released, September corn futures had rallied $1.14 per bushel, or 22 percent. By July 16, September corn futures had rallied $2.62 per bushel, or 51 percent; and feed grain prices continue to rise. With the economic indicators from USDA’s report changing, it seems logical that actual fourth-quarter farrowing intentions will drop radically from the 2.89 million head predicted in the June report.

The severe drought conditions will likely impact not only the corn crop’s quantity but the quality. Crop quality tests have shown light test weights for corn and a greater risk of aflatoxins, leaving feed quality in question.

In addition to the grain price challenges, currency values have discouraged U.S. export sales. Year-to-date U.S. export sales and projections have fallen below expectations, resulting in a shift of the grain-rationing burden to the livestock sector.

The high feed cost challenges don’t end at the border; rather they impact the global pork picture. Declining pork production into 2013 will result in a price rebound, but it remains to be seen if it will be sufficient to cover feed costs, which will remain elevated at least until mid-2013. The situation is such that sufficient sourcing at any price is a primary concern for pork producers and processors.

Canada has a somewhat different outlook, as pork will likely remain at elevated levels with some pressure due to herd liquidation later this year. A mitigating factor is the relatively good grain harvest in Canada, which might give the Canadian pork industry a competitive advantage into 2013.

In Brazil, the slight drop in corn values was not enough to offset rising soybean meal prices, which increased 32 percent between March and June. Meanwhile, hog prices declined 4 percent over the same period. The scenario could have been much worse if exports had not been so strong. Supported by a depreciation of the real, exports absorbed part of the domestic supply surplus. The recent acceleration in herd liquidation also may lead to a lower supply and stronger prices in the second half of 2012. The relatively good feed situation might give Brazil a competitive advantage into 2013.

At current prices, breeding farms and piglet suppliers in China can only break even or make thin profits. China’s sow herd has declined to 47 million head, which indicates producers are shifting their views on the 2012 and 2013 market potential, and the hog supply recovery will be postponed.

China’s pork imports reached a record level in the first five months of 2012, up 40 percent from the same period in 2011. Pork imports will likely become an important sourcing channel for the domestic market.

In the European Union, second-quarter pork prices continued strong, supported by the seasonal upswing, unexpected export demand (aided by the euro’s depreciation) and stable-to-slightly-declining production. Pork prices are expected to remain relatively strong through the rest of the quarter. Toward year’s end, herd liquidation could pressure prices lower.

Japan’s pork consumption should remain flat for the second half of 2012, while import volume should recover steadily, given its declining price and reduced ending stocks. The United States accounts for 47 percent and Canada another 21 percent of the imported volume and continue to gain leadership against Denmark, which declined to a 13 percent share.

Mexico’s hog prices have seen their lows for the year. Gains in international prices and decreased domestic hog supplies pulled prices up in July. Still, second-quarter 2012 was difficult for producers, and rising feed costs will make the rest of the year even more challenging.

From a packer standpoint, possible herd liquidation is likely to increase hog supply and limit the margin pressure from high hog prices for non-integrated pork processing companies. Rabo AgriFinance expects hog production to decline in 2013, re-applying pressure on pork packing margins.

With the many pork sector challenges, astute risk management will be required, and Rabo AgriFinance recommends a written plan. Have an established time window of weekly or bi-weekly evaluations and revise your marketing plan accordingly. Have a commodity broker and marketing advisor in the risk-management loop. Given the anticipated volatility, all participants in the process will be better prepared to handle unanticipated situations with the fewest surprises.

Editor's note: Rabobank and Rabo AgriFinance provide clients with access to reports and research, including a quarterly pork report, from our Rabobank Food and Agribusiness Research and Advisory team. If you’re interested in learning more, visit RaboAg.com.