As spring arrives, it is time to contemplate what transpired this winter. It is also time to congratulate ourselves and our pork chain partners for getting through what could have been a horrible period in relatively good shape. In fact, the recent past has set up 2017 to hold promise that some didn’t expect.
Last fall, pork producers appeared to have the odds stacked against them. A near-record slaughter week occurred in late September, and packing capacity was almost surely not sufficient for the animals coming to market.
“Luck is where preparation meets opportunity.”
Exports were lagging year-ago levels. Domestic demand was, as expected, down from the robust levels of 2015, but observers wondered if it would remain even close to that given given larger beef and chicken supplies.
Quoting Greek philosopher Senenca, Indy 500 Champion Johnny Rutherford once said that “luck is where preparation meets opportunity.” This is exactly what happened with the pork industry over the fall and winter.
The same preparedness will be needed again this year, but we should relish new opportunities because of how we handled the most recent ones. Some 2017 factors to keep in mind are:
The Numbers – Just the magnitude of the supply numbers last fall was impressive. Annual 2016 slaughter was a record 118.203 million head. Every quarter set records, with the fourth quarter’s 31.516 million head shattering 2015’s record by 3.8 percent.
The two largest slaughter months ever were recorded in November and December.
Records also were set for pork production for the year (24.939 billion pounds), each quarter and in November and December. Those are big opportunities that will likely be repeated – and more – in 2017.
The Hard Work – Q4 slaughter was 3.8 percent larger than a year earlier while record Q4 pork production was only 2.9 percent larger. Perhaps “only” is not an appropriate modifier, but it makes the point that a lot of hard work went into keeping production growth a bit lower than slaughter growth.
The factor that drove the difference was hog weights that barely grew from September through December due to the hard work of producers and packing plant workers. Getting 31.516 million head to packing plants in a timely manner took vigilance and many, many hours.
If hog numbers had backed up and added pounds to the already-record production, it could have been disastrous.
Low, but Solid Prices –
I don’t celebrate low hog prices very often, but those lows just above $41 for the national negotiated price in November could have been much worse.
Why? The supply of hogs and the demand for hogs were both nearly perfectly inelastic this fall. The inelastic supply is just a fact of life for hogs – the number ready for market in any given week is predetermined by past production decisions. A certain number must go to town regardless of the price.
The inelastic demand curve was the result of packing plants working right at capacity. Producers could bring no fewer hogs. Packers could process no more.
That mixture allowed prices to fall to $10/cwt in 1998. Packers made record profits but could have made more if they focused on short-term gains and not the long-term health of their businesses and the industry as a whole.
Pork movement – Domestic pork disappearance was a record 20.866 billion pounds, carcass weight, in 2016. Every quarter set records, as well. Q4 frozen pork stocks were down 25.7 percent when production was record high. Q4 exports exceeded last year’s level by 14.5 percent.
A furious comeback –
After bottoming at $41.71 Nov. 25, the national net negotiated hog price gained $27.70/cwt or 66.4 percent by Feb. 7. That kind of winter rally is virtually unheard of and is a testament to several of the above factors. An $80/cwt rally in bellies was key to the rebound, but the driver was exceptional bacon and bellies usage that drew inventories sharply lower.
Profit opportunities –
While fall and winter were better than expected, November lean hogs, corn and soybean meal futures implied that Iowa farrow-to-finish producers would lose nearly $7/head in 2017. But the same model and prices in early February showed producers could lock in $6.70 per head for the entire year.
Were producers lucky in 2016? Absolutely. Preparedness met opportunity. Will they be lucky again in 2017? Only if they are equally prepared to seize the opportunities at hand.