By Steve Meyer

Steve Meyer is an Economist for Kerns and Associates.

In the spring edition of Pork Checkoff Report magazine, I discussed how low production costs and the Lean Hogs futures market pointed to an average profit of $26 per head for low-cost producers in 2018. Yes, that discussion. Well, things change quickly sometimes, do they not?

My production cost model now points to a break-even of $65.22/cwt, carcass, for low-cost producers in 2018, up from $61.79/cwt in February. As of late May, this is the highest since 2014 when the last effects of policy-driven ethanol production and the 2012 drought held average production costs above $71/cwt.

Production challenges in Argentina and a cold, wet spring in much of the United States have driven future prices for feed ingredients higher. Record-late snowfalls in northern and western growing areas provided challenges. But planting progress was impressive in May, and we will go into June in good shape.

Most weather forecasts indicate slightly wetter and cooler conditions this summer. That’s a recipe for good yields. Add a good crop to large projected year-end 2017-2018 stocks, and we should see lower input costs eventually.

The hog market is another matter. In February, the nine Lean Hogs futures contracts for 2018 averaged $75.18/cwt. Combining average cash prices for January through April and CME Lean Hogs futures prices for the rest of the year, it’s now $68.20, a decline of nearly $7/cwt or about $15/head. What happened?

I do not believe it is pork demand.

Though questions abound about future U.S. trade relationships, that hasn’t had a huge impact on U.S. exports. Through March, which is the most recent data, U.S. pork muscle-cut exports were up 5.3 percent in volume and 8.3 percent in value from a year ago. Pork variety meat exports, which set a record in 2017, were down 14.8 percent in volume and 8.6 percent in value.

Total Exports Up from 2017

Total pork and pork variety meat exports through March were still up 1 percent in volume and up 5.9 percent in value from last year. Muscle

cuts have been a clear winner so far in 2018. Lower variety meat exports took about $2 per head off total by-product values as computed by the Livestock Marketing Information Center.

Domestic demand also has been strong. Real per capita expenditures (RPCE) for pork exceeded year-earlier levels in January, February and March, and for the year were up 2.4 percent. During the same period, beef RPCE fell 0.9 percent year-on-year and chicken RPCE fell 3 percent.

There is one caveat to pork’s strong demand story: Late-winter storms in the northeast disrupted food demand. Due to the storms, consumers ate out less often and did less grocery shopping. Not eating out one week does not translate into eating out twice the next.

The disruptions may not be accounted for well in the RPCE calculations because inventories held by food stores, foodservice outlets or supply warehouses are not reflected in USDA data. Anecdotal evidence from foodservice and retailers support that the disruptions did occur. The soft performance of chicken and beef demand adds support since those species have more exposure to foodservice demand.

Large Market Numbers

So that leaves supply, and it has been huge, not unexpectedly so, but huge nonetheless. On average, we harvested 11,159 more hogs every day from Jan. 1 through May 11. Daily harvest averaged 399,967 head, up 2.8 percent over last year.

Higher weights added 0.8 percent to year-on-year production growth. Export growth has taken about 1 percent of the growth while a higher population has accounted for 0.7 percent.

That left 1.9 percent more pork for every person in the United States. This put pork buyers in the driver’s seat and pressured wholesale pork prices and pork cutout values, which in turn has kept a lid on packer bids for hogs.

Some observers expected the same kind of big run for hogs this summer that we witnessed last year. I was never in that camp and still am not primarily due to one factor: Bellies.

Frozen bellies stocks were historically low from the fall of 2016 into the spring of 2017. When seasonal slaughter reductions arrived in May 2017, bellies prices exploded to a record of more than $2.20 per pound, adding about $18/cwt to the cutout value and pushing cash hogs into the lower $90s.

Belly inventories this year are back to their five-year average, so the rally that we saw last year is unlikely. In fact, belly prices finally worked their way back above $1 per pound the week of May 18 and will likely peak at $1.20 to $1.30. Belly prices $0.90 per pound lower than last year would take $14.40 off the cutout value – and hog prices – versus last year.

The new packing plants opened last fall have been a godsend given the larger supplies and will continue to be so. Delays in ramping up those plants, however, have meant that supplies relative to packer needs have remained fully sufficient.

Packers seldom have had to scramble to find enough hogs to keep plants running at comfortable throughput levels. Yet packer margins have been significantly

tighter than last year, which has reduced the incentive to push plants to their fullest throughput rates.

Seaboard-Triumph’s plant in Sioux City, Iowa, has delayed adding its second shift until 2019. The Prestage

Farms plant in Wright County, Iowa, might harvest a few pigs in 2018, but will not run significant volume until next year. We have sufficient packing capacity to handle expected hog supplies this fall, but hogs initially slotted for those two plants will have to find another outlet, tipping the supply-versus-needs balance further toward packers.

“Will Rogers once said that he was more concerned about the return of his principal than the return on his principal. Now may be time for that mindset.”

– Steve Meyer

What Can Producers Do?

It’s almost always more fun to play offense as a marketer, but there are times that you must play defense. Futures markets are still offering a profit and there are strategies to protect those profits. Some even allow you to benefit if markets reverse.

Know your costs. Study your balance sheet to determine how much risk you can stand. Talk to your banker and marketing advisor now and develop a plan that protects what you have worked hard to earn.

Will Rogers once said that he was more concerned about the return of his principal than the return on his principal. Now may be time for that mindset.