By Steve Meyer
One of President Harry Truman’s frequent admonitions was “Study your history!” He was a firm believer in the lessons that can be learned from a thorough understanding of the past. So am I. So, as we begin a new year, some retrospection on the factors that have made the U.S. pork industry successful is in order.
Subsidized and mandated production of corn-based ethanol pushed corn demand upward faster than U.S. farmers could respond and prices rose sharply. Throw in the first real drought since 1988, and you end up with 2013 and 2014 costs that were nearly double those of 2006. But that’s all behind us, right? Yes, until the next drought comes along, but even one drought likely won’t take us back to $80-plus costs. Three great crops in a row have set up a good run of affordable feed prices and resulting low costs.
Demand remains strong. After a post-Atkins Diet slump was exacerbated greatly by the Great Recession, pork demand has come roaring back, reaching its highest level since the mid-1980s in 2015. The debunking of 1970s and ‘80s hysteria over dietary cholesterol and animal fats has given U.S. consumers permission to eat things that taste good, and pork fits the bill. Real per capita expenditures (RPCE) for pork hit record highs in 2015. While RPCE was lower in 2016, it has held its own this year, which indicates that domestic demand is solid. Continued economic recovery bodes well for 2018.
Market hog numbers continue to increase far faster than does the breeding herd. The obvious implication is that U.S. producers are getting more efficient. Also, the chart shows that the hog cycle is, for all intents and purposes, dead. There is little variation in the size of the breeding herd, and the only regular variation in hog numbers is a normal seasonal pattern.
The only exceptions to these statements since the late 1990s have been two animal health-related episodes. The first was the introduction of circovirus vaccines in 2007 that enabled millions more pigs to reach market weight. The downside of the vaccine’s introduction was that it, along with the higher grain prices mentioned earlier, drove roughly 500,000 breeding animals out of production.
The other animal health episode was, of course, porcine epidemic diarrhea virus (PEDV) in 2013 and 2014. While tightened hog supplies were a boon for prices, producers always put the welfare of the animals first and wouldn’t want to go through that experience again.
Exports are once again a big driver of pork industry success. After rising steadily since the late 1980s, U.S. pork exports had stopped growing since 2011. Most analysts expected 2017’s growth to be a modest 4-6 percent. But a surprisingly weaker U.S. dollar has helped exports grow by 8.2 percent over 2016 levels through October, the last month for which data are available. If that rate holds for November and December when new data is released, 2017 exports will set a new annual record near 5.8 billion pounds, carcass weight. Exports through October accounted for 26.4 percent of total U.S. production.
What about 2018? The cost situation is pretty well set for this crop year. Demand was on an upward trajectory for the second half of 2017, and for the year may end up higher than 2016. Productivity continues to grow. The modest rate of breeding herd growth in recent years will still provide significantly more market hogs barring a negative animal health event. Both PRRS and PEDV are well controlled at the moment but bear careful attention as the winter progresses. Finally, a weaker U.S. dollar that appears to be staying near its pre-2017 levels is a good harbinger for exports. Production reductions in the European Union will open up some opportunities. The question of “How much export business is too much – or too risky?” is still present. But the industry knows rewards do not come without risk. Best wishes for a happy and prosperous New Year!