Market Outlook

Posted on

A variety of negative factors are influencing the hog market. Kerns and Associates economist Steve Meyer offers insight into the dynamics at play in the hog trade, which includes large swine inventories, trade disruptions and competition from other proteins. Learn more in this edition of Pork Pod.


Don Wick


Steve Meyer, Kerns & Associates




Don Wick: 00:00 From the Pork Checkoff in Des Moines Iowa, its Pork Pod. Pork Pod, a look at the hot topics in today’s pork industry. The Pork Checkoff is working for you through various forms of research, promotion, and consumer information projects. I’m Don Wick speaking on behalf of the Pork Checkoff, and today our guest is Steve Meyer, economist with Kerns and Associates, and certainly this hog market has been under pressure. Steve, let’s take a look at it. What do you see as the factors behind this downturn?

Steve Meyer: 00:32 Well there’s just kind of everything negative. You’ve got hog numbers that are big. You’ve got packer margins that are lousy. You know, we’ve got plenty of other proteins on the market, as well, with beef production up substantially this year and chicken production has grown some. Actually chicken is lagging the others as far as growth. And then all of the negatives about trade with China and with Mexico, for sure. And then you know, the rumblings with the EU, which kind of got a little better this week, but it’s just been negative, negative, negative. And then we know that the futures market is kind of, it’s not quite as emotional as a teenage girl, but it’s close, or a teenage boy for that matter. When that happens, you know, it’s an overreaction and we still think that the cash market will probably be a little better than what the futures indicating now. But you can’t rule out, you know, that this thing could be a pretty lousy this fall.

Steve Meyer: 01:29 Our cash forecasts are well down around $50, but we don’t have anything but 40s on our cash forecast right now. So we think the futures markets a little bit overcooked to the downside, but still there’s not a lot of positive news out there. And this August close, it looks pretty ugly. If that could be the worst of it, you know, we’d feel pretty good about it, but I’m not sure that’s going to be the case either. So the best solution will be, get these trade things solved. That would be a shot of positive, a sentiment that would really help things.

Don Wick: 02:02 Watching those pork carcass values, bellies have been taking a hit as well. What’s happening there, Steve?

Steve Meyer: 02:09 Well, that’s because bellies, if they’re high, they’re going down and if they are low, they are going up. Ok? I mean they just, it’s just a rollercoaster and they traded to a $1.70, that’s $30 higher than I thought they would go. And then kind of a normal season would go, but I’d have no idea what a normal seasonal is for bellies now. I mean, it’s just this wild rollercoaster that we’ve been on for about three years and we’re still on it. I mean, these bellies are probably going to go to a dollar or less here in the next few weeks. But we’ve heard of some companies offering large amounts of bellies for a dollar or right around a dollar here out into the future. And that, that tells me that that will put some kind of a floor in this market and then we’ll get people that get on the bandwagon of featuring them again and push them back up.

Steve Meyer: 02:55 And so, it’s just a wild rollercoaster with bellies. They went higher than we thought. Now they’re going to go a little lower than what we thought. And so, you know, I have clients that I tell them, look, I’ll give you my belly forecast, but I, I don’t even, I don’t believe it myself, but I don’t know what else to do. So that’s kind of where that is. But the good news is when you get bellies cheap, you do attract featuring and sandwich usage and those kinds of things. And so we think we can put a floor in them here somewhere around a dollar, hopefully above a dollar. But my guess is we’ll go {inaudible}.

Don Wick: 03:31 While we’ve seen pressure in the hogs, the feed bill has gone up a bit as well with come back on some of these grain and oil seeds. How much of an impact does that have?

Steve Meyer: 03:43 Well, it’s certainly going to have an impact. I mean, in this kind of hog pricing scenarios, you’ve got to get your costs as low as you can. And this little rally we’ve seen here in the last couple of weeks certainly has pushed those costs back up. Now we do think that a lot of producers moved aggressively to lock in some prices on corn and soybean meal here a few weeks ago. We, you know, getting some pressure on bean meal into the future is not out of the question. It all depends on August rains here. The corn story is proof positive for price at this point, even though we’ve got a big crop here, you had a short drop in South America and we’re kind of the only game in town on that one. Beans on the other hand, could have some pressure on them as we go through August. So producers should be, in my, in our opinion, aggressively trying to get their cost laid in here for the coming year and you know, given where the prices are right now, the best producers out there going to be in the 64, 65 range. The lower you can get that number, the better this hog price situation will be for you.

Don Wick: 04:52 We have gone through a time of pretty steady expansion. With all the anxiety that we’ve got here, and I look back to that last Hogs and Pigs report, do you see that that backs off somewhat here?

Steve Meyer: 05:03 Well, I think it will. Now normally it takes, it takes the better part of a year of losses to get us to reduce the breeding herd. And I’m not sure we’re going to reduce the breeding herd, we will just stop growing it for a while. That’ll help. But, you know, we’re going to go into losses this fall. Well, we’re already there on some of these hogs. The thing we’ve got to remember is that quoted cash price is 60 something. The net price being received by producers is still well up in the 70s. There haven’t been any losses incurred across, on average, yet. Those guys sell them on the spot market. Yeah, they might have. But if we looked at the industry, it’s still been profitable. We’re going to get into some losses this fall. We will have losses in the spring. We’ve got some profits next summer and then losses again in the fall.

Steve Meyer: 05:50 And so that kind of outlook will probably get, you know, if they’ve got projects out there for sow herd expansion that haven’t been started or, you know, are still on the books, we think we’ll probably start hearing of some of those getting delayed or canceled outright. One of the things we have to remember is steel has gone up tremendously over the last three months. And so the cost of putting those buildings in has risen pretty sharply. So, we think those things will probably start slowing us down some, but still, you know, that three and a half percent larger breeding herd on June 1 was a big shock. I can’t rule it out, you know, we’ve been running in this one to two percent range for a while. And so, we think that there are going to be enough losses and negative sentiment out there to slow things down.

Steve Meyer: 06:41 Now, we get to deal with Mexico next week. That’s all probably off, because I think we would solve some of this. And again, we wouldn’t be at a robustly profitable position, but we wouldn’t be looking to very large losses going forward if we were to get the trade situation with Mexico solved. And China would be gravy on that. China is not nearly as important as Mexico in this deal, but, China will be a positive as well if we could do something there. But what we’re hearing is the Mexico thing is a possibility, the China one is a little farther off probably. I think one thing that we ought to remember is that, through June, through May, which is the last data we have, domestic demand is still good. I mean, people are still buying a lot of meat and they’re buying it at very good retail prices.

Steve Meyer: 07:30 And so, you know, the spreads between the retail price down to the farm price have widened, but if we can maintain retail prices that keeps the revenue coming in, that can get back to producers. I think that’s a positive for us. And so demand has been pretty strong. The economy is still relatively strong. There are a few storm clouds on the horizon and so we’re a little concerned about demand in ’19, but in the short run here, I think meat demand, domestic meat demand is still pretty strong and that it’s going to get us through this better than it would be otherwise.

Don Wick: 08:09 Steve Meyer from Kerns and Associates. Thanks to you for listening to this edition of Pork Pod. For more information on this topic or the Pork Checkoff itself, visit