What’s wrong with the hog market? It’s the supply

Beef prices remain positive for pork demand though we think that help will wane as we move through 2018. Chicken prices are neutral to slightly negative but have actually been stronger than we expected in recent weeks. That rally was too late to help March, of course. Incomes are becoming a larger positive factor as tight labor markets (sub-4% unemployment!) push wages higher. And tastes and preference are, from everything we can tell, still much better than in the past regarding protein, animal protein, animal fat, etc.

We think the problem with beef and chicken demand and perhaps pork demand, too, in March was something else: Demand opportunity. Now that’s not an Econ 101 term. I invented it, too. But it describes what happened in late winter and spring as storm after storm moved through highly populated areas of the East Coast. People had to stay home and what showed the biggest impact? The two species with the largest exposure to foodservice usage. It fits our hypothesis pretty well. Or at least our biases. Pork RPCE may have been even better had it not been for these demand interruptions.

• Exports were larger than one year earlier for the seventh month in a row in March at up 2.7%. March marks 21 of the last 22 months for which that claim can be made. More important, U.S. pork exports were record large on a carcass weight basis. March’s year-to-year increase was smaller than those of January and February so the year-to-date increase slowed slightly but it is still 5.8% even with Mexico and Japan down (by 2% and 2.1%, respectively) for the year.

Those declines have been made up for by huge growth for Korea (+34.5% and record large in March), the Caribbean (+18.4%) and “other” markets which include Australia, Colombia, Hondurans and Chile (+17.5%).

• It is important to note that exports to China and Hong Kong fell 8.8% short of last year’s level in March. That is well before any tariffs had been imposed on U.S. pork. This decline is symptomatic of China’s hog supply and price situation. They have plenty of pork and it is cheap. That is the reason we have stated that we think the tariffs will do little to impact our exports to China/Hong Kong because those exports were already going to be much lower than in recent months.

One soft spot in exports has already been revealed. Pork variety meat exports were down 10% in volume and 7.2% in value, year-on-year, in March. Year-to-date, variety meat exports are down 15% in volume and 8.6% in value. While shipments to Hong Kong, China and Mexico — our three largest variety meat markets that typically account for about 90% of all variety meat exports — are all lower, the decline for China through March is much larger than for the other two. Year-to-date shipments to China are down 31% in volume and 25% in value so far this year. Note again that these are through March, before any tariffs were imposed. They are likely the result of higher Chinese hog supplies.

So what’s wrong with these markets? It appears to us that the main (and perhaps only) culprit is supply. Those will tighten seasonally as warm weather has its impact but year-on-year increases will remain large through the end of 2018 and in to 2019. Supplies for the first half of ’19 are already pretty well programmed. We will have another shift at one of the new plants and another large, modern packing plant operating next year. But those help hog demand relative to hog supply. They exacerbate the pork supply versus pork demand challenge. And that challenge could get worse if the situations with the North American Free Trade Agreement and China are not reconciled successfully.

Look at your costs, your balance sheets and your risk preferences. It is likely time to play defense. St. Ceteris Paribus has done his job so far. Let’s hope he continues.