Throughout the summer pork markets looked bleak. Pork producers received blow after blow. They were slapped with impending trade war, retaliatory tariffs, decreases in demand and more. The outlook is still indicating losses. However, those losses may be much less than originally anticipated.
According to the recent USDA inventory report, pork producers said they were continuing to expand the breeding herd by 3.5 percent above year-previous levels. The breeding herd has been expanding steadily since PEDv broke in 2014. Lower feed costs have also contributed to this increase.
Additionally, producers reported a 3 percent increase in the market herd. This represents the supply of hogs to come to market over the next five months.
Farrowing intentions for this fall and winter were up as well. These numbers saw a 2 percent increase and increased pigs per litter. This means the the number of market hogs in the spring and summer of 2019 look to be up 3 percent.
Pork production will reach record levels in 2018 near 26.5 billion pounds. That record is expected to be broken in 2019 when production may reach 27.3 billion pounds-another three percent increase.
Low, But Not Lowest
This summer, we saw one of the largest drops in hog prices in recent history. So, why did lean hog futures collapse in the summer? Futures markets anticipate supply and demand conditions into the future. From time to time, anticipation of undesirable news is not as severe as originally thought. This seems to be the case this year.
This situation is largely due to negative impacts caused by retaliatory tariffs from Mexico and China.
Pork exports represent 22 percent of production and thus have become very important to the price of hogs. In addition, the tariff situation was a new event with little historic precedent for the market to draw on.
The magnitude of this drop was immense. For example, December lean hog futures fell from about $60 in June to $44 by early August. On the bright side, prices have recovered most of the decline, rising back to $58 by September 28.
The new question is, what now? What lies ahead for the export market? What do we know now about the influence of tariffs?
First, we can relate that USDA analysts expect pork exports to rise by a strong 6.3 percent this year. Official Census trade data through July show that exports had been up 6.5 percent which is encouraging.
July was the first month with the full effect of Chinese tariffs in place. July pork exports to China and Hong Kong were down 17 percent. However, exports to Mexico were down only 1 percent. This is crucial as Mexico is our largest export customer. More importantly, total pork exports were up nearly 9 percent due largely to notable increases to Japan and South Korea, our second and fourth largest export buyers respectively.
Weekly USDA Export Sales Reports extend through the week ending September 20 and have total commitments (already exported plus unshipped sales for this year) up 5.3 percent. On this more extensive data, China (plus Hong Kong) commitments for the year are down 32 percent; Mexico is unchanged; Canada is up 11 percent; and South Korea is up 37 percent. Together this information helps support the idea of stronger exports.
Overall, Mexican purchases were not affected much by tariffs. Exports to China and Hong Kong were negatively impacted. However, they represent only 9 percent of 2017 exports. Even so, other buyers increased purchases and more than compensated for these losses.
Agricultural economists shared their forecast prices for the next several quarters following the Sept. 27 announcement of the September 2018 Quarterly Hogs and Pigs Report in a teleconference funded by the Pork Checkoff.
Len Steiner, president of Steiner Consulting Group, believes the Iowa-southern Minnesota hog price for end of the year will be about $56/cwt. This is down about 4.5 percent from last year. However, the price looks to improve from January to March at over $66/cwt, a 3.6 percent increase from a year ago.
Additionally, he predicts $73/cwt from April to June. This is up 12.8 percent from a year ago. For July to September, he envisions $72/cwt. Due to the big decline in prices last August, this is up 31.8 percent. He anticipates the annual average to be up 10.4 percent for the year.
David Miller, director of research and commodity services at Iowa Farm Bureau, says he’s looking at USDA 49-51% carcass price coming in right around the mid-$53 to $55/cwt for fourth quarter of 2018. For 2019, he predicts the first quarter to come in at $54 to $57/cwt, the second quarter to be higher at $60 to $64/cwt, the third quarter at $60 to $66/cwt, and the fourth quarter to end around $54 to $60/cwt.
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This summer, hog markets looked bleak. Though producers are still experiencing losses, those losses are not near the magnitude we originally expected. Tariffs did not have the severe impact we feared and the future of pork exports looks bright. Hopefully this glimmer of hope develops into the light at the end of the tunnel for pork producers.