Can US Pork Supply Match Demand?

Regardless of the means by which a reduction in the US pork supply occurs, a reduction is needed for the health of the industry moving forward, write Justin Fix and Todd See in the October issue of Swine News from North Carolina State University.

20 October 2009

7 minute read

Numerous reports through various media outlets have described the dismal economic conditions faced by both the US and Canadian pork industries. For various reasons, the economic climate of both industries tend to move in tandem and behave fairly similar; however, the focus of this article will be the US pork industry.

Obviously, costs and revenue structures vary between region and producer; however, during this time there have been reports of farrow-to-finish producers losing upwards of $30 per head with an average of approximately $21 [1]. These losses stem from what seems to be a perfect storm of bad news for swine producers, which has led to dramatically increased costs to produce and reduced market prices for their product.

In last month’s Swine News, Dr Kelly Zering discussed some of the causes of the current conditions. To summarise, initially the losses stemmed for dramatic increases in corn and soybean meal prices which make up a considerable portion of the total feeds costs. Consequently, of the cost to produce a hog to market weight, the largest portion is attributable to feed costs, shot up. During the early stages of unprofitability, pork prices were still relatively high; however, corn prices have come down off their highs but demand for pork has decreased.

This reduction in demand is attributable to the current state of the US and global economies and consumer fears of the H1N1 virus. Together, this has caused a reduction in both domestic and foreign demand for US pork [2]. Recent report [3] on US exports of pork through July showed year to date numbers 10 per cent below last year’s but still ahead of the same time period during 2007. While overall exports are down, the year-over-year change varies between countries. Country specific details are:

Even prior to the H1N1 outbreak, exports to China had slowed and following the outbreak, bans of US pork by China and Russia greatly reduced their demand.
Demand from Russia appears to be returning somewhat; unfortunately the ban by China is still having a negative impact on the demand for US pork.
Prior to the H1N1 virus, US exports to Mexico were far above last year’s amount. Unfortunately, after the outbreak, demand for US pork in Mexico was greatly reduced for a period.
Demand from Mexico appears to have returned from the lows immediately after the outbreak of the H1N1 virus.
Exports to Japan, the leading importer of US pork with respect to value, continue to be positive and are up modestly in terms of volume but up over 10 per cent in value for 2009 versus2008.

Based on simple supply and demand, for producers to become profitable again, there needs to be a reduction in the supply of pork coming to the market or an increase in the demand. Unfortunately, producers have very little impact on increasing demand for pork. Other than supporting organisations working to increase demand through marketing promotions or promoting their product themselves, there is little that can be done. Therefore, the only way producers can significantly impact the price of pork is to reduce supply, which will drive up price. There are several methods to accomplish a reduction in supply: mainly, a reduction in pig slaughter weights and/or a reduction in the sow herd.

Iowa State University economist, John Lawrence, suggests reducing slaughter weights could potentially reduce the problem of excess pork supply sooner. However, Dr Lawrence notes this will lead to a near term increase in supply due to earlier marketing of lightweight pigs with current heavier pigs and go against current packer incentives for heavier carcasses [4]. Some producers have implemented this strategy for recent slaughter weights with respect to slaughter weights in 2008 [5]. Furthermore, if and when demand begins to turn around, a reduction in supply due to lighter slaughter weights is potentially easier to overturn and subsequently increase supply, compared to a reduced breeding inventory [4].

The other alternative is a reduction in the sow herd. This option seems to have had more emphasis placed on it, at least through the various media outlets. Earlier this summer Smithfield Foods, the largest US producer, and Tyson Foods, another large US producer, announced plans to reduce their sow herd by 27,000 and 20,000 sows respectively [6]. This comes on the heels of Smithfield Foods’ 2008 announcement of a planned reduction of 100,000 sows [6].

The Pork Powerhouse® 2009, which provides changes in sow numbers from 2008 to 2009 for the 25 largest US swine companies was recently published [5]. Of the 25 largest companies, 15 reduced numbers, eight maintained the same numbers, and only two increased the number of sows from 2008 to 2009. Combined, these top 25 produces account for approximately 50 per cent of the sows in the US and their total reductions from 2008 to 2009 were just over 200,000 sows. Reduction in sows by these producers is in line with the change in the number of sows, based on USDA pig crop data, over a similar time frame (Figure 1). Recent sow market information would seem to indicate that sow culling is beginning to increase once again and sow liquidation is not yet complete [7,8].

Those indicating more sow culling is needed differ somewhat in their estimate of the number of sows needs to be removed. However, most estimates agree the number of sows after liquidation should be around 5.5 million [5, 6, 7, 8], which indicates there is still a considerable amount of additional sow culling that needs to be done.

Sow numbers have declined and appear to be on the path to continue to decrease. However, the ability of pork producers to continue to improve productivity is actually hurting rather than helping in the current situation. During this period of sow reduction, the average number of pigs saved per litter is actually increasing (Figure 1). This is likely due to a combination of things such as improved management, nutrition, genetics, etc. that producers have at their disposal. Another factor is the culling of sows itself: as producers cull sows, they likely are culling their least productive sows within a farm or are closing down their least productive facilities. Also, some producers indicate low levels of culling within systems that were at or above capacity actually improves the overall productivity due to less crowding and less demand on workers [5].

Figure 1. Changes in the US breeding inventory and average pigs saved per litter since March 2007.
^{Adapted from USDA pig crop data}

Regardless of the means by which a reduction in the US pork supply occurs, a reduction is needed for the health of the industry moving forward. All seem to be in agreement that something needs to be done. Even if the worst of the effects of the poor US and global economy and the H1N1 virus are past, it will still be some time before these current economic times are behind the US pork industry. Most reports are for continued negative returns into 2010 with some predictions going well into 2010.