Pork Industry Economic Outlook Cautiously Optimistic

North American pork producers have reason for optimism on prices and cost of production through 2012, says leading industry economist, Karl Skold, speaking at the 2012 Banff Pork Seminar.
calendar icon 7 March 2012
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However, caution is called for in equal measure in a world facing instability in the wake of the global economic downturn, according to Mr Skold, reports Meristem Land and Science.

“The signs are positive but there’s a bit of wait and see,” said Mr Skold, who is president of Midwest–US–based Westside Economics. “Overall the fundamentals are promising and looking more solid than they have in recent years. We’re seeing transitions in the markets that should benefit US and Canadian pork production.”

At the 2012 Seminar attended by over 650 pork industry players from across North America and around the globe, Mr Skold provided a rapid-fire yet detailed analysis of the many intertwined and dynamic factors shaping this outlook.

Karl Skold

Here are a few snapshots of what Mr Skold sees as the key factors.

The Big Picture

At a macro or global level, there is significant volatility and lots at play, said Mr Skold. Europe is likely moving into a recession. The US economy is showing some improvement despite an array of challenges. There are overall lower rates of growth in developing economies. China shows slowing growth but at around nine per cent, is still moving at a very strong rate.

“There are some headwinds against commodity markets which overall is fairly good for hog producers,” stated Mr Skold. But caution is the order of the day as the world finds its way in the wake of financial shock, he says.

“The history shows the types of collapses we’ve seen aren’t normal and take a while to get through, so we need to bear that in mind,” he said.

American consumer sentiment remains fragile and the country’s debt is a looming issue, he says. Crude oil is on a solid upswing, which may cause headwinds in Canada’s favour. Weather issues in South America due to La Niña have cut the Argentine corn crop. And drying across the western US and western Canada is a potential factor to watch.

Feed Grain Picture

Feed grain markets also show encouraging signs for pork producers, said Mr Skold. Corn futures suggest much lower prices than in 2011, with under $6 a bushel likely for 2012.

He continued: “We’re anticipating really favourable prices among all feed grains. Big reasons include higher production of crops outside the US, the shift in US ethanol policy to end subsidies, and the overall transition from the demand-led markets we’ve seen that are now catching up with supply. Ethanol, in particular, has really driven the market and now we’re seeing the emergence of a more supply driven environment.”

Soybeans markets are likely to be pretty flat.

Mr Skold explained: “The big driver outside the corn crop is going to be China and what they do. They’re importing 60 per cent of the world’s soybeans and are likely to continue to import at a very strong level this year.”

The short-term bottom line is that current crop year prices will likely find support, he says.

“Unless there’s a shock, we’re looking at a promising scenario for the cost of pork production in Canada and the US.”

Pork Picture

Coupled with the good news of the feed costs outlook improving, there are signals of continued strong and rising demand for pork.

This is one of the most solid factors pork producers and their industry can bank on, said Mr Skold.

He continued: “World consumption of pork continues to expand with income growth. This is a pretty foundational long–term projected trend that is very promising for pork–exporting countries that can maintain disease-free and efficient pork production.”

In the short-term, however, there is some tempering of expectations following more favourable than anticipated conditions in 2011, he believes.

Mr Skold explained: “When we look back at the past year, we saw export factors really drive the market. We had the South Korean foot and mouth disease situation, the Japan earthquake and China’s attempts to control inflation by increasing pork imports starting last August. Those are three huge events that gave a lot of upside in 2011 that won‘t happen this year.”

He sees the overall export market declining about four per cent in 2012, which is not necessarily a bad thing.

He said: “It’s okay to take a breather. In 2011, we had a seven percent jump so we’re still looking pretty good overall.”

For the next couple years, the crystal ball shows modest productivity growth for Canada and the US coupled with the flattening of exports.

“Another factor that may come into play to benefit the pork sector is reductions in competing meat supplies, with pork likely to be very favourably priced relative to beef,” according to Mr Skold.

Overall, there is not much to complain about, particularly for a Canadian industry that has struggled through four years of extremely challenging conditions.

Me Skold concluded: “If we can see stability and improvement at the macro level, all these other factors should add up to support fairly good margins for pork production.”

Further Reading

- You can view other articles from the Banff Pork Seminar 2012 by clicking here.

March 2012

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