Pork Outlook Report - June 2005 - By U.S.D.A., Economic Research Service - This article is an extract from the April 2005: Livestock, Dairy and Poultry Outlook Report, highlighting Global Pork Industry data. May was the first month in 2005 when the live equivalent price of 51-52 percent lean hogs fell below year-earlier levels.

Due to uncertainties as to the length of bans on trade in ruminants and ruminant products because of the discovery of BSE in the United States and Canada, forecasts for 2005 and 2006 assume a continuation of policies currently in place among U.S. trading partners. It is assumed that the current delay in the implementation of the minimal-risk rule is temporary. Subsequent forecasts will reflect any announced changes.

May Hog Prices Lower Than a Year Ago

The May 2005 price--$55.40 per cwt-- was 5 percent below the May 2004 price of $58.45, but exceeded the May 2003 price by 27 percent, and remains well above USDA’s estimated May breakeven price of $42.15 per cwt for a farrow-to-finish operation in the North Central region of the United States. The recent weakness of U.S. hog prices is an outcome of supply and demand factors: slightly elevated U.S. pork production and a slowing domestic demand for some pork products.

On the production side, first-half 2005 pork production is expected to be only fractionally above a year ago. With 2005 slaughter numbers running very close to last year, the small year-over-year production difference is largely attributable to higher average dressed weights. Through May 2005, estimated dressed weights have been running almost 2 pounds ahead of last year. When feed costs are relatively low and pork demand is strong, heavier hogs are especially desirable for both producers and processors because per-head costs can be spread over the additional weight of the animal, thus lowering average costs of production and processing.

Pork Cuts Stocks Much Higher Than a Year Ago

On the demand side, it appears that U.S. consumers’ demand for some pork cuts is slowing in comparison with last year. USDA’s Cold Storage reports (http://usda.mannlib.cornell.edu/ reports/nassr/other/pcs-bb/) show that ending stocks of total frozen pork have been building, on a year-over-year basis, since February. The May Cold Storage report indicated that movement of all pork cuts has slowed from a year ago. Total frozen pork stocks at the end of April were 26 percent greater than for the same time last year. In particular, there was a significant increase of year-over-year stocks of bellies (+85 percent), butts (+47 percent), ribs (+37 percent), hams (+29 percent), and loins (+22 percent) suggesting lower consumer demand, at current prices. In addition, the wholesale value of pork cuts, as measured by the USDA Estimated Pork Carcass Cutout, has registered below year-earlier levels since early April, and in May they averaged $75.67 per cwt, almost 8 percent below the average Cutout for May 2004 of $81.89.

Higher Retail Prices and Macro Factors Could Be Slowing Pork Demand

Slower movement and lower wholesale values of pork cuts may be partially attributable to good availability of other animal proteins--beef, and poultry in particular--with poultry relatively well-priced at retail compared with beef and pork. Second-quarter 2005 retail prices of beef and pork are expected to average more than 2 percent above the same period last year, whereas retail chicken prices are expected to decline slightly. So, relatively strong retail red meat prices, together with higher gasoline prices and interest rate uncertainty on the macro side, could be contributing to the moderating consumer demand for pork products. It is also possible that U.S. consumers are to some degree resuming animal protein consumption patterns established prior to the popular weight-loss regimes of 2004.

For 2005, hog prices are expected to range between $48 and $50 per cwt, and retail pork prices are expected to average in the low-$2.80s per pound. This year, per capita pork consumption is expected to be slightly more than 50 pounds, down about a pound from 2004. USDA will release its Quarterly Hogs and Pigs (http://usda.mannlib.cornell.edu/reports/nassr/livestock/php-bb/) report on June 24.

U.S. Pork Exports Skyrocket in April

The record for U.S. pork exports, set only in March 2005, was shattered by sharply higher April exports of 252 million pounds. This means that U.S. exporters shipped almost 15 percent of commercial pork production to foreign markets in April. By comparison, about 11 percent of commercial pork production was exported in April 2004. Strong foreign demand for U.S. pork products undoubtedly provided support to the North American pork sector this spring. Using the seasonal index as a guide, it is likely that exports should begin to slow seasonally into the summer months, before heating up again in the fourth quarter.

Shares of U.S. exports to importing countries in the first 4 months of 2005 are shown in the table below.

Clearly, Japan is the stand-out importing country. A number of factors continue to support Japan’s demand for U.S. pork. In particular, import bans on North American beef and continued interruptions of imported Asian poultry products due to disease issues create additional demand for U.S. pork products. The U.S. dollar exchange rate relative to the yen continues to also favor U.S. pork. The same set of factors likely plays a role in South Korea’s demand for U.S. pork, although South Korean import demand has been volatile historically, often characterized by sudden market entries and exits.

North American Free Trade Agreement (NAFTA) partners, Mexico, and Canada, continue to account for significant shares of U.S. pork exports. So far this year however, Mexico’s year-over-year imports of U.S. pork are only fractionally ahead of last year’s pace. USDA expects that total Mexican pork imports from all sources in 2005 will increase 8 percent. On a cumulative monthly basis, Canada’s imports of U.S. pork have increased 27 percent over the same period last year. Canada’s increased demand is likely a function of the favorable exchange rate between the U.S. and Canadian dollar, and ongoing integration of the North American pork sector.

Although Russia and Romania have been significant importers of U.S. pork to date, continued strong increases in U.S. exports are likely not a “given”. Like South Korea, Russia and Romanian import demand is volatile, often driven more by sudden trade policy changes and logistical constraints than by purely supply and demand factors. Moreover, Brazilian pork will likely continue to provide strong competition to U.S. pork products, in Russia particularly.

Continued U.S. exports to Australia--which has lately become a more visible U.S. export market as a consequence of the U.S.-Australia Free Trade Agreement--could be banned as a result of an ongoing dispute in the Australian courts. “On May 27, a Federal Court in Sydney handed down a decision in a legal challenge of a recent change in quarantine conditions for imported pork. The judge was extremely critical of the methodology used in the government’s recent pig meat Import Risk Analysis, particularly as it relates to Post-weaning Multisystemic Wasting Syndrome, or PMWS. The judge made no final ruling regarding pork imports, but a decision may occur as soon as next week. Australian Pork Limited, who brought the case, is calling for a stop to all imports from PMWS affected countries, which would include product from Canada, the EU and the United States.”

(http://www.fas.usda. gov/gainfiles/200505/146129843.pdf). PWMWS affects pigs from 8 to 16 weeks of age, and is often fatal. PWMWS is a viral infection, first observed in 1991 in North America that has now been detected worldwide. The virus believed to be responsible for the PWMWS has reportedly been detected in Australia, although the disease itself has not. The Australian Government will appeal the judge’s ruling, and will reportedly initiate action to ensure unimpeded import flows during the legal process.

Imports Continue To Decline

U.S. pork imports for April of 76.7 million pounds were 9 percent below April 2004. On a cumulative year-over-year basis, imports for the first 4 months of 2005 fell almost 11 percent below the same period last year. Denmark has borne the brunt of U.S. import declines. So far this year, Denmark’s exports to the United States are off by more than 28 percent, while Canada’s shipments are down by almost 9 percent. Lower U.S. pork imports are most likely a consequence of the lower valued U.S. dollar relative to both Danish and Canadian currency. While the U.S. dollar has declined more against the Canadian dollar (-9.8 percent) than against the Danish krone (-5.5 percent) in the last year, proximity to the United State and strong cross-border commercial ties likely mitigate exchange rate effects for Canadian exporters.

Live Imports Also Decline

U.S. buyers imported almost 603,000 head of live swine from Canada in April, more than 15 percent below April 2004. In the first 4 months of 2005, U.S. imports of Canadian hogs and feeder pigs fell almost 15 percent below imports in the same period last year. Pork industry information published by Statistics Canada (http://www.statcan.ca:8096/bsolc/english /bsolc? catno=23-010-X&CHROPG=1) and Agriculture and Agri-Food Canada (http://www.agr.gc.ca/redmeat/wlmr20050604.htm) suggest that more Canadian pigs are being finished and slaughtered in Canada. In the first quarter of this year, Canadian pork exports had increased more than 5 percent, with 38 percent of total exports accounted for by the United States.

At the same time last year, the United States accounted for 44 percent of Canadian pork exports. Canada thus appears to be succeeding in capturing a greater share of the value added from pork production- -by finishing and slaughtering more hogs in Canada, rather than exporting them to the United States-- and in diversifying its client base on the meat side, to countries beyond the United States.

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For more information view the full Livestock, Dairy and Poultry Outlook - June 2005 (pdf)

Source: Livestock, Dairy and Poultry Outlook - U.S. Department of Agriculture, Economic Research Service - June 2005