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Pork Producers Caught in the "Perfect Storm"

by 5m Editor
15 July 2008, at 10:08am

NEW YORK - After three years of profitability, a new Rabobank podcast explores why producers have been seeing red for the past nine months.

In the podcast, Animal Protein Analyst and Executive Director for Rabobank's Food & Agribusiness Research and Advisory group, Fiona Boal says pork producers are in the middle of a "perfect storm." The industry has an excess supply of hogs, record feed prices and there are some concerns that U.S. demand is slipping.

"What's clear is that the industry is being forced to adjust to a new unique and very difficult operating environment," said Boal.

In terms of supply, weekly slaughter numbers have been at record through the first half of this year. Boal said "by the end of June U.S. hog slaughter was running approximately 10 percent above year ago levels, and pork production was up by similar amounts." Recent reports indicate that these record levels will continue in the second half of the year.

"So, unfortunately, we have lots of meat, and lots of hogs left to process for the rest of 2008," Boal said.

The increase in feed prices, as well as higher transportation and energy costs, are major factors in the loss of margin for pork producers. "I think industry participants will continue to have their gaze firmly fixed on the grain market. And what they should expect is that any new information, whether it's fact or rumor will move prices," said Boal.

Boal said, "consumers are spending more to fill up their stomachs and their gas tanks," so consumer demand is also a part of the equation. However, at least for now, it is a positive portion.

"We are in a situation where domestic demand for meat -- and particularly pork -- has actually been really resilient," said Boal.

One reason for this resilience has been that consumers are "trading down" -- shifting their protein purchases from more expensive steaks to less expensive chicken and pork. The demand for pork is likely to remain strong as chicken and beef prices are expected to increase. Additionally, pork products are less widely used in the food service sector at a time when consumers are shying away from restaurants.

While pork producers have faced losses, there are positives. "U.S. pork exports have reached record levels in each of the last 16 years: a really impressive feat for any industry. And, the good news is that pork exports are on pace to set new records this year," said Boal.

Boal advises that in the current market, exports may be key for hog producers, who "shouldn't underestimate the importance of export demand in the current market dynamic. Hog prices have held up amazingly well considering the huge supply, and exports have played a major role with that respect."

With the average producer losing as much as $50 per head in early 2008, exports have kept the U.S. industry from falling even further into the red. In fact, in the first five months of 2008, U.S. pork exports (excluding variety meats) were 60 percent higher than 2007 levels. U.S. pork exports could surpass $4 billion for the year.

5m Editor