Pig prices in the US are back to profitable levels again, said Dr Steven Meyer of Paragon Economics. Speaking at a press conference at the World Pork Expo yesterday (6 June), he said that summer 2012 was the last time the pig industry was profitable in the US.

He forecast “black ink” for average hog producers here this summer, followed by an increased risk of losses again in the fourth quarter unless there is a good crop, which looks unlikely following very difficult planting and early growing conditions. A good spring in 2014 would set the industry up for returning profits in 2014.

Exchange Rate Changes: Minimal Market Impact

The exchange rate between the US and Canadian dollar has been stable at around parity and Dr Meyer thinks that is likely to continue. This puts Canadian producers at a disadvantage to the US neighbours as some of their costs are higher.

As a result of the Japanese government devaluing the yen, in order to stimulate the domestic economy, he sees some added stress in the buying market for US pork imports.

Russia’s Ban on Ractopamine Will Not Upturn US Market

Trade with Russia has been erratic in recent years, according to Dr Meyer, and it would be wise to estimate modest US pork exports to that country in future. The main issue he sees is that in banning imports of meat from animals given the beta-agonist, ractopamine, the Russian requirements were unclear and it is the lack of clarity that is causing more market disruption than the ban in itself.

The requirement for ractopamine-free meat for Russia is hitting the smaller producers and integrators harder than the mega-corporations like Smithfield and Seaboard, Dr Meyer suggested. The latter firms have greater control over their live production than Cargill, for example. If Smithfield moves to 50 per cent ractopamine-free production, as expected, that volume would more or less meet the demand for untreated pork. What is important, Dr Meyer said, was how the resulting financial loss could be re-couped.

Trends in Feed Prices and US Production

Dr Meyer admitted he was surprised that the drought and high feed prices in 2012 did not affect the structure of the industry or its output as much as many expected. Some smaller producers did exit the industry but not on the scale predicted and overall, sow numbers have remained stable.

One clear response from the industry was to use alternative feed ingredients, despite the fact that their prices tend to fixed relative to maize (corn). Distillers dried grains with solubles (DDGS) and synthetic amino acids came into the formulations to replace some – sometimes all – the soybean meal.

The third change that Dr Meyer identified was to reduce market weights by four to five pounds . Even now, finishers are being marketed two to three pounds lighter than a year ago.

Sow numbers fell by two to three per cent but overall production did not fall much as the long-term trend of increasing output per sow largely made up for the reduction in the breeding herd.

Producers have done a good job over the last three to four years, locking in prices and costs, Dr Meyer said.

In 2014, he expects the sow herd to increase a little which, combined with the 1.5 per cent per year increase in productivity and a return to heavier market weights. These could combine to bring about a two to three per cent increase in production.

While maize will not run out this year, prices could peak again, Dr Meyer predicted. This is linked to the delay in planting the US maize crop caused by cold and/or wet weather. Soybean supplies, he forecast, could be even tighter, a limit too on crushing capacity.

“Hog producers will be scrambling for supplies,” he said, unless they have already secured their feed ingredients needs.

Smithfield-Shuanghui Deal Likely to Benefit US Market

The merger between Smithfield Foods of the US and China-based Shuanghui International announced at the end of May gives the Chinese access to a company that knows how to pull all the elements of pig meat production together. One of the reasons given for the deal, according to the Chinese partner, is that the high food safety standards used in the US can be transferred to China and its ever more hygiene-aware consumers.

Dr Meyer said that the 1.3 billion human population with its growing demand for pork as well as limited grain production and suitable arable land will mean that pork imports from the US are likely to continue for some considerable time.

The deal will ease access to the Chinese market for Smithfield product in both the short- and longer term.

For US pork producers generally, hog prices are not likely to fall as a result of the merger, Dr Meyer thinks – in fact, they are likely to rise.

US Processing Capacity Becomes Critical

US pork packers have been able to process the additional pigs produced in recent years as some plants have modified systems and equipment to match the increased throughput but Dr Meyer expects packing capacity to become critical in the next year or two. Only one plant has announced its intention to expand capacity significantly and such is complexity of the procedure to establish a new plant that it can easily take two years from the initial application to being ready for production.

Finally, returning to the Smithfield merger, Dr Meyer said that future growth relies on decisions being taken soon. If the company processes large numbers of pigs for export to China, that critical point in packing capacity could be reached within 12 months, he warned.