Pork profit outlook dims
Late last year, margins were tough for hog farmers. The drought had really clamped down on the business, largely because of skyrocketing feed costs. But, despite a tough marketplace leading up to Thanksgiving last year, some experts said the nadir wouldn't last forever and there was reason to believe a market rebound was on the horizon.
But, new analysis this week shows that horizon may be a mirage stretching a little further beyond where the business thought it'd be at this point. Hog prices haven't started their rebound many expected to begin by now -- in fact, things have moved the other direction -- despite lower overall supply.
"Over the last four weeks, pork production has been down nearly one percent compared to the same weeks a year-ago," says Purdue University Extension livestock economist Chris Hurt. "With smaller supplies over this four week period, prices have been $3.80 per hundredweight lower than during the same period in 2012."
The demand side's where the problem lies, Hurt says. Several factors are compounding a demand picture that's short on incentive for domestic consumers to ramp up pork spending. It's a multi-pronged issue, he says.
"The first of those concerns is the weakened buying power of U.S. consumers. Unusually high gasoline prices for this time of year and increased payroll taxes since January 1 have reduced the buying power of consumers," Hurt says. "Secondly, the recent discussions around potential furloughing of federal meat inspectors due to sequestration have probably had a numbing effect on hog prices. If plants were to shut down some days they would not buy hogs for those days, thus weakening hog prices."
But, it's not just sluggishness in U.S consumer demand; factors outside the nation's borders are also weighing on pork profitability moving forward.
"In 2012, the volume of pork exports represented 23% of total U.S. production. The first threat came in early February when Russia banned imports of U.S. pork due to their stated concerns over U.S. ractopamine use. Russia was the 6th largest buyer of U.S. pork in 2012 and that volume represented 1.2% of U.S. production," Hurt says. "The loss of Russian business would not be terribly bearish due to their small share, but later in February China also announced that they were going to more closely check imports of U.S. pork for ractopamine. Last year China's pork purchases from the U.S. represented 3.4% of total U.S. production volume."
That adds to the strain placed on the industry by issues facing the Japanese yen, which has lost considerable value -- 12% so far in 2013 -- and made it tougher for that nation to continue its status as the largest buyer of U.S. pork. "Japan is the largest U.S. pork buyer, purchasing 6% of U.S. production volume in 2012. A decline in the yen makes U.S. pork prices higher in Japan by a similar percentage," Hurt adds.
The net result of this slide in demand at home and abroad is a growing concern that the profits originally thought to be right around the corner this spring are likely going to be held back. How long?