Positive news in the pig business, but still many concerns
The packing situation is recovering quicker than expected.
Steve Meyer, economist with Kerns and Associates, gave pork producers some encouraging news Tuesday about packing plant capacity, along with a few warnings. Here are the highlights.
- Food service demand for pork is recovering in some states, as restaurants start to open.
- Export demand for U.S. pork remains strong. China still needs product. Hams are extremely low priced, and that will help exports to Mexico. Maintaining export flow is important for the long run, but there is a question if it is going to be tolerated if U.S. shelves are empty. “I certainly hope so, because we are going to be shooting ourselves in the foot,” says Meyer.
READ MORE: Pork exports set record in March
- COVID-19 outbreaks at plants have slowed, but some states are just now seeing peaks of virus curves. It’s too early to tell if workers will stay healthy when plants reopen or increase capacity. A few plants have reopened and so far it has gone pretty well, says Meyer.
- We are in much better shape this week in slaughter capacity. All plants are open as of yesterday, although most plants are running below 100%. The country, as a whole, is running at 26% below operating capacity, says Meyer. The Columbus Junction, Iowa, plant is back to normal, and the Prestage plant near Eagle Grove is at 90%. “This improvement is as fast as I thought possible. At this rate, we could be back to normal capacity by August or September,” says Meyer.
- Carcass weights have gone up. “If you hold hogs, I don’t care how well you do putting them on maintenance diets, they are going to get bigger,” says Meyer. “More weight is not all bad, because we can make up some gap in the pork supply with heavier weights.” He expects average carcass weight to get above 220 pounds.
- Will we have a pork shortage at retail? It depends on who your supplier is. “Hormel dodged a bullet,” says Meyer. “Their Austin plant had a few problems, but not many. Their customers did fine. But if you were a customer of Tyson, JBS, Smithfield, or especially Indiana Pack, which was completely closed for two weeks, you are not in good shape.”
- Cutout values are heading for a record, as end users chase the limited supply of wholesale pork products.
- The negotiated price of hogs is hitting rock bottom. Meanwhile…
- Packer margins hit a record high of $112 per head. Remember, that margin is earned only on the hogs you get to slaughter. Tyson ran 30% of total capacity for a couple of weeks, so the effective margin for them was $33 a head on total capacity. “There is a separation between the end-use value and the value we pay for hogs,” says Meyer. “That difference between the cutout value and the bid from the spot market is record wide, and it says we are not doing a very good job of finding what the value of these animals are at the farm level.”
- Do we need a sow buyout program? Meyer says no. Sow slaughter bumps nothing in the short run, and we can only slaughter 74,000 sows a week. It would help capacity issues in the fourth quarter and into 2021.
- Unfortunately, we are going to have to destroy animals, as many as several million pigs, says Meyer. Destroying smaller pigs will have an impact on slaughter in the fourth quarter. We need to reduce pigs placed by about 15%.
- Government purchase support announced for food service is a nice gesture if it focuses on hams, but the price of other pork cuts is high. “It wouldn’t be a good use of taxpayer dollars, and right now we don’t need it. In a month of two, we might need that as production starts to grow again.” Until we get a better handle on how many pigs have been euthanized due to the backup on farms during plant closures, we can’t predict prices in the fall.
- Direct payments to producers need to have higher or no limitations, says Meyer. “The problem in the past has been payment limitations do nothing for larger producers that account for 90% of our pork. If we are worried about feeding ourselves, we shouldn’t be leaving those folks out.”
- Are we going to get paid for animals destroyed? That is a big question out there. USDA is still muddling through that.
- Losses will mount quickly and force some producers out of business. There have been some sow herds already liquidated, says Meyer. “There is no way we will avoid another round of massive consolidation. Some producers are in good shape and will will buy some of the ones that go out of business. Packers have to have pigs. If their suppliers go out of business, they may have no choice but to get into the pig business themselves."
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