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9 Questions and Answers About Pork Exports for 2017
1. What can we expect from China?
When Dermot Hayes traveled to China last fall, he saw something eye-opening. Pork with the Smithfield Foods label was selling for twice what the local Chinese product was bringing.
Smithfield, which is owned by the Chinese company WH Group, is raising and killing pigs in the U.S. and shipping carcasses to China for processing and packaging in that country. The plan is working.
“Chinese consumers will pay a premium for U.S. product,” says Hayes, Iowa State University professor and Pioneer Chair in Agribusiness. “The Chinese product is heavily discounted.”
Consumers trust U.S. pork more than Chinese pork, where drug withdraws and other regulations are not as well monitored, says Hayes.
2. Will Chinese companies buy more U.S. pork producers?
“I keep waiting for that to happen,” says Hayes. When Chinese investors rank companies they would like to buy, U.S. agricultural companies are often at the top of the lists, he says.
“I suspect there are Chinese investors checking out various large U.S. integrated pork producers right now,” says Hayes. For example, he expects that once Prestage Foods of Iowa builds its new pork packing plant near Eagle Grove in 2018, a Chinese company will swoop in. “They are looking for large private pork producers that have integrated into packing,” he explains.
It is more economical for China to import pork rather than corn or soybeans, says Hayes. “It’s best to import the final product because of transportation costs. When they buy from Smithfield they buy at cost of production.”
The chart below shows Chinese imports of all pork products starting in 1995 (when there was nothing) to 2016. There is lots of potential for the U.S. to sell more to China.
“We are not in that market as much as we could be, so the European pork industry has been kicked back into profitability,” says Hayes. “Europe has been so busy in China we are getting back into our traditional markets of Japan and Korea.”
U.S. pork exports to China jumped up last November and have stayed up. “November was a huge month for exports, and partially responsible for the uptick in hog prices,” says Hayes. He thought the China bounce would happen sooner in 2016.
3. What’s holding us back with exports?
“We saw this China thing coming, but I thought we would get ractopamine out of the system faster than we did.” This feed additive that promotes lean muscle growth has been popular in the U.S. until recently, but is banned in China.
Hayes estimates that half of the U.S. swine industry still feeds ractopamine, especially in the summer when the hog market is traditionally higher, but that number has shrunk in the past year as more packers go “racto-free” in their plants. This is a drastic change from just two years ago when the only U.S. pork company trying to eliminate ractopamine was Smithfield, and that was only on one farm in Illinois, says Hayes.
The ability to export to China if your plant is racto-free means the feed additive is on the wane. Triumph Foods recently went made the switch to eliminate it from its farms and plants.
“I struggle with the ractopomine issue,” says Hayes. “I’m all for science, but the customer is always right. More and more producers will quit using it; that’s already happening.”
4. Will China expand?
“Chinese pork producers are making a fortune, as much as $80 a hog, so you would expect they would increase production,” says Hayes. “However, year over year their sow numbers are going down.”
Modern pig farms are under scrutiny in China, he says. “People are getting fed up with pollution and a lot of modern hog facilities are right in the heart of cities. The pigs are in the wrong place. The fundamental problem is pigs and people are in the same places.”
The central government slapped a duty on all pork and gave permission to local governments to shut down facilities, killing 10 million sows, says Hayes. “The government is trying to shut down smaller units, has been for the past seven years. They are finally getting rid of the last of the backyard units.”
In one province, the Chinese government forcibly closed 70,000 pig farms producing 5 million pigs, says Hayes. “About 10,000 sows were dumped in a river.” There is a national ban on pork production near markets or highways and restrictions on how to dispose of manure.
“However, the pig producers located farthest away from people are making so much money it’s crazy,” says Hayes.
5. How easy is it to expand in China?
“In areas where the government wants them to go, I suspect expansion is easy,” says Hayes. One challenge to increasing pig numbers is “their sows are just not very productive, mainly because of disease pressure,” he explains.
China doesn’t want to drive imported pork prices too high because their volume of demand is so big. “When they do buy they shoot themselves in foot because they cause prices to be more expensive,” says Hayes.
China is comfortable importing 5% of its muscle meat needs, he says. That may sound small, but they were importing less than 1%. And 5% of China’s protein needs is a lot. “They are going to need to import 10 million tons of meat,” says Hayes. This includes pork, poultry, and beef. Poultry will be difficult due to trade restrictions. China lifted trade restrictions on U.S. beef last year, but there is no beef moving there yet.
History shows if a developing country gets access to pork it starts importing pork instead of importing corn and soybeans, explains Hayes. This happens in about a 10-year period. “If that happens with China you can see more pig farms being put into the Dakotas and Kansas.”
6. Are there countries outside of China we should be watching?
“Vietnam is like a small China 10 years behind, but it’s so hot there they will never have productive sows,” says Hayes. That means we may have access to 100 million people who are going to eat a lot more pork in their future.
Central and South America will see trade increases, he predicts. Southern Brazil imports corn and that’s where the good pork producers are located. “But production costs are not any better than ours,” he says. Western and Central Brazil have foot and mouth disease. They vaccinate swine herds, but because cattle and wild animals are infected, “there is no solution.”
Mexico will grow in pig numbers, says Hayes. “Mexico is growing as an importer and as an exporter. It’s possible some boneless hams they export came from U.S. originally, but we will never know because there is a substantial transformation so it’s Mexican product.” Mexico has cheap labor to remove the bone.
Mexico bought a lot of U.S. pork last November, helping our hog prices, says Hayes. “One thing I learned talking to exporters, they look at the forward curves in futures. It was telling them to fill their freezers in November. Mexico was down all year in imports and suddenly in November and December they are back up. They saw what going on in our futures market.”
Canadian hog production is growing, too, he says. Over 300,000 more feeder pigs came into the U.S. from Canada last year than in 2015. The exchange rates and strength of the U.S. dollar have helped.
The U.S. is lagging behind where we should be in exports to China, says Hayes, and “Canada is taking advantage of this. Canadian exports are really high right now.”
Country of Origin Labeling (COOL) hurt Canadian pork producers, he says. “The fact that we would do that damaged their confidence.” When the final rule amended the regulations to remove beef and pork from mandatory COOL requirements (along with the cheap dollar and general profitability in North America), Canadian hog farms geared up.
7. What should concern us?
One concern with Mexico, says Hayes, is if President Trump gets in a border war. “We export more than 10% of our pork to Mexico. He talks loosely about slapping duties on things like cars coming in from Mexico. He can’t do that, because they retaliate against where you are weak. It would be crazy to do that. But just because it’s crazy, doesn’t mean it won’t happen.”
In November, for example, we exported 28% of the pork we produced,” says Hayes, “so we can’t afford a disease or a trade war.”
A border adjustment tax, where a tax is levied on imports, is being considered and could be controversial, says Hayes. “When we export pork to Europe, China, and Japan, as soon as it lands there is a value-added tax put on it. If they export pork to us they get a refund on their value added tax. We are thinking about switching over to that system.”
8. What about domestic markets in 2017?
November and December were expected to be a really bad time for U.S. pork producers, due to a record supply of hogs and pork, and suddenly we got this bump in exports, says Hayes.
Lee Schulz, assistant professor and Extension livestock economist at Iowa State University, was watching the domestic market closely. “Producers were aggressively marketing hogs throughout the fall, expecting the historical price crash post Thanksgiving,” says Schulz. “We were able to pull some of those hogs forward and spread out supply, and didn’t stress capacity as much. It’s amazing that the industry collectively was able to do that. Packer margins were strong so they had incentive to kill those hogs earlier and pay higher prices to do that. They didn’t want to pay overtime, so they spread out the supply a little bit more.”
Hayes agrees. “It was beautiful how the market told us we were going to have a problem, we saw the problem coming, and we fixed that.”
9. What is the good news?
“We have two large plants coming online in 2017, and another in 2018,” says Schulz. “When they open, packers are going to have to get after those hogs. They want to operate near capacity level to spread out their fixed costs, so it is going to put a little bit more leverage in the hands of producers. They want their pork to be on shelves, on food-service menus or in shipping containers going for export, so that is setting up competition and support for prices later in 2017. Until then it’s still a demand story.”