Editor’s note: The following was written by Chris Hurt, Purdue University Department of Agricultural Economics, for the University of Illinois Farmdoc Daily website March 11.
Hog prices have been struggling so far this year. The USDA reports that live prices in January and February have averaged below $40 for the first time in over a decade.
In February, USDA estimated live prices were $39.04 per hundredweight, the lowest February price in 16 years dating back to 2003.
A bearish price story usually points quickly to large supplies, and that is the case for pork. So far this year, pork supplies have been up about 4 percent with most of that as a result of higher slaughter numbers.
The inventory count in the December Hogs and Pigs report indicated slaughter numbers in January and February would be up about 3 percent. Head counts are running somewhat above anticipation.
Demand for pork seems to be weak as well, but it is a little harder to find this evidence in the marketplace. There is competition for pork this year, with total meat and poultry supplies expected to be at record levels. The strong U.S. economy seems to be benefiting the beef sector with strengthening demand, but not the pork sector.
This is not a surprise. We know that when consumers have more money they will tend to increase beef purchases more than pork.
Pork demand is also strongly influenced by foreign consumers. About 22 percent of the pork produced in the U.S. is exported to our foreign customers. This is about double the 11 percent of beef that we export. So, hog and pork prices can be more sensitive than cattle to changes in international trade events.
At first glance, pork exports look positive for 2018. The total volume of pork exports rose by 4 percent last year, which seems to indicate favorable foreign demand. The problem is that U.S. pork exports were very strong in the early months of 2018, but faded after retaliatory tariffs were placed by China and Mexico.
Mexico, our largest pork buyer, bought 5 percent more U.S. pork in the first-half of 2018, but 10 percent less in the second-half. Mexico placed a 10 percent tariff on U.S. pork in June 2018. Pork exports to Mexico were down 2 percent for 2018.
The impacts were even larger for China (data includes Hong Kong) which bought the same amount of pork in the first four months of 2018 compared to 2017, but began backing away from U.S. pork after putting a 25 percent tariff on it in April 2018. From May-December 2018, China reduced U.S. pork purchases by 38 percent. This left annual U.S. exports to China down 24 percent in 2018.
Maybe a trade deal with China will soon be announced. That remains the hope of many in U.S. agriculture. It is believed that pork will be favored both by reducing current Chinese tariffs and by an agreement for China to buy substantially more U.S. agricultural products including pork. Time will tell!
The current Mexican tariffs on U.S. pork are related to the initial tariffs the Trump administration placed on steel and aluminum on Mexico and a host of other countries. Mexico will likely want those metal tariffs taken off before they take off their tariffs on U.S. pork. The U.S.-Mexico-Canada Agreement (the USMCA) still must be ratified in each of the countries.
The March Hogs and Pigs report is scheduled to be released on March 28. Tight margins and losses in 2018 and 2019 are incentives for the industry to slow breeding herd expansion. We will look to that USDA report for signs of slower breeding herd growth.
Unfortunately that may not occur, as there remains a lot of inertia toward expansion that has been the norm since 2014. New packer capacity added in the past few years is still trying to fill lines and thus is a stimulus to expansion.
The final reason producers may not reduce the rate of breeding herd expansion is their hope that our pork trade problems may take a more positive direction in coming weeks.