Livestock

The pork outlook looked bleak in August. Fear of large pork supplies and Mexican and Chinese tariffs on U.S. pork exports appeared disastrous to hog prices. At that time, my forecast was for losses of $40 or more per head in the fall and winter, the worst since 1998. The outlook is still suggesting losses this fall and winter but much less than in August. In the recent USDA inventory report, pork producers said they were continuing to expand the breeding herd by 3.5 percent above year-previous levels. The breeding herd has been expanding steadily since 2014 when the PED virus caused large baby pig losses resulting in skyrocketing hog prices and profits. The second driver since 2014 has been lower feed costs. Producers reported the market herd was up three percent and represents the supply of hogs to come to market over the next five months. Farrowing intentions for this fall and winter were up two percent and with increased pigs per litter means that the number of market hogs in the spring and summer of 2019 are expected to be up about three percent. Pork production will reach record levels in 2018 near 26.5 billion pounds. That record is expected to be broken in 2019 when production may reach 27.3 billion pounds-another three percent increase. Why did lean hog futures collapse in the summer? We know that futures markets anticipate supply and demand conditions into the future, and sometimes the anticipation of bad news is not as severe as originally thought. This seems to be the situation this year, especially related to the late-summer anticipation of the negative impacts of Mexican and Chinese tariffs on U.S. pork exports. Pork exports represent 22 percent of production and thus have become very important to the price of hogs. In addition, the tariff situation was a new event with little historic precedent for the market to draw on. The magnitude of the price drop was huge. December lean hog futures as an example fell from about $60 in June to $44 by early August. The good news is that prices have recovered most of the decline, rising back to $58 by September 28. So what are export prospects and what do we know so far about the influence of the tariffs? First, we can relate that USDA analysts expect pork exports to rise by a strong 6.3 percent this year. Official Census trade data through July show that exports had been up 6.5 percent which is encouraging July was the first month of the full Chinese tariffs on U.S. pork. Our July pork exports to China and Hong Kong were down 17 percent. However exports to Mexico-our largest export customer were only down one percent. More importantly, total pork exports were up nearly nine percent with notable increases to Japan and South Korea, our second and fourth largest export buyers. Weekly USDA Export Sales Reports extend through the week ending September 20 and have total commitments (already exported plus unshipped sales for this year) up 5.3 percent. On this more extensive data, China (plus Hong Kong) commitments for the year are down 32 percent; Mexico is unchanged; Canada is up 11 percent; and South Korea is up 37 percent. Together this information helps support the idea of stronger exports. Mexican purchases seem to not be affected much by the tariffs and they are our largest customer purchasing 32% of all pork export volume in 2017. Exports to China and Hong Kong have been negatively impact, but they are much smaller-representing just nine percent of exports in 2017. In addition other buyers have more than compensated for the lost volume to China. The second factor providing more optimism to lean hog futures has been the concern over potential hog death losses in China from African Swine Fever (ASF). ASF is difficult to control and animals must be destroyed in order to control the disease. China’s pork production is 4.5 times that of the U.S. In addition, they raise 97 percent of their consumption domestically and import only three percent. So, a one percent loss of their production means they will need to increase imports by about one-third. If ASF does result in increased Chinese imports, the U.S. may not get that business, but rather Canada and the EU will. The advantage for the U.S. is that we will get added exports to some of the destinations that Canada and the EU were shipping to. Live weight prices for 51-52 percent lean carcasses are expected to average in the low $40s in the final quarter this year. An improvement to the mid-$40s is expected for the first quarter of 2019, and then low $50s in the spring and summer quarters. Price forecasts for the fall of 2019 drop back to the low-to-mid $40s. Cost of production estimates are $49 to $51 per live hundredweight. My outlook is for losses of $10 to $20 per head this fall and winter and then for profits of $5 to $10 a head next spring and summer, before returning to losses late in 2019. Needless to say, the pork outlook has improved with considerable uncertainties. Trade issues with Mexico have improved with a bilateral agreement. However it remains unclear if Congress will accept this potential agreement with Mexico without a trilateral agreement with Canada. The trade disagreements with China continue to escalate and it remains unknown if African Swine Fever will result in China increasing pork imports. What does seem assured is that pork supplies will be at record levels. The recent rate of U.S. pork expansion probably cannot be sustained. The industry will simply reach a point where supplies are too large to sell at profitable prices. Recommended citation format: Hurt, C. "Pork Prospects Improve, But Losses Still Loom." farmdoc daily (8):182, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, October 1, 2018.

China’s Ministry of Agriculture says it will lift restrictions in the two regions where the first and second African Swine Fever outbreaks occurred. Monday, China’s Ministry of Agriculture says it will lift restrictions on the central Henan province, where the country’s second ASF outbreak occurred. Saturday, China removed restrictions on an area in Shenyang, Liaoning province, where the country’s first case of African swine fever (ASF) was found in September. There have been no new cases in the infected areas, the ministry said. For the past six weeks, the two areas were sealed off to stem the spread of the contagious disease. In order to contain the spread of the disease, authorities banned live hogs and pig products transport from regions bordering provinces where African swine fever has been reported, shut live markets and banned the use of feed derived from pig blood. Nearly 20 cases of ASF have been reported in China since July. Due in part to the disease, China’s Ministry of Agriculture and Rural Affairs says the country’s sow herd, as of August 2018, is 4.8% smaller than a year ago. The sow herd declined just over 1% from the month prior. China’s disease problems has furthered challenged the trade picture with the U.S. The country’s smaller herd is also raising questions about the country’s future appetite for soybeans. U.S. Still Diligent on Biosecurity USDA-APHIS has increased preparedness and border screening checks to avoid entry of swine byproducts from contaminated areas. As PorkBusiness has reported previously, African Swine Fever has no human health implications, but it is highly contagious and lethal for pigs. The virus is very hardy and can survive in extreme environmental conditions for long periods of time in fresh and frozen meat. U.S. pork leaders reemphasize the importance of biosecurity measures on farms and feed supply chains.

Hurricane Florence is barreling toward the No. 1 turkey state just a couple months before Thanksgiving. But thanks can be given to frozen stockpiles that will likely help prevent a shortage of holiday birds. The storm is heading straight for North Carolina, threatening the turkey industry as coastal residents flee what may be the most powerful hurricane to hit the area in 64 years. The state is also a leading producer of hogs and chicken. While most animals are raised in indoor barns, high winds and heavy rain can risk losses and processing slowdowns, according to Will Sawyer, an economist at CoBank. Poultry farms are already working to prevent potential damage. Most of Butterball LLC’s North Carolina processing plants, hatcheries and feed mills are in the storm’s projected path, and the company began hurricane preparations last week, according to a statement from Jay Jandrain, chief operations officer at the top U.S. turkey company. Feed mills ran through the weekend to make sure there is sufficient inventory, he said. Butterball’s whole birds, a staple of Thanksgiving feasts, are produced and stored at facilities in the Midwest, while the company’s North Carolina plants produce items such as ground turkey, turkey bacon and turkey breast. “National Turkey Federation members have extensive plans in place to address scenarios of this nature, and they are taking the appropriate steps now to best protect the safety of their employees and flocks,” Beth Breeding, a spokeswoman for the Washington-based group, said by email. For Thanksgiving, ample frozen inventories will help to offset any possible birds losses, said Tom Elam, president of consultant FarmEcon. The industry stockpiles turkeys throughout the year before a rapid drawdown near Thanksgiving and Christmas. Supplies of whole, frozen turkeys at the end of July were slightly below 2017, while above the five-year average. Still, lost animals may impact the supply of fresh birds for the holiday, he said. Whole-turkey prices have been weak this year and reached the lowest since 2010, the U.S. Department of Agriculture said in an August report. The large supplies in cold storage are evidence that production has outpaced demand, the agency said. There’s another Thanksgiving staple in the storm’s path: sweet potatoes. North Carolina is the nation’s top grower and produces more than half of the country’s supply. If soils are saturated or flooding occurs, the tubers may rot, and low-lying areas of fields may not be harvestable, said Normal Harrell, North Carolina Cooperative Extension director in Wilson County, a major producing region. Most of the state’s crop has yet to be gathered.

South Korea is taking steps to reinforce its sampling methods for inspection of U.S. beef imports after the discovery of an atypical case of bovine spongiform encephalopathy (BSE) in a six year-old mixed-breed beef cow from Florida. The Ministry of Agriculture, Food and Rural Affairs for South Korea plans to increase inspection samples from the current 3% to 30% for all U.S. beef imports. The inspection process requires packages to be opened, with meat defrosted and cut into for a detailed check. South Korea already requires that imported U.S. beef come from cattle younger than 30 months of age to reduce specified risk materials (SRM). Also, there are no packing plants in Florida that are approved for export to South Korea. “We are taking pre-emptive measures and put public safety as a top priority,” says Agriculture Minister Lee Gae-ho. “We need to consult with the U.S. government to promptly receive quarantine inspection results and closely monitor responses in other nations.” There have been six cases of BSE in the U.S. since 2003. The only case that was the classical BSE came in 2003 when an imported cow from Canada was detected with the disease. BSE is not contagious and exists in two types - classical and atypical. Classical BSE is the form that occurred primarily in the United Kingdom, beginning in the late 1980’s, and it has been linked to variant Creutzfeldt-Jakob disease (vCJD) in people. The primary source of infection for classical BSE is feed contaminated with the infectious prion agent, such as meat-and-bone meal containing protein derived from rendered infected cattle. Regulations from the Food and Drug Administration (FDA) have prohibited the inclusion of mammalian protein in feed for cattle and other ruminants since 1997 and have also prohibited high risk tissue materials in all animal feed since 2009. “Consumers can rest assured that the U.S. continues to be the global leader in the production of safe and wholesome high-quality beef,” says National Cattlemen’s Beef Association (NCBA) chief veterinarian Kathy Simmons. In 2008, an estimated 100,000 people in South Korea protested the decision to start importing beef from the U.S. again following a halt in imports after the 2003 case. Since the reopening of the market, South Korea has become the 2nd largest export destination for U.S. beef on a value basis. In ten years South Korea has turned into more than a billion export market after buying less than $300 million in U.S. beef during the first two years of the market opening back up. Last year South Korea bought $1.22 billion worth of beef from the U.S., according to the U.S. Meat Export Federation (USMEF). The South Korean market has also been one of the largest increasing exports markets this year. From January to June export values to South Korea have increased by 52% compared to the same time last year. For the first half of 2018, South Korea has accounted for more than $802 million in beef trade for the U.S., the only market larger is Japan.

Nearly half a million more cattle were added to feedlots since August last year. According to the latest USDA Cattle on Feed report, the 4.6% increase in the Aug. 1 inventory resulted in 11,093,000 cattle in feedlots. The 489,000 additional cattle resulted in the highest inventory for August since the 1996 report began. Despite the year-over-year increase the amount of cattle on feed fell by 194,000 head since July 1, a drop of 1.7%. Placements for July reached 1.74 million head, a rise of 7.9% compared to the same time in 2017. The most popular class of cattle to be place were 700-799 lb. followed closely by calves weighing less than 600 lb. The placements went as follows: 700-799 lb. = 415,000 head Less than 600 lb. = 410,000 head 800-899 lb. = 367,000 head 600-699 lb. = 290,000 head 900-999 lb. = 175,000 head 1,000 lb. and greater = 85,000 head Fed cattle marketing for July was up 5% since last year with 1.87 million head going through packers. State-by-state the largest gains for cattle on feed inventory were seen in the Southwest with Arizona and California both seeing a nearly 22% increase from 2017. The state to see the biggest drop in percentage was South Dakota at approximately 9%. The top five cattle feedlot inventory states are as follows: Texas 2,720,000 head Nebraska 2,330,000 head Kansas 2,230,000 head Colorado 890,000 head Iowa 700,000 head No states reported a gain in inventory from July to August.