The changing face of pork production

Date posted: January 12, 2018

When Ron Plain talks hog markets, people who make a living from those markets tend to listen.

The professor emeritus in the Department of Agricultural and Applied Economics at the University of Missouri-Columbia brings a farm background and solid experience in production economics to his presentations including a long history of industry service.

Plain has been a speaker at past Banff Pork Seminars and one that delegates rate highly. This year, in his Hog Market Outlook and Pricing Methods presentation to the 2018 Banff Pork Seminar, he looked at trends in the United States, Canada and globally and shared his insights on what may lie ahead for the hog sector.

Pricing

Negotiated sales for barrows and gilts, as well as for carcass weights, makes up only between two and three percent of total sales but has a longer reach than the numbers imply.

"This matters because those small numbers of negotiated sales drive the price for the rest of the industry," says Plain. "Half the US barrows and gilts in the United States are priced based on a formula that is linked in one way or another to the negotiated price. Of all hogs under contract, approximately 60 percent are under a price formula.

What difference does it make on price? Plain shared five-year data, 2013-2017, on both the base price for the hog and the net price after premiums and discounts to explain why negotiated sales continues to decline. "The price that those producers are getting for hogs is the lowest major category that is out there. It is a lot more work for negotiating but they are getting a lot less money for doing so."

Plain shared his thoughts on a solution for the disparity. "In my opinion, the industry needs to move to pricing hogs based on the cutout value."

Packing capacity

The percentage of packer owned hogs keeps increasing. Currently about 30 per cent of barrows and gilts raised for slaughter are packer owned and raised by the company that is going to slaughter them.

"They say hog producers can't stand prosperity. They will just breed more gilts and expand production until the profits go away. Same thing appears to be true of hog packers – when they make money they start building more packing plants and eventually the profits are going to get squeezed for them too," jokes Plain.

But it appears there is some truth to his observation. While the trend is usually one new packing plant every 10 years, there will be three new, large plants built in three years – Sioux City, IA and Coldwater, MI opened in 2017 and plans to open one in Eagle Grove, IA in 2019 are in place.

Cost of production

Corn prices are cheap compared to recent history but will likely continue to increase. "Soybean and corn futures will give us a forecast cost of production for hogs- the last few years we have been looking at a low cost of production," says Plain. 2017 saw the lowest cost of production since 2006 but the forecast is for an increase as feed costs rise and with the anticipation of a less desirable weather in the summer in the United States.

Productivity increases and evolution

Typically, the size of the swine herd is driven by last year's profitability. Canada has seen a steady increase in hog inventory in the last few years. Canada's export and import volumes remain steady and Canada and the United States continue to be each other's strongest trading partners.

Plain believes there is going to be a steady to modest increase for hog slaughter in 2018 and into early 2019.

The value of continually evolving production practices can be seen in the continual increase in numbers for things such as pigs-per-litter, which show a long-term trending increase year-over-year in the last 80 or more years. The growth is slowing because biologically there is a limit to how far this can increase, so Plain says not to expect any rapid increases in this going forward.

However, there is room to grow according to Plain in areas such as pigs per sow. "U.S. pork producers are showing that they are getting better and better at what they do and are improving upon what their parents and grandparents did. So, there is a lot of upside potential."

"Pork production per sow has seen a tremendous increase. In 1930, the average was 700 pounds of pork produced per sow in the United States. Last year we averaged 4,500 pounds of pork per sow. I think there is every reason to expect that this will continue to move higher."

"We produced more pork in 1999 than any other year in the century. In 1999, we had the fewest number of sows in 100 years. This is because the American and Canadian pork producers are much better than they were last year or a year ago. The challenge is that numbers indicate you are going to have be better again next year because the competition keeps getting tougher."

Overall there is a significant increase of about 5.3 per cent forecast for U.S. pork production in 2017-2018 which is the largest increase among the animal proteins.

Demand

Meat demand increases as the world population rises and is impacted by how well the economy is doing. When people have jobs and are making money, they buy more meat.

U.S. meat production for beef and pork in past years has climbed steadily each year, and turkey is fairly stable. Broilers continue to have steady and predictable growth. "I remember forecasting chicken production in the states and learning three things in life are certain- death taxes and three per cent more chicken than we had last year," says Plain.

An interesting outcome of the 2014 PED outbreak was a large increase to the average slaughter weights. Pork producers tried to increase the weights to accommodate the volume shortfall. "The average slaughter weights continue to rise and increase by about a pound per year – expect that to continue."

Bacon demand is steering cutout values, and has been for the last few years. "Bacon is the new 'in' food both at home and in foodservice," says Plain.

World pork trade – the amount of pork moving between countries – is fairly stable with slight increases in the last few years expected to continue.

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